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Commercial Bank of Ceylon: Annual Report 2021

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4 months ago
Commercial Bank of Ceylon: Annual Report 2021

Islamic banking, Takaful, Credit Risk, Net Assets, Participation, Provision, Receivables, Reserves, Sales, Specific Provision


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  1. Commercial Bank of Ceylon PLC Annual Report 2021 (Integrated Report and Financial Statements)
  2. Our Vision To be the most technologically advanced , innovative and customer friendly financial services organization in Sri Lanka, poised for further expansion in South Asia. Our Mission Providing reliable, innovative, customer friendly financial services, utilizing cutting edge technology and focusing continuously on productivity improvement whilst developing our staff and acquiring necessary expertise to expand locally and regionally. Our Values y Honesty–We strive to earn and retain the trust of our stakeholders through transparent actions that inspire them and align with their values. y Integrity–Maintaining our integrity is of paramount importance to us in ensuring that our brand value keeps growing for all stakeholders. y Fairness–We focus on doing the right thing by all our stakeholders so that their trust in us continues to deepen, enriching invaluable relationships. y Responsible citizenship–Continuing our commitment to the community we focus on making lives better and being a force for good. y Accountability–We live by our brand values, ready to take responsibility for our actions towards all stakeholders.
  3. Envisioning Tomorrow ’s Banking A surge in disruptive technologies. An incessant consumer demand for banking experiences that are simple, convenient, and functional. An evolving operating context where social and environmental concerns are brought to the centre of the corporate agenda. The shape and colour of banking as we know it is changing for good, bringing new opportunities and possibilities with it. And Commercial Bank is geared to pivot and capitalise.
  4. Contents 3 Annual Report of the Board of Directors 5 Introducing our 53rd Annual Report FINANCIAL REPORT 179-336 14 INTEGRATED REPORT Joint Message from the Chairman and his Successor 7-178 8 Organisational Overview 8 9 10 11 12 About the Bank A Snapshot of the Bank ’s Profile Financial Highlights Strategic Highlights Our Journey over 100 years “When the global and local operating environment is volatile, it is important that we frequently take stock of our strategic direction and reassess and recalibrate it as needed.” 14 Tone from the top 14 Joint Message from the Chairman and his Successor 16 Managing Director/Group Chief Executive Officer’s Review 20 Operating Environment 16 20 Connecting with Stakeholders 23 Material Matters 28 Operating Context and Outlook Managing Director/Group Chief Executive Officer’s Review 33 Business Model for Sustainable Value Creation 34 Business Model 36 Statement of Capital Position “We have faced a profound crisis with courage, conviction, and resilience and I remain optimistic about what lies ahead for our Bank.” 38 Management Discussion and Analysis 39 40 46 54 59 66 67 86 100 All references to the banking industry figures in this Annual Report are based on the CBSL publications, which are based on regulatory reporting requirements and may differ from the figures published as per the Sri Lanka Accounting Standards. Strategic Imperatives Prudent Growth Customer Centricity Leading through Innovation Operational Excellence Awards and Accolades Financial Review Investor Relations Key Events 2021 104 Governance and Risk Management 104 110 113 117 129 146 152 154 156 157 158 159 2 Board of Directors and Profiles Corporate Management and Profiles Senior Management Annual Corporate Governance Report Board Committee Reports Statement of Compliance Statement of Directors’ Responsibility for Financial Reporting Directors’ Statement on Internal Control over Financial Reporting Independent Assurance Report Managing Director/Group Chief Executive Officer’s and Group Chief Financial Officer’s Statement of Responsibility Directors’ Interest in Contracts with the Bank Risk Governance and Management Commercial Bank of Ceylon PLC 181 182 185 186 187 188 189 190 194 198 199 Financial Calendar – 2021 and 2022 Independent Auditors’ Report Financial Statements Highlights – Bank Financial Statements – Table of Contents Income Statement Statement of Profit or Loss and Other Comprehensive Income Statement of Financial Position Statement of Changes in Equity – Group Statement of Changes in Equity – Bank Statement of Cash Flows Notes to the Financial Statements SUPPLEMENTARY INFORMATION 337-401 337 Annexes Notice of Meeting – Annual General Meeting Circular to the Shareholders on the First and Final Dividend for 2021 Form of Proxy (Voting Shareholders) Form of Proxy (Non-Voting Shareholders) Stakeholder Feedback Form Corporate Information – Inner Back Cover Look out for these throughout the report: This Annual Report is published within three months of the date of the Statement of Financial Position. The comprehensive end-to-end online HTML version is also published online on the same date as the date of issue of this Annual Report at http://combank2021.annualreports.lk/ Scan to view the online version Annual Report 2021 Reference to another page, table, figure or graph in the report COVID-19 impact Awards and Accolades
  5. Annual Report of the Board of Directors Having carefully considered the matters material to the Bank and its stakeholders in preparing this Report , the Board acknowledges that reasonable care has been exercised in the preparation and presentation of this Integrated Report and Financial Statements while preserving its integrity. Signed in accordance with a resolution of the Directors. Justice K Sripavan Chairman Prof A K W Jayawardane Deputy Chairman S Renganathan Managing Director/Group Chief Executive Officer K Dharmasiri Director L D Niyangoda Director Ms N T M S Cooray Director T L B Hurulle Director S C U Manatunge Director/Chief Operating Officer Ms J Lee Director R Senanayake Director S Muhseen Director Mrs D L T S Wijewardena Director R A P Rajapaksha Company Secretary February 25, 2022 The Board of Directors of the Bank is pleased to present to the shareholders the 53rd Annual Report of the Bank comprising an integrated report, the Audited Financial Statements of the Group and the Bank for the year ended December 31, 2021, and the Independent Auditors’ Report on the Financial Statements conforming to all applicable statutory requirements. This Integrated Report, where applicable, is presented in accordance with the Guiding Principles and Content Elements as stipulated by the International <IR> Framework issued by the International Integrated Reporting Council (IIRC), now known as the Value Reporting Foundation consequent to merger of the former with the Sustainability Accounting Standards Board in June 2021. According to sections 150 (1), 151, 152 and 153 (1) & (2) of the Companies Act No. 07 of 2007 and amendments thereto, the Bank’s Board of Directors is responsible for preparing the Financial Statements of the Group and the Bank, which reflect a true and fair view of the financial position and performance of the Group and the Bank. In this respect, the Board of Directors wishes to confirm that the Financial Statements, namely, Income Statement, Statement of Comprehensive Income, Statement of Financial Position, Statement of Changes in Equity, Statement of Cash Flows, and Significant Accounting Policies and Notes thereto appearing on pages 187 to 336 have been prepared and presented in conformity with the requirements of the Sri Lanka Commercial Bank of Ceylon PLC Annual Report 2021 3
  6. Accounting Standards as mandated by the Sri Lanka Accounting and Auditing Standards Act No . 15 of 1995 and the Companies Act No. 07 of 2007 and amendments thereto. This Report also provides the information and disclosures as required by the Companies Act No. 07 of 2007 and amendments thereto, Banking Act No. 30 of 1988 and amendments thereto, the Directions issued thereunder including the Banking Act Direction No. 11 of 2007 and subsequent amendments thereto, the Listing Rules of the Colombo Stock Exchange (CSE) including the Rules pertaining to Related Party Transactions as required by Section 9.3.2 (c) and (d) thereof and the recommended best practice. The Board of Directors has approved and authorised for issue the Financial Statements of the Group and the Bank for the year ended December 31, 2021, including comparatives for 2020, in accordance with the resolution of the Directors on February 25, 2022. Within the statutory time limits, the appropriate number of copies of the Annual Report will be submitted to the CSE and to the Sri Lanka Accounting and Auditing Standards Monitoring Board (SLAASMB) and soft copies of same will be hosted on the website of the Bank, www.combank.net. This Report effectively communicates the Bank’s efforts to create value for all its stakeholders across the short, medium and long term through its business model (pages 34 and 35) and identifies the emerging developments and trends that are likely to impact its business model and value creation process. These trends have been categorised into risks and opportunities based on their importance to the Bank and its stakeholders, together with the stakeholders that are likely to be affected most. Through its annual strategic planning exercise, the Bank identified its strategic imperatives and continued to execute the required strategies to mitigate risks and capitalise on opportunities. A detailed account of such imperatives and strategies are given in the Management Discussion and Analysis (pages 38 to 85) contained in this Report. The 4 Commercial Bank of Ceylon PLC underlying governance structure and the risk management framework are detailed on pages 120 and 165. The Bank has obtained external assurance on integrated reporting and non-financial information on sustainability reporting from Messrs Ernst & Young and assurance on non-financial reporting from Messrs DNV Business Assurance Lanka (Pvt) Ltd., who represents DNV. The opinion expressed by the Bank’s External Auditors, Messrs Ernst & Young, who were appointed in accordance with a resolution passed at the 52nd Annual General Meeting held on March 30, 2021 is given on pages 182 to 184 of this Annual Report. The details on the remuneration of External Auditors are given in Note 21 on page 231 to the Financial Statements. As far as the Directors are aware, the Auditors do not have any other relationship with the Bank, or any of its subsidiaries and its associate. The External Auditors do not have any interest in contracts with the Bank, or any of its subsidiaries and its associate. The Board, to the best of its knowledge and belief, are satisfied with the timely disbursement of all statutory payments to the Government, other regulatory institutions, and to employees. Having reviewed the business plans of the Bank and its subsidiaries, the Board of Directors is satisfied that the Bank and its subsidiaries have adequate resources to continue their operations in the foreseeable future. Accordingly, the Financial Statements of the Group and the Bank are prepared based on a going concern assumption. Having carefully considered the matters material to the Bank and its stakeholders in preparing this Report, the Board acknowledges that reasonable care has been exercised in the preparation and presentation of this Integrated Report and Financial Statements while preserving its integrity. The extent of compliance with the requirements of Section 168 of the Companies Act No. 7 of 2007 and amendments thereto and other relevant statutes are disclosed in detail on pages 146 to 151. Annual Report 2021 > Annual Report of the Board of Directors
  7. Introducing our 53rd Annual Report Commercial Bank of Ceylon PLC commenced reporting in line with the International <IR> Framework in 2013. This Report is the 53rd Annual Report of Commercial Bank of Ceylon PLC and covers the 12- month period from January 1 to December 31, 2021, and is consistent with our usual annual reporting cycle for financial and sustainability reporting. This follows our most recent Report for the year ended December 31, 2020, for which comparatives are given, where applicable. the value creation process. It provides the reader with a clearer understanding of the Bank's direction in the wake of unfolding megatrends. We have taken into account investors’ as well as regulators’ calls for more clarity and concision in corporate reporting, and have employed a unique approach for this Integrated Report to meet the varying information needs of our valued stakeholders. Accordingly, each main section begins with a brief overview, which then expands to include further details in a comprehensive narrative format. We started integrated reporting in line with the IIRC Framework elements with our Annual Report for 2013. This has strengthened and reinforced integrated thinking across the Bank, leading to the integration of various aspects, making the Bank more sustainable in creating value over the long term by minimising risks, reducing compartmentalisation and dysfunctional behaviour, generating cost efficiencies, and making capital allocation more efficient. This not only integrated economic goals with those of society and environment, but also integrated the following aspects too, as you will find later in this Report: Transcending the medium This Report is available in multiple mediums and formats catering to the communications needs of the Bank’s diverse stakeholder groups. A limited number of printed annual reports have been produced to be dispatched to those who have requested them, taking into to account the environmental footprint of printing a large number of reports as well as the prevailing regulations. Readers who prefer the ease of accessing our Annual Report online through either a computer or mobile device can access our Online Interactive version of the Annal Report while a soft copy (PDF) version is hosted on the websites of the Bank as well as the Colombo Stock Exchange for those who would like to maintain an easy-portable digital version of the Annual Report. This approach also aims to balance the disparate imperatives of conciseness, comprehensiveness, and accessibility in our disclosure practices. Irrespective of the method, information is central to effective investor engagement. This Report provides investors with insights into the Bank’s growth potential and the strategies by which the growth will be achieved. Integrated thinking z The business model to business relevant for ascertaining future potential. Accordingly, going beyond the historical financial information that depicts the value created in the past, we have enhanced disclosures of non-financial and futureoriented information that depicts the ability of the Bank to create value in the short, medium and long-term in the future, the essence of sustainability and integrated reporting. Thereby, this Annual Report seeks to provide a holistic, integrated discussion of the Bank’s performance, operations, and strategic imperatives. Basis of preparation This Report has been prepared in line with the International <IR> framework, and the Bank’s social and environmental impacts are presented in accordance with the GRI Standards: Core option. It also comments on the Bank’s contribution towards the UNDP Sustainable Development Goals. z The concepts, principles, and guidelines used in the preparation of this Report are drawn from the following sources: z The International Integrated Reporting Framework (www.theiirc.org) z The Global Reporting Initiative opportunities in the market Sustainability Reporting Guidelines – GRI Standards (www.globalreporting.org) z Strategy with the evolving business environment z A Preparer’s Guide to Integrated Corporate z The organisation from a functional and Reporting, published by The Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka) team-based one to an integrated one z Service standards across all the channels z Handbook on Integrated Corporate leading to an integrated customer experience z The Bank’s key messages across all communication channels for greater clarity z Software systems used to make the Bank agile and speed up processes z Information available across channels and products z The Bank with other service providers such as telecoms and fintech firms Strategic focus and future orientation Non-financial information Giving the reader a clear understanding of how the Bank plans to execute strategy (to the extent that it is possible to disclose such information), this Report is also structured according to the Bank’s strategic imperatives. How the activities undertaken under the four strategic imperatives lead to value creation for the mutual benefit of the Bank and the various stakeholders, which is reflected in Financial, Manufactured, Intellectual, Human, Social & Relationship and Natural Capitals is explained on pages 33 to 65. This structure highlights the plotted course of action that will propel the Bank forward and perpetuate Recent trends make it clear that in addition to traditional forms of financial reporting, stakeholders in general, and providers of financial capital in particular, want access to non-financial information when assessing future potential of corporates. The Bank is well aware that information needs of stakeholders are changing in keeping with the dynamic environment we operate in. Investors in particular are increasingly becoming more interested in the future potential of the Bank than its past performance and non-financial information is becoming more and more Reporting, published by CA Sri Lanka in collaboration with The Integrated Reporting Council of Sri Lanka Report boundary The Financial Statements depict the consolidated performance of the entire Group, which includes the Bank along with seven subsidiaries – Commercial Development Company PLC, CBC Tech Solutions Limited, CBC Finance Ltd., Commercial Insurance Brokers (Pvt) Ltd., Commex Sri Lanka S.R.L. Italy, Commercial Bank of Maldives Private Limited and CBC Myanmar Microfinance Company Limited – and the associate – Equity Investments Lanka Ltd. (depicted in the Consolidated Financial Statements on pages 187 to 336). The Bank’s social and environmental impact, as discussed within the Management Discussion and Analysis, focuses on both Sri Lankan and Bangladesh operations of Commercial Bank of Ceylon PLC, the Parent entity of the Group which accounts for more than 98% of Group’s revenue, assets and borrowings, unless stated otherwise. Commercial Bank of Ceylon PLC Annual Report 2021 5
  8. Internal and external assessments of the Bank ’s operations in Sri Lanka and other countries such as Bangladesh are encompassed within the material aspects boundaries. The Bank always takes into account reasonable aspirations and expectations of its stakeholders and engages with them in myriad ways and they have been taken into account in deciding on the information content of this Report. Information is presented in a sustainability context, covering topics that reflect the Bank’s significant economic, environmental and social impacts that substantively influence stakeholder decisions. For your convenience, we have provided quantitative and qualitative data along with reliable external benchmarks wherever possible to ensure completeness and aid comparison and further analysis of information within this Report. During the year under review, no significant changes in the organisation type, structure, ownership, supply chain or topic boundaries took place. No changes in reporting or restatements were made of previously reported financial, social or environmental information. Quality assurance Through this Integrated Report, we set out to provide you with a holistic and meaningful picture of our business model, strategy, governance, performance, and future prospects. We also strive to illustrate the value created by the Bank in terms of nonfinancial resources such as human, natural, intellectual, and social and relationship capitals, in addition to financial capital. We have taken every effort to provide credible information with the aid of visual elements such as figures, graphs, and tables in a consistent manner facilitating clarity and comparability. The qualitative criteria taken into account in the production of both text and visual elements presented in this Annual Report include: z Completeness: This Annual Report includes material impacts within and under the direct control of the Bank, external impacts that are indirectly influenced through our engagement with stakeholders, and broader sustainability initiatives undertaken through the Bank’s own CSR Trust. z Comparability: This Report includes the performance of current and previous reporting periods together with industry benchmarks where relevant and available. z Accuracy and Consistency: The content of this Report is supported by inbuilt internal controls to facilitate traceability and verifiability of information. 6 Commercial Bank of Ceylon PLC z Clarity: This Report incorporates both text and visual elements to enhance readability, facilitate understanding, and maintain concision. z Balance: This Report makes every possible effort to present a balanced review of relevant material information. z Credibility and Reliability: The financial Figure 01: Guiding Principles, Regulations, Codes, and Acts FINANCIAL REPORTING Sri Lanka Accounting Standards (SLFRSs & LKASs) Companies Act No. 07 of 2007 and sustainability information presented in this Report has been vetted by reputed external assurance service providers. Precautionary Principle Being keenly aware of the direct and indirect social and environmental impact of our actions, the indirect consequences resulting from the business activities of our customers to whom we lend in particular, the Bank avoids or reduces any such negative impacts through credit policies, screening based on the Social and Environmental Management System (SEMS), post-disbursement supervision, dedicated green products and risk management processes. NARRATIVE REPORTING International Integrated Reporting Framework A Preparer's Guide to Integrated Reporting by CA Sri Lanka Handbook on Integrated Corporate Reporting by CA Sri Lanka SUSTAINABILITY REPORTING GRI Standards: Core option Although the Bank’s business model and operations do not directly create a significant negative impact on the environment, every effort is made to reduce its own carbon footprint through initiatives such as solar energy usage, energy efficient air conditioning and the elimination of paper usage in its processes. These efforts enabled the Bank to become the first fully carbon neutral bank in the country. UNGC Principles and UN Sustainable Development Goals Figure 01 on the right illustrates the guiding principles, regulations, codes, and Acts used for financial and narrative reporting; reporting on sustainability goals and practices; and the governance of the Bank. Listing Rules of the Colombo Stock Exchange Responsibility for sustainability practices and external assurance The Bank’s Managing Director/Group Chief Executive Officer, Chief Operating Officer and other members of the Corporate Management are responsible for the sustainability practices and disclosures made in this Report. They have actively engaged with the external assurance providers on the Report content in this regard. The Bank’s external Auditors, Messrs Ernst & Young, have assured the Group’s Financial Statements, integrated reporting and non-financial information on sustainability reporting, while Messrs DNV Business Assurance Lanka (Pvt) Ltd., who represents DNV, has assured the Bank’s non-financial reporting. The Board of Directors and the Management have no other relationship with these external assurance service providers, aside from their engagement as independent Assurance Service providers of the Group. Annual Report 2021 > Introducing our 53rd Annual Report AccountAbility – AA 1000AS v3 CORPORATE GOVERNANCE Banking Act Direction No. 11 of 2007 Code of Best Practice on Corporate Governance 2017 issued by CA Sri Lanka Securities and Exchange Commission of Sri Lanka - Act No. 36 of 1987 (as amended) ASSURANCE Sri Lanka Auditing Standards Sri Lanka Standard on Assurance Engagements SLSAE 3000; Assurance Engagements other than Audits or Review of Historical Financial Information AccountAbility’s AA1000 Assurance Standard 2008 DNV assurance methodology VeriSustain™ Contact Your comments or questions on this Report are welcome and we invite you to direct them to: Group Chief Financial Officer Commercial Bank of Ceylon PLC “Commercial House” 21, Sir Razik Fareed Mawatha Colombo 1, Sri Lanka
  9. INTEGRATED REPORT This Integrated Report provides a multidimensional view of the Bank ’s performance over the year 2021. It has been prepared in accordance with the Guiding Principles and Content Elements outlined in the International <IR> Framework. As stated in the Annual Report of the Board of Directors on page 3, the Board of Directors acknowledges that reasonable care has been exercised in the preparation and presentation of this Integrated Report while preserving its integrity. 8 14 20 33 38 – – – – – Organisational Overview Tone from the top Operating Environment Business Model for Sustainable Value Creation Management Discussion and Analysis 104 – Governance and Risk Management > Introducing our 53rd Annual Report Commercial Bank of Ceylon PLC Annual Report 2021 7
  10. ORGANISATIONAL OVERVIEW About the Bank Sri Lanka Branches ASIA 268 Bangladesh Branches 19 Subsidiaries Myanmar Subsidiary 4 1 Associate 1 Correspondent Banks 26 Maldives Subsidiary Business Promotion Officers 1 15 Italy Subsidiary Correspondent Banks 19 1 EUROPE North America Correspondent Banks 11 NORTH AMERICA Australia Correspondent Banks 4 AUSTRALIA Higher-tier Domestic Systemically Important Bank Commercial Bank of Ceylon PLC is the only private sector Bank in Sri Lanka that has been designated by the Central Bank of Sri Lanka as a higher-tier Domestic Systemically Important Bank (D-SIB). The Commercial Bank Group (which comprise of the Bank and its subsidiaries and an associate) total assets stood at 1.983 Tn. as at December 31, 2021. Accounting for approximately 10.42%, 11.58% and 11.82% of sector loans and advances, deposits and assets, respectively, 8 Commercial Bank of Ceylon PLC the Bank is the third largest bank overall in Sri Lanka, in terms of total assets, customer deposits and net loans & advances which stood at Rs. 1.949 Tn. (USD 9.746 Bn.), Rs. 1.443 Tn. (USD 7.215 Bn.) and Rs. 1.015 Tn. (USD 5.073 Bn.), respectively, as at the end of 2021. Over Hundred Plus Year Legacy The origins of the Bank date back to 1920, and marks just over a half-century of operations under its present name in 2021. With a total staff strength of 5,072 as at end 2021, the Bank serves over 3.5 million customers through a wide local and international network of branches, subsidiaries, agency arrangements, Business Promotion Officers, and correspondent banking relationships. Growing International Footprint Commercial Bank began its expansion beyond Sri Lanka’s shores with the acquisition of the Bangladesh operations of Crédit Agricole Indosuez in 2003, and became the first private sector bank to establish a branch operation outside the country. Since then, three subsidiaries have been established by the Bank in Italy, the Maldives and Myanmar. The Bank is exploring the possibilities of expanding its presence to a few more countries in the near future. Risk Profile Fitch Ratings Lanka Ltd. (Fitch) affirmed Commercial Bank’s National Long-term Rating at 'AA-(lka)' with a stable outlook in August 2021. In addition, the Bank’s Bangladesh Operation’s credit rating was reaffirmed at AAA by Credit Rating Information Services Ltd in June 2021 for the 11th consecutive year. This reflects the Bank’s intrinsic financial strength, the established domestic franchise as Sri Lanka's third-largest bank and the entrenched domestic deposit franchise that underpins the Bank’s funding and liquidity profile. Diversification The Bank’s business is well-diversified across four main business segments - Personal Banking, Corporate Banking, Treasury, and International Operations. The International Operations of the Bank, which now accounts for 12.38% of consolidated assets and 18.63% of consolidated profit before taxes, covers operations in Bangladesh, Maldives, Italy, and Myanmar. Besides geographical diversification, the Bank has successfully achieved a high level of diversification in its operations across several parameters such as customer profile, currency, products and Annual Report 2021 services portfolio, funding profile, maturity profile, economic sectors and the sources of revenue. Vibrant financial intermediation Commercial Bank became the first private sector bank in Sri Lanka to have three key balance sheet indicators to surpass Rs. 1 Tn., having crossed Rs. 1 Tn. mark in assets and deposits in 2016 and 2019 respectively and the loan book in Q2 of 2021. Demonstrating its strong role as a financial intermediary, 74.03% of the total assets of the Bank are funded by customer deposits. The Bank’s loans to deposits ratio has been over 78% on average for the past five years consecutively, reflecting a growth in loans commensurate with the growth in deposits. The Bank’s asset quality is one of the best in the industry, while its Current Accounts and Savings Accounts (CASA) is the highest among the peer banks accounting for 47.83% of total deposits. Strong capitalisation The Bank’s Tier 1 Capital Ratio and Total Capital Ratio stood at 11.923% and 15.650%, respectively, as at December 31, 2021, compared to the regulatory minimum ratios of 9% and 13% applicable for the year. The Bank’s growth was prudent with gearing in terms of on-balance sheet assets as well as risk-weighted assets remaining at 11.82 times and 6.39 times, respectively, as of the end of 2021. Demonstrating the strength of the franchise, the Bank’s shares reported the highest price to book value of 0.57 times and the highest market capitalisation of Rs. 94 Bn. (USD 470.963 Mn.) among the banking sector on the Colombo Stock Exchange at year’s end (the Bank is the ninth largest institution listed on the CSE overall). Ownership of the Bank Of the 16,609 ordinary voting shareholders of the Bank at end of 2021, DFCC Bank PLC held 12.12% and entities related to the State, including Employees’ Provident Fund, Employees’ Trust Fund Board and Sri Lanka Insurance Corporation, collectively held 18.95% of Bank’s shares. Mr Y S H I Silva (9.88%), the International Finance Corporation (7.11%), Melstacorp PLC (4.14%), CB NY S/A IFC Emerging Asia Fund LP (3.67%), CB NY S/A IFC Financial Institutions Growth Fund LP (3.67%), and Citibank New York S/A Norges Bank Account 2 (3.63%), are the other major shareholders, holding a combined ownership stake of 32.10%. Notably, the Bank has a substantial foreign shareholding, with foreign shareholders owning a combined 20.59% stake in the Bank.
  11. A Snapshot of the Bank ’s Profile Profitability Liquidity Profit After Taxation Statutory liquid assets ratio – DBU 2021 – Rs. 23.606 Bn. 2020 – Rs. 16.373 Bn. Earnings Per Share (Basic/Diluted) 2021 – Rs.19.77 2020 – Rs. 14.81 Return on Assets 2021 – 1.28% 2020 – 1.05% Return on Equity 2021 – 14.66% 2020 – 11.28% Interest Margin 2021 – 3.51% 2020 – 3.17% Credit Quality Rs. 1.949 Tn. Total assets Statutory liquid assets ratio – OBC Rs. 1.443 Tn. Liquidity coverage ratio (All currencies) Customer deposits (2020 – Rs. 1.266 Tn.) Financial intermediation maturity transformation Rs. 1.079 Tn. Gross loans and advances (2020 – Rs. 948 Bn.) Net NPL ratio 2021 – 1.44% 2020 – 2.18% Over 3.5 million Customers Liquidity coverage ratio (Rupee) 2021 – 425.97% 2020 – 599.38% Share Valuation Net Assets Value per ordinary share 2021 – Rs. 138.08 2020 – Rs. 134.67 2021 – Rs. 7.50 2020 – Rs. 6.50 Market capitalisation 2021 – Rs. 94 Bn. 2020 – Rs. 94 Bn. 2021 – 0.57 times 2020 – 0.60 times 2021 – 68.93% 2020 – 57.42% 2021 – 8.79% 2020 – 11.88% 2021 – 242.52% 2020 – 422.86% Price to Book Value Provision cover ratio Open credit exposure 2021 – 36.39% 2020 – 32.70% Dividends Per Share Gross NPL ratio 2021 – 4.62% 2020 – 5.11% 2021 – 38.73% 2020 – 44.99% 5,072 Employees Impaired Loans (Stage 3) Ratio 2021 – 3.85% 2020 – 6.78% Impairment (Stage 3) to Stage 3 Loans Ratio 2021 – 42.76% 2020 – 30.87% Stability Tier 1 ratio 2021 – 11.923% 2020 – 13.217% Total capital ratio 2021 – 15.650% 2020 – 16.819% Net stable funding ratio 2021 – 157.47% 2020 – 157.49% Leverage ratio 2021 – 5.29% 2020 – 5.74% AA–(lka) 287 Fitch Ratings Lanka Ltd. [2020 – AA–(lka)] Branches 921 ATMs 60 Correspondent banks 1st in Market Capitalisation Ranked 1st in the Banking sector on the CSE 8 Subsidiaries/Associate Top 1000 Banks Only Sri Lankan bank to be ranked for the 11th consecutive year Commercial Bank of Ceylon PLC Annual Report 2021 9
  12. Financial Highlights Table – 01: GROUP 2021 Rs. ’000 2020 Rs. ’000 Change % 2021 Rs. ’000 2020 Rs. ’000 Change %  163.675 38.801 5.845 32.957 8.667 24.290 8.957 151.966 29.047 4.531 24.520 7.433 17.087 7.586 7.70 33.58 28.99 34.41 16.60 42.16 18.07 160.886 37.810 5.809 32.001 8.395 23.606 8.957 149.711 28.017 4.505 23.511 7.138 16.373 7.586 7.46 34.96 28.95 36.11 17.62 44.17 18.07 167.475 1,472.640 1,094.931 1,983.491 159.193 1,286.616 961.859 1,762.496 5.20 14.46 13.83 12.54 164.894 1,443.093 1,078.685 1,949.213 157.146 1,265.966 947.842 1,736.218 4.93 13.99 13.80 12.27 20.15 20.15 – – 140.24 N/A N/A 15.32 15.32 – – 136.42 N/A N/A 31.53 31.53 – – 2.80 – – 19.77 19.77 4.50 3.00 138.08 79.30 72.00 14.81 14.81 4.50 2.00 134.67 80.90 70.10 33.49 33.49 – 50.00 2.53 (1.98) 2.71 14.87 1.30 N/A 5.97 1.37 – – – – N/A N/A N/A 11.64 1.08 N/A 5.41 1.88 – – – – N/A N/A N/A 3.23 0.22 – 0.56 (0.51) – – – – – – – 14.66 1.28 8.73 5.94 1.35 4.62 1.44 3.85 42.76 4.01 9.46 2.64 11.28 1.05 9.59 5.38 1.88 5.11 2.18 6.78 30.87 5.46 8.03 2.28 3.38 0.23 (0.86) 0.56 (0.53) (0.49) (0.74) (2.93) 11.89 (1.45) 1.43 0.36 N/A N/A N/A N/A 38.73 36.39 44.99 32.70 (6.26) 3.69 12.049 12.049 15.696 13.356 13.356 16.882 11.923 11.923 15.650 13.217 13.217 16.819 (1.29) (1.29) (1.17) N/A N/A N/A N/A 425.97 242.52 599.38 422.86 (173.41) (180.34) As at December 31, Results for the year – (Rs. Bn.) Gross income Operating profit before Value Added Tax on financial services Value Added Tax on financial services Profit before taxation (PBT) Income tax expenses Profit after tax (PAT) Gross Dividends Position at the year end – (Rs. Bn.) Shareholders' Funds (Stated capital and reserves) Financial liabilities at amortised cost – due to depositors Financial assets at amortised cost – Loans and advances to other customers Total Assets BANK Information per Ordinary Share (Rs.) Earnings (Basic) Earnings (Diluted) Dividends – Cash Dividends – Shares Net Assets Value Market value at the year end – Voting Market value at the year end – Non-voting Ratios Return on average shareholders' funds – (ROE) (%) Return on average assets – (ROA) (%) Financial intermediation margin (%) Total impairment provision as a % of gross loans and advances (%) Cost of risk on loans and advances (%) Non-performing loans ratio – Gross (%) Non-performing loans ratio – Net (%) Impaired loans (Stage 3) ratio (Based on proposed regulatory provisions) (%) Impairment (Stage 3) to Stage 3 Loans Ratio (Based on proposed regulatory provisions) (%) Price Earnings – Ordinary Voting Shares – (times) Dividend Yield – Ordinary Voting Shares (%) Dividend Cover on Ordinary Shares (times) Statutory Ratios % Liquid assets ratio – Domestic Banking Unit (DBU) (Minimum Requirement – 20%) Liquid assets ratio – Off Shore Banking Unit (OBC) (Minimum Requirement – 20%) Capital Adequacy Ratios (Under Basel III) (%) Common Equity Tier (CET) I capital ratio (Minimum Requirement – 2021 – 7.500%, 2020 – 7.500%) Tier I capital ratio (Minimum Requirement – 2021 – 9.000%, 2020 – 9.000%) Total capital ratio (Minimum Requirement – 2021 – 13.000%, 2020 – 13.000%) Liquidity Coverage Ratio (%) Rupee – (Minimum Requirement – 2021 – 100%, 2020 – 90%) All Currency – (Minimum Requirement – 2021 – 100%, 2020 – 90%) – – (1.31) (1.31) (1.19) – – Financial Goals and Achievements – Bank Financial Indicator Goal Achievement 2021 Return on average assets ROA (After Tax) (%) Return on average shareholders' funds (After Tax) (%) Growth in income (%) Growth in profit for the year (%) Growth in total assets (%) Dividend per share (DPS) (Rs.) Capital Adequacy Ratios CET I capital ratio (%) (Minimum requirement as per Basel III – 2021 – 7.500%, 2020 – 7.500%) Tier I capital ratio (%) (Minimum requirement As per Basel III – 2021 – 9.000%, 2020 – 9.000%) Total capital ratio (%) (Minimum requirement As per Basel III – 2021 – 13.000%, 2020 – 13.000%) 10 Commercial Bank of Ceylon PLC Annual Report 2021 Over 2% Over 20% Over 20% Over 20% Over 20% Over Rs. 5.00 2% buffer over the regulatory minimum requirement 2% buffer over the regulatory minimum requirement 2020 2019 2018 2017 1.28 14.66 7.46 44.17 12.27 7.50 1.05 11.28 0.68 (3.83) 25.15 6.50 1.27 13.54 7.72 (2.96) 6.43 6.50 1.43 15.56 20.72 5.81 14.00 6.50 1.54 17.88 24.10 14.25 12.96 6.50 11.923 13.217 12.298 11.338 12.111 11.923 13.217 12.298 11.338 12.111 15.650 16.819 16.146 15.603 15.746
  13. Strategic Highlights Refer page 39 for further details ). While The Strategic Highlights for the year 2021 are organised around the Bank’s four Strategic Imperatives ( the Financial Highlights captures the key details of the Bank’s financial performance, the Strategic Highlights encapsulates how this performance was achieved in the context of the Bank’s long-term vision. The Financial Highlights provide the reader of this report with a snapshot of the Financial Review (pages 67 to 73), while the Strategic Highlights are a summary of the Management Discussion and Analysis (pages 38 to 103), which is similarly structured around the four Strategic Imperatives. PRUDENT GROWTH High level of diversification in its operations across many parameters. Increased the provision for impairment to Rs. 24.692 Bn. for the year 2021, the highest ever annual provision in the history of the Bank. The Bank’s deposit base grew by 13.99% YoY to Rs. 1.443 Tn. resulting in the Bank’s CASA ratio improving to 47.83% in 2021 from 42.72% in 2020, the best in the Banking Sector. Overseas operations now contribute 12.4% of the assets and 18.6% of the pre-tax profits of the Group. First bank in the region and the 4th bank in the world to introduce a tool (approved by the UNEP) for its retail customers to measure the environmental impact of their spending via its Flash Digital Bank Account App. CUSTOMER CENTRICITY The “Q+ Payment App” of the Bank, which is the first app to be certified and launched under the LANKAQR standards of the CBSL, reached over 100,000 customer registrations in 2021. Increased membership in BizClub by 19.38% to 4,866. Established a Centralised Credit Processing Unit, completed the SME Banking Transformation operation and became the largest lender to the SME sector among private sector banks via the “Saubhagya” scheme. Secured a USD 50 Mn. loan from the CDC Group, UK and supported underserved SMEs directly to boost jobs and promote economic and social inclusion. Launched the exclusive Women Banking vertical named “Anagi Women Banking” and added a range of new financial and non-financial products and services for women. The Bank’s Green Financing portfolio has contributed to reducing 225,847.33 tCO2e emissions to the atmosphere. ComBank website was launched as a trilingual resource with a series of cutting-edge enhancements. Board-approved prudent dividend policy in place. Re-launched a dedicated loan scheme named “Diribala Green Development Loan” Scheme targeting financing of Solar Power Systems of SMEs/ Business clients. Disbursed 1,208 green financing loans and leasing facilities to support customers to transition to a low-carbon economy. The Bank proactively managed the Foreign Currency liquidity by adopting new strategies in managing Foreign Currency trade flows, working closely with its corresponding banks and its trade finance customers to manage and address the concerns and requirements. Anti-Bribery and Anti-Corruption Policy was approved by the Board during the year. LEADING THROUGH INNOVATION Became the first bank in Sri Lanka to accept digital signatures from business customers using LankaSign, improving the customer experience of the Bank’s retail and corporate customers. Launched the first LANKAQR supported android POS device, allowing the processing of transactions via VISA, Mastercard, UnionPay, LankaPay and JCB cards as well as QR-based wallet payments under LANKAQR. The Bank became the first in Sri Lanka to deploy EMV 3DS fraud prevention technology for authenticating payments made by credit, debit and pre-paid cards in collaboration with Visa. Set up Mini Digital Experience Zones to help customers gradually migrate into digital channels. Invested over Rs. 1.2 Bn. in IT infrastructure. Over 212,000 existing customers migrated to digital channels, a growth of 35%. Launched the Agri Gold Loan facility during the year to support those engaged in agriculture, fisheries, and livestock farming. Dirishakthi Value Chain Development Program’ was launched to strengthen rural value chains, focusing on segments such as dairy, tea small holders, coir, spices and ground nut. Debit and credit card usage grew by 59% and 30% respectively. OPERATIONAL EXCELLENCE First Sri Lankan Bank to become fully Carbon Neutral. Achieved improvements in all productivity and efficiency ratios, recording the best performance over the past five years. All branches operating in Bank-owned buildings are commissioned with solar power. Implemented a range of operational measures, including: splitting teams and working at alternate sites and from home; providing food, lodging, transport, and personal protective equipment for the safety of all staff; and outfitting branches with partitions, sanitisers and instituting other best practices for social distancing and hygiene, and deployed the Call Tree Notification System. Signed Collective Agreement with the Bank’s branch of the Ceylon Bank Employees’ Union for a further 3-year period. Solar power generated 14.14% of the Bank’s energy consumption, a fourfold increase since 2018. Became the first bank in Sri Lanka to link the Import and Export Control Department (IECD) to a digital platform with LankaPay, enabling customers to pay their license fees to the IECD conveniently. A dedicated YouTube Channel was launched to increase customer awareness about ComBank Digital in addition to user guides. Number and the value of transactions initiated through digital channels increased by 60% and 70% respectively, YoY. IPG usage in terms of volumes and merchants increased by 65% and 37% respectively, YoY. Commercial Bank of Ceylon PLC Annual Report 2021 11
  14. Our Journey over 100 years 1920 Eastern Bank Ltd . (EBL) opens a Branch in Chatham Street 1980 - 1998 1980 Commercial Development Company (CDC) formed to construct Head Office Building for CBC with 40% equity participation 1984 1957 - 1979 Head Office moved to new premises at No. 21, Sir Razik Fareed Mawatha, (formerly Bristol Street), Colombo 01 1987 1957 EBL was acquired by Chartered Bank 1969 Commercial Bank of Ceylon Ltd. (CBC), incorporated with EBL holding a 40% stake 1971 Business of EBL was completely integrated with Chartered Bank 1972 First two branches opened in Galewela and Matale 1973 CBC acquired Galle, Jaffna and Kandy branches of Mercantile Bank Ltd. 1979 Offshore Banking Centre formed EBL changed its name to Standard Chartered (UK) Holdings Ltd. 1990 Introduced ATM facilities to customers 1993 Introduced core banking software-International Comprehensive Banking System (ICBS) 1996 Increased shareholding in CDC to 94.5% through a share swap 1997 Standard Chartered Bank sold its 40% stake in the Bank 1998 First 365 Day Branch opened in Colombo 07 All branches linked to ICBS (except Jaffna) 12 Commercial Bank of Ceylon PLC Annual Report 2021 2000 - 2009 2000 Launched Internet Banking 2001 Opened the 100th branch at Kaduruwela 2003 Acquired operations of Credit Agricole Indosuez in Bangladesh 2005 Raised USD 65 Mn. syndicated loan, becoming the 1st non-sovereign corporate in Sri Lanka to source external funding 2006 Issued USD 10 Mn. bond, becoming the first indigenous bank to do so 2008 First Sri Lankan bank to be ranked among the Top 1000 Banks in the World 2009 First Sri Lankan Bank to be certified CMMi 2011 - 2015 2011 Commenced ‘Sharia’ compliant Islamic Banking Opened 200th branch in Kataragama Opened an exclusive “Elite” Branch at Colombo 07 for high net worth customers Reached milestone 500th ATM located at the Maradana railway station 2012 Raised USD 65 Mn. from the International Finance Corporation (IFC) Launched an exclusive Savings Account for Women named “Anagi” 2013 Opened “24-Hour Automated Banking Centre” at Ward Place Raised a 10-year subordinated debt of USD 75 Mn. from IFC 2014 Bank acquired 100% stake of Indra Finance Ltd. Became the first Sri Lankan Bank to be granted a license by the Central Bank of Myanmar to operate a Representative Office 2015 Indra Finance, a fully-owned subsidiary of CBC, renamed Serendib Finance Ltd.
  15. 2021 Became Sri Lanka ’s first carbon-neutral bank UK’s CDC Group commits USD 50 Mn. to bolster SME lending and climate projects 2016 - 2020 2016 Commenced commercial operations of Commex Sri Lanka S.R.L. Italy, our fully owned subsidiary Opened Commercial Bank of Maldives Private Limited, 2nd foreign subsidiary with a 55% stake The Bank became a Trillion Rupee Asset company 2017 Commercial Bank of Maldives opened its second branch in Hulhumalé CBC Myanmar Microfinance Company Limited., was established as the second fully-owned subsidiary of CBC outside Sri Lanka in Nay Pyi Taw, Myanmar 2018 Launched the country’s first fully-automated cheque deposit machine at City Office Branch in York Street Colombo 2019 2020 One of the leading mobile payment solutions in China, “WeChat Pay” acceptance launched in Sri Lanka for the first time by CBC with a partnership between Tenpay Payment Technology Ltd. Celebrated 100 years of banking in Sri Lanka with a series of events including a staff gathering of unprecedented scale Became PCI-DSS (Payment Card Industry Data Security Standard) certified Launched “ComBank Digital” powered by Fiserv, the US-based global provider of financial services technology “Flash” becomes Sri Lanka’s first multilingual Digital Banking App Launched ComBank Q+ Sri Lanka’s first QR based payment app under LANKAQR Launched “Yasasa” savings account exclusively for pensioners Private placement of shares with the IFC for USD 50 Mn. First private sector bank to achieve the feat of Loan book surpassing Rs. 1 Tn., joining Assets and Deposits Named once again among the global giants in banking, becoming the only Sri Lankan bank to be ranked in the “Top 1000 World Banks”, for the 11th consecutive year Commenced a project to donate smart STEM classes to 100 schools to mark the Bank’s centenary The Bank was declared the “Strongest Bank Brand” in Sri Lanka by Brand Finance Enabled Dynamic Currency Conversion at ATMs for foreign Visa Cards Serendib Finance Ltd., a fully-owned subsidiary of CBC, was renamed CBC Finance Ltd. Launched UnionPay cards by a bank in Sri Lanka for the first time, making Sri Lanka the 51st country in the world to issue UnionPay cards Introduced Flash Digital Bank Account > Our Journey over 100 years Commercial Bank of Ceylon PLC Annual Report 2021 13
  16. TONE FROM THE TOP Joint Message from the Chairman and his Successor Resilience is ingrained in the very ethos of Commercial Bank . Despite a myriad of challenges during the financial year 2021, the Bank created significant shareholder value, helped millions of customers achieve their goals, paid over Rs.14 Bn. in taxes to strengthen the fiscal resilience of our Nation, supported our communities through charitable donations and volunteerism, and made progress towards achieving Sri Lanka's climate-related goals. A strong financial performance in an uncertain context The Sri Lankan business environment performed below expectations in 2021 partly due to the economic concerns fuelled by foreign exchange shortfalls prevalent during the year. The government took proactive efforts to ensure the long-term stability of the Sri Lankan economy and 14 Commercial Bank of Ceylon PLC stemmed the surge of the pandemic through effective COVID-19 protocols and processes. Nevertheless, the operating context remained challenging. Recording a resilient performance, we ended a tough 2021 with solid growth. In line with the Bank's strategic pillars of Prudent Growth and Operational Excellence, we placed emphasis on controlling operational expenses and arresting any possible deterioration in our cost-to-income ratio and profitability. As a result, the Group profit after tax increased by 42.16% YoY to Rs. 24.290 Bn. for the year compared to Rs. 17.087 Bn. in 2020. The Bank recorded the lowest cost-to-income ratio among the peer banks, which improved from 33.95% in 2020 to 31.61% in the year under review. The gross loans and advances of the Group Annual Report 2021 grew by 13.83% to Rs. 1.095 Tn. while total deposits grew by 14.46% to Rs. 1.473 Tn. as of December 31, 2021. Consequently, total assets increased by 12.54% to Rs 1.983 trillion. With healthy deposit inflows, the Bank carried substantial excess liquidity levels throughout the year and also maintained a solid capital position. The Bank's CASA ratio strengthened further to 47.83%, becoming an industry benchmark in the process. As a result of this strong performance this year, we are happy to announce that we have increased dividends to Rs. 7.50 per share compared to Rs. 6.50 per share paid annually over the past nine years. A track record of operational excellence The Bank has grown over the decades to its current position as Sri Lanka's largest private sector bank and has built a rich legacy as the most recognised, both locally and internationally, bank in the country. We are extremely proud that we have won awards for all facets of the Bank’s performance: customer service, digital innovations, sustainability, social responsibility, governance, corporate communication,
  17. etc . The Bank's recent recognitions include the overall award for the Best Sustainability Report 2020, the Best Corporate Citizen award, the Best SME Bank, the Domestic Trade Finance Bank of the Year, the Most Respected Bank in Sri Lanka, and the Strongest Bank Brand, among others. During 2021, a primary objective was to make the best use of our assets – which, to use the vocabulary of Integrated Reporting, involves making use of all of the Bank’s different capitals, not simply financial capital. In terms of customer capital, we focused on deepening our customer relationships by providing exemplary service during challenging times, making banking more accessible to and inclusive of the public. In terms of human capital, we focused on not only on enhancing the skills and competencies of our people in core banking functions, but training all levels of staff in a wider array of topics like compliance, corporate governance, and integrity. And in terms of manufactured capital, we emphasised improving the performance of loss-making branches. The Bank has one of the largest touch-point networks of any corporate in the country, a network that was built through a huge strategic effort during the late 1990s and 2000s. Even as the emphasis shifts from brick-and-mortar branches to digital banking, the Bank recognizes the immense value of its network, and will continue to capitalise on all the benefits – in outreach, customer relationships, new customer acquisition, etc. – that an island-wide physical presence offers. A strategic blueprint for growth Crucial to the Bank’s resilience is its strategic planning process, which is well entrenched and has been fine-tuned over a period of 25 years. The Corporate Plan and Budget are set out for five years on a rolling basis, allowing for the Bank to be responsive to shifts in the operating environment. Especially when the global and local operating environment is volatile, it is important that we frequently take stock of our strategic direction and reassess and recalibrate it as needed. In 2021, we continued to strengthen our position in the SME and Micro enterprise customer segment, and, in particular, with enterprises that are women-led and women-connected. A strategic approach is imperative here since these segments encompass a wide range of industries of different sizes. As such, catering to them requires building our own skills and capacities to create solutions that meet their needs and expectations, rather than scaling down solutions that are applicable to larger corporates. Our ongoing SME Banking Transformation Project and our Gender Advisory Project are enabling us to do just that, and the Bank has emerged as a leading lender to these segments. > Joint Message from the Chairman and his Successor We also made great progress in the execution of our Digital Road Map, and we have virtually arrived at our target of becoming a digital bank, i.e. offering our customers a full range of services and journeys through digital channels. However, providing a customer experience of simplicity and functionality is only one aspect of our Digital Road Map; the other is ensuring that our internal processes and controls are similarly digitalized, creating end-to-end digital chains. This allows our people to be relieved of tedious, repetitive tasks, and reassigned to more customercentric functions, which, in turn, not only drives our profitability, but also enhances internal stakeholder experience as well. Proactive risk management and sound corporate governance Necessary in an unstable operating environment is an astute and proactive approach to risk management. In 2021, we worked with a consultant to implement an Early Warning Signals system. The system’s predictive capabilities will analyze portfolio performance and market trends to identify risk-elevated assets, allowing us to better understand the pressures our customers face and collaborate with them more productively to avert negative outcomes. Furthermore, with capital providing an indispensable buffer during times of heightened credit risk, the Board played a guiding and advisory role in prudent capital management. This is particularly crucial as a true picture of the condition of the Bank’s loan book will be revealed once government relief and forbearance measures are phased out in 2022, and we must be prepared to manage credit risk accordingly. Additionally, a competitive and saturated industry landscape means that there is an even greater demand for the Board to remain vigilant in terms of its corporate stewardship. Our stakeholders have heightened expectations of transparency, accountability, and good governance that go beyond mere compliance. The Bank, through its conduct and performance, must demonstrate its corporate integrity and responsibility – and this is a pre-condition for its ability to remain a viable enterprise in the communities in which it operates. The reader will find more information on these aspects in the Chairman’s message on Governance on page 117. Vote of thanks from Justice K Sripavan As I conclude my tenure on the Board as a Director since April 2017 and as the Chairman since December 2020, I extend my sincere appreciation and gratitude to several crucial people whose support was invaluable. Even as Sri Lanka faced unprecedented economic challenges, I have worked closely with the Deputy Chairman/ Chairman Designate Prof A K W Jayawardane who will assume duties as the Chairman of the Bank on March 1, 2022. His insights and broad experience will be a great asset for the Bank and the Board. I am deeply grateful to the Managing Director/Group Chief Executive Officer, Mr S Renganathan and the Executive Director/Chief Operating Officer Mr S Manatunge for their outstanding efforts over the past truly challenging year. I warmly welcome the Deputy Chairman Designate, Mr Sharhan Muhseen, who will assume duties as the Deputy Chairman from March 1, 2022. Against the backdrop of economic uncertainty fuelled by the pandemic, our staff represented the Bank with immense professionalism and dedication and worked tirelessly to serve our customers, many of whom were facing struggles of their own. On behalf of the Board, I thank all our staff members for their dedication and response during this difficult period. I am grateful for the unstinted support and loyalty of our shareholders, customers and other stakeholders. My appreciation is extended to my colleagues on the Board, for their strong and consistent support and insightful guidance. The Bank is in good hands and is well placed to deliver sustainable long-term value for stakeholders. Vote of thanks from Prof A K W Jayawardane As I assume my position as the Chairman of the Bank, I wish to extend my sincere gratitude to Justice K Sripavan who will be relinquishing his duties from the Board effective March 1, 2022. Under his visionary leadership, the Bank navigated an unprecedented year and ascended to greater heights. I thank him for his dedicated service to our Bank and wish him well with his future endeavours. My appreciation and warm wishes are extended to the Deputy Chairman Designate, Mr Sharhan Muhseen who will assume duties as the Deputy Chairman of the Bank. I thank the Managing Director/Group Chief Executive Officer, Mr S Renganathan and the Executive Director/Chief Operating Officer, Mr S Manatunge for their exemplary leadership. My appreciation is extended to our shareholders and other stakeholders for their unstinted support throughout the year. I also acknowledge the hard work and dedication of the Commercial Bank team, who stepped up for our customers and shareholders in another challenging year. They remain our greatest asset. Drawing on our experience of 102 years and our strong foundation, I look forward to 2022 as we continue to deliver value to our shareholders and exemplary services to our customers. Justice K Sripavan Prof A K W Jayawardane Chairman Chairman Designate Colombo, February 25, 2022 Commercial Bank of Ceylon PLC Annual Report 2021 15
  18. Managing Director / Group Chief Executive Officer's Review We have faced a profound crisis with courage, conviction, and resilience and I remain optimistic about what lies ahead for our Bank. 16 For nearly two years, we have been maneuvering through an unprecedented global pandemic that has challenged us all, both personally and professionally. Amid this time of turmoil and unpredictability, we improved the financial wellbeing of our customers and communities and strengthened the resilience of our Bank. of the country’s economy. These included the effective vaccination drive supported by efficient COVID-19-related protocols and processes and the efforts to increase value-added exports, boost FDIs, and revive tourism via strategic country positioning. We entered 2021 with renewed hope and optimism. Unfortunately, Sri Lanka faced multiple challenges even beyond the COVID-19 pandemic, most significantly, economic concerns fuelled by foreign exchange shortfalls prevalent during 2021, which exerted an adverse impact on the business community and our customers. The Government took proactive measures to curb the spread of the virus while ensuring the revival and long-term stability Despite the challenging operating context, the Bank has delivered a resilient performance, weathering the economic effects of the pandemic, and we have continued to progress and transform. We are proud, in these very difficult times, of having served our customers and the communities in which we operate while going above and beyond to safeguard our employees. Our main focus for the year was to enhance the customer experience across Commercial Bank of Ceylon PLC Delivering for our customers Annual Report 2021 our retail, corporate, and SME segments. We focused on creating end-to-end customer journeys by seamlessly integrating human and digital interactions to get even closer to customers. Our team worked with empathy and understanding, analysing the information shared by customers to better appreciate their goals and challenges to create more personalised products, services, and experiences. We are exceedingly proud of the ways in which our team served with the utmost dedication, putting customers first. Our branches stayed open for business throughout the pandemic to extend an uninterrupted service. The reliability and robustness of our network is exemplified by the high value of cash dispensed through our automated cash dispensing network, comprising automated teller machines
  19. (ATMs) and cash recycler machines (CRMs), which exceeded a mammoth Rs. 91 Bn. in December 2021. This emphatically demonstrates the indispensable role we play in the lives of Sri Lankans. Enhancing the digital experience of customers The investments we made over the years in building our digital ecosystem provided a strong foundation to meet the increased demand for digital services and become a pioneer in the digital payment space. As per the Bank’s Digital Strategy 2021-2023, we continued to spearhead innovative, convenient and comprehensive digital experiences for our customers by redesigning conventional banking processes as digital processes, integrating with other ecosystems, upgrading internal systems to capitalise on changes in the regulatory environment, developing talent and building partnerships. We continued to deliver compelling, emotive digital propositions to elevate the customer experience in the postpandemic new normal, offering customers instant gratification, increased convenience, flexibility, and tailored services they seek. Our retail customers were onboarded to our digital platforms, facilitating simplified customer experiences in an environment of the highest security standards. To facilitate customer migration to digital platforms, we set up Mini Digital Experience Zones, deployed Dedicated Digital Assistants to guide customers in digital migration and set up automated banking centres in the branches. The success of our efforts saw a 35% YoY increase in digital adoption of our existing customer base and a 29% increase in new customer onboarding during the year. Reimagining customer service using technology, we were the first bank in Sri Lanka to launch Viber banking and WhatsApp banking to enhance customer experience by using new-age communications to offer solutions that are relevant to the times. Whilst continuing our efforts to promote a cashless ecosystem and facilitate digital access, these innovative channels encouraged non-digital customers to embrace digital banking. During the year, several advanced features were added to our groundbreaking digital banking app, Flash Digital Bank Account, and to ComBank Digital to elevate user experience and convenience further. Furthermore, we introduced several automated processes focused on building robust back-end digital processes improvements to enhance customer experience. These included becoming the first bank in Sri Lanka to accept digital signatures from business customers, automating the analysis of CRIB reports, implementing an image-based customer request processing flow, and an ATM reconciliation system, to name a few. Uplifting the national economy As a Domestic Systemically Important Bank, we have been a driving force in partnering and cooperating with national economic development efforts, playing a significant role in the post-pandemic recovery process. Our support extended to granting working capital loans and providing concessions to affected sectors, which stretched beyond the mandated debt moratorium measures. In the face of uncertainty, we continued to build on our last year’s momentum and relief program, emerging as the leading lender for COVID-19 relief amongst private sector banks in Sri Lanka whilst initiating two major loan programs for SMEs and Micro enterprises affected by the pandemic. Under the ‘Arunella’ financial support scheme that was launched in 2020, multiple initiatives were implemented to lend support to the SMEs, ranging from relief schemes and special loans schemes to reducing lending rates and offering concessions and more. In 2020 and 2021, we had extended 49,566 moratorium facilities to the tune of Rs. 217 Bn. to affected customers. Furthermore, 25% of the total portfolio of advances that came out of the moratorium were restructured through proactive communications and close monitoring by our staff. We were able to maintain our net non-performing loan ratio at a low level of 1.44%, which reflects the high asset quality maintained by the Bank and the success of the initiatives implemented to support our customers tide over the difficult operating context. Supporting the SMEs The SME sector forms the backbone of the Sri Lankan economy, accounting for nearly 80% of all businesses, and is a main source of employment generation accounting for 35% of jobs in the Nation. Recognising the importance of the SMEs, which was one of the hardest hit by the pandemic, we pioneered tailor-made financial solutions to the sector. In recognition of our efforts towards the SME sector, the UK-based Global Business Outlook (GBO) awarded us as the “Best SME Bank” in 2021. The ComBank Biz Club, which was launched in 2019 to provide SMEs with extensive networking opportunities and other benefits beyond lending, has grown to over 4,800 members, comprising 42% of our SME portfolio. Our SME Banking Transformation operation, which was initiated in 2020, was formalised during the year under review. This includes a new SME architecture in the form of a > Managing Director/ Group Chief Executive Officer's Review The investments we made over the years in building our digital ecosystem provided a strong foundation to meet the increased demand for digital services and become a pioneer in the digital payment space. Centralised Credit Processing Unit (CCPU), which enabled the Bank to become the largest lender to the SME sector across the Banking Industry in 2020. The setting up of the CCPU helped to expedite the service levels and facilitated doorstep-banking services to the SMEs. The SME customer relationships were further strengthened and new relationships were acquired during the year under review through the newly designated SME relationship managers and SME sales staff, who extended a proactive and speedy doorstep banking service to this segment. All our sales staff were empowered to access and upload information to the Bank’s centralised system in real-time reducing the processing time and delivering a seamless service. Empowering women Our commitment to women empowerment is evident in our products that support women's health and wellbeing, career advancement, education, access to finance and financial independence. In partnership with the International Finance Corporation (IFC), a strategic initiative was taken to conduct a “Gender Advisory Project”, which is a 360-degree approach to focus on both financial and non-financial aspects to further improve our attention on the needs of female customers. In addition to empowering women at our workplace, we have continued to offer non-financial services, such as conducting programs to enhance the knowledge and financial literacy of women entrepreneurs, and establishing women networks to enable women to excel in their chosen trades. Notably, women make up more than 40% of our Micro customer segment, while close to 50% of the Bank’s SME exposure is in “women-connected” entities. Commercial Bank of Ceylon PLC Annual Report 2021 17
  20. Advancing sustainability In a landmark accomplishment during the year , we secured a USD 50 Mn. funding facility from CDC Group, UK’s development finance institution and impact investor, to extend lending to SMEs and support climate projects in Sri Lanka. The investment marks CDC's re-entry into Sri Lanka and its first climate commitment in the island. The investment has strengthened our own Green Financing strategy, supporting Sri Lanka’s commitments under the Paris agreement and contributing to United Nation’s Sustainable Development Goals (SDG) on affordable and clean energy, decent work and economic growth and climate action. Our commitment to sustainable financing is further demonstrated when we pioneered a mandatory social and environmental screening process for our project lending activities, becoming the first bank in Sri Lanka to venture into Green Financing. During the year under review, we disbursed 1,208 green financing loans and leasing facilities, enabling customers to pursue ventures that will aid in the transition to a low-carbon economy. We also revolutionised digital banking by introducing the “Save the Environment” feature in the “Flash” mobile application to measure and offset customer impact on the environment and promote an understanding of the social carbon footprint of consumption. Our position as the pre-eminent bank in climate financing and environmental consciousness in the South Asian region was exemplified when we became one of the top banks – and the only Sri Lankan bank – to win two Climate Assessment for Financial Institutions (CAFI) awards from the IFC. We continued to support our communities in a myriad of ways during the year under review– by donating medical equipment and contributions to the COVID-19 fund, uplifting education and community development, and creating employment opportunities for young entrepreneurs. Nurturing a winning team Our staff demonstrated tremendous resilience over the past year, showing that regardless of the circumstances, they will go over and above to support our customers, communities, and one another. Our people and our culture are and will continue to be our biggest competitive advantage. We strive to be a magnet for the best people, those who help our customers with empathy and a deep understanding of their requirements. As the largest private sector 18 Commercial Bank of Ceylon PLC bank in the Nation, they impact millions of customers every day and the communities where we all work and live. Our unwavering commitment to diversity and inclusion and career development creates an environment that unleashes innovation and allows our people to perform at their very best in an environment where everyone feels they have an equal opportunity to belong and build a career. During the year, we continued to support our people with new benefits, health and wellness support, and frequent communication to help them manage through this challenging period. We renewed the collective agreement with the Bank’s branch of the Ceylon Bank Employees’ Union (CBEU) effective January 2021 for a further 3-year period which offered increases in salary and a host of other benefits. A resilient performance We continued to demonstrate remarkable operating resilience throughout the pandemic through customer focus, digital engagement and operational excellence. Our results reflect our strong ability to maintain healthy and balanced growth in core banking operations to mitigate the impacts of fluctuations in income. Each quarter, we have been maintaining or improving on our key performance ratios to become even more financially stable and better positioned to continue our mission as a systemically important bank. The profit after tax of the Group swelled by 42.16% YoY to Rs. 24.290 Bn. for the year ended December 31, 2021. This is before providing for the proposed Surcharge Tax, which had not been enacted in Parliament at the time of reporting. The Bank’s Cost to Income Ratio before VAT on Financial Services improved to 31.61% at the end of the year under review from 33.95% in the previous comparable period. Total assets of the Group increased by 12.54% over the year to Rs. 1.983 Tn. and the gross loans and advances of the Group grew by 13.83% to Rs. 1.095 Tn., recording a monthly average growth of Rs. 11 Bn. over the 12 months. A noteworthy achievement of the year under review was the continuous improvement of the Bank’s CASA ratio, which stood at 47.83% in 2021, improving from 42.72% at the end of 2020. The Bank’s Tier 1 Capital Adequacy Ratio (CAR) stood at 11.923% as at end December 2021, and the Total Capital Ratio stood at 15.650%, compared to the revised minimum requirements of 9% and 13% respectively imposed by the Annual Report 2021 Our main focus for the year was to enhance the customer experience across our retail, corporate, and SME segments. We focused on creating end-to-end customer journeys by seamlessly integrating human and digital interactions to get even closer to customers. regulator consequent to the COVID-19 pandemic. Throughout the financial year 2021, substantial excess liquidity levels were carried with healthy deposit inflows, showcasing the confidence the Bank has built over the years. As a result, our deposits grew by 14.46% during the year and reached Rs. 1.473 Tn. by the year end. However, at the time of writing this review, the banking sector is experiencing a shortage of liquidity in the market, and the comfortable levels of liquidity will help us brace ourselves for the challenges arising therefrom. Our overseas operations and subsidiaries, especially in Bangladesh and the Maldives, continued to make substantial contributions to the Bank/Group profits. A detailed analysis of our performance is given in the Financial Review on pages 67 to 73. Future outlook Looking ahead, we anticipate the inflationary pressure to elevate in 2022. The increase in taxation is expected to challenge the entire banking sector, exerting pressure on the banks’ liquidity positions and capacity to lend due to the resulting reduction in capital adequacy levels. Although we have continued to maintain a capital adequacy ratio exceeding 200 bps above the mandated requirement in the past, maintaining such > Managing Director/ Group Chief Executive Officer's Review
  21. a buffer will be a challenge going forward . Our liquid asset ratio could be impacted due to the liquidity shortage in the market. Furthermore, we will maintain a cautious approach to new lending opportunities in 2022 given the high inflationary scenario. As we continue to explore diverse opportunities to expand our business both locally and globally, we intend to venture in to fund management operations by establishing a fund management company in the Asia Pacific region in 2022. Grateful thanks I wish to close by extending my deep appreciation to our staff across Sri Lanka and other overseas locations for their unwavering dedication, resilience and resolve as they stood by our customers despite the often difficult circumstances. I am grateful for the confidence our customers have shown us as we have continued to stand by them through these challenging times. The Board has been a tremendous source of support throughout the challenging year and I am grateful for their ongoing engagement, counsel, and support. I extend my sincere appreciation to our Chairman, Justice K Sripavan who will be relinquishing his duties from the Board effective March 1, 2022, under whose visionary leadership the Bank navigated an unprecedented year. I extend my warm wishes to our present Deputy Chairman, Prof A K W Jayawardena who will assume duties as Chairman from March 1, 2022, and Mr Sharhan Muhseen who will assume duties as Deputy Chairman from March 1, 2022. Their leadership and foresight will be a great strength in steering the Bank to greater heights. I also wish to thank the Managing Director and Head of Asia, Mr Srini Nagarajan and the officials of Commonwealth Development Corporation, UK, for their unstinted support. We have faced a profound crisis with courage, conviction, and resilience, and I remain optimistic about what lies ahead for our Bank. S Renganathan Managing Director/ Group Chief Executive Officer Colombo, February 25, 2022 > Managing Director/ Group Chief Executive Officer's Review Commercial Bank of Ceylon PLC Annual Report 2021 19
  22. OPERATING ENVIRONMENT Connecting with Stakeholders As evident from the developments around the globe , proliferation of the social media from instant messaging and blogs to social networking sites with its enormous “wordof-mouth” impact has made it possible that anybody can be a stakeholder, making the selection and prioritization of stakeholders to engage with difficult and also, changing the manner corporates communicate with them. While compounding these difficulties, the unprecedented conditions that prevailed in the recent past have created an acute need to engage deeply with stakeholders to clearly identify their concerns and aspirations and appropriately engage with them. Accordingly, the Bank considers those that have the potential to make an impact on its value creation process and those who are affected by its activities as its stakeholders that need to be constantly engaged with. Based on the above, we have identified the following groups to be our key stakeholders (Table 02) considering their power and their Refer interest in our business model ( page 34) and we have presented them in the order of their ability to affect our operations from high to low. The diagram given below (Figure 02) demonstrates the stakeholder engagement process in place at the Bank which reflects our ethos of having the best interest of all the stakeholders at heart – Bank’s tag line – “Our interest is in you” which has enabled us to maintain continuous and open engagement through multiple platforms, thereby strengthening collaboration with stakeholders. This process has paved the way for us to incorporate their legitimate concerns and expectations in to our strategy and deliver value to and, in turn, derive value from them, leading to sustainable value creation. Table 02: Our Key Stakeholders Stakeholder group Level of priority and the reason Engagement strategy Investors High – due to the difficulty in raising fresh capital to meet the capital management objectives of the Bank given the lackluster performance in equity markets consequent to the adverse economic environment Highly engaged Customers High – because the ability to operate as a “going concern” depends on how best and effectively their expectations are met Highly engaged Employees High – they connect the Bank and the customers Highly engaged Government institutions and regulators High to moderate – since we are operating in a highly regulated industry and being a top tier Domestic Systemically Important Bank Keep satisfied Business partners High to moderate – due to the dependence on critical to less customized solutions by vendors Keep informed Society and environment High to moderate – due to the obligation to operate responsibly to secure its social license Keep informed Figure – 02: Our stakeholder engagement process FEEDBACK Feedback on performance negative/positive IDENTIFICATION PLANNING ENGAGEMENT Identify and prioritise issues Identify stakeholder group Establish objectives, scope, and timelines Identify specific stakeholders Prioritise stakeholders Determine engagement mode Allocating necessary resources Conduct engagement REPORTING EVALUATION Report to stakeholders MONITOR Measure the effectiveness, monitor lapses/ shortcomings 20 IMPLEMENTATION Communicate policies, procedures, and timelines of implementation Implementation Commercial Bank of Ceylon PLC Annual Report 2021 RE-ENGAGE Repeat engagement, if needed Evaluate results Evaluate effectiveness of the process Determine the need for further engagement DESIGNING PRIORITISATION Identify methods/modes of addressing the issue Formulate necessary policies and procedures Pre-implementation testing, if required Prioritise findings for further action
  23. As depicted in Table 03 on pages 21 and 22 , multiple formal mechanisms are in place to connect with our stakeholder groups, to address their expectations. Responsibility for such engagement is shared across the Bank at every stakeholder point of contact. The changes brought about by the pandemic affected the way, the level and the frequency of engagement with our stakeholders. Following the movement restrictions and lockdowns during the year, we resorted to digital mediums more and more in engaging with our stakeholders. Our stakeholder engagement process enables to better adapt ourselves to meet the evolving challenges, sustain and improve our business model, drive innovation, and gather invaluable insights for our strategic planning process. Table 03: Mode and frequency of stakeholder engagement WHAT ARE THE KEY TOPICS RAISED AND FEEDBACK PROVIDED ENGAGEMENT MECHANISM AND FREQUENCY INVESTORS CUSTOMERS Engagement mechanism Frequency Engagement mechanism Frequency Annual Reports and AGMs Annually Customer visits As required Extraordinary General Meetings As required Complaints received As required Interim financial statements Quarterly Complaints resolution officer, relationship managers As required Investor presentations As required ComBank Biz Club Continuous Press conferences and releases As required Branch network and call centre Continuous Announcements to CSE As required Media advertisements As required One-to-one discussions As required Corporate website Continuous Corporate website Continuous Customer workshops As required Feedback surveys As required Financial performance Governance Transparency and disclosure Business expansion plans Risk management Sustainable growth Resilience to the effects of the pandemic Rising NPA and impairment charges Dividend payments Economic slowdown due to lack of policy consistency Achieving sustainable business growth against accepted risks Sharp drop in the FCY reserves and successive sovereign downgrades (i) Robust Risk Management Framework (ii Optimum levels of liquidity and maximising profitability by optimal usage of liquid assets HOW DID THE BANK RESPOND TO STAKEHOLDERS (iii) Maintained comfortable levels of capital adequacy (iv) Worked closely with its corresponding banks and its trade finance customers to manage the foreign currency liquidity (v) Reached out to new funding partners and established new funding lines Swift service Customer security and privacy Service quality Affordability of services and convenience Grievance handling mechanism Financial education and literacy Financial support for revival of business Access to financial services Enrolment to digital platforms Operationalising of CBSL directives Growing interest in sustainable investing among private sector Need of Financial support for women entrepreneurs (i) Adjusting the ways of working and service delivery channels and providing the necessary infrastructure to support customers (ii) Set up Mini Digital Experience Zones, to help customers gradually migrate into digital channels (iii) Extended relief to diverse customers affected by the pandemic through moratorium schemes, relief to non-performing borrowers, reduction of lending rates (iv) Non financial support to SMEs and Micro Businesses - Com Bank Biz Club launched grew by 830 to 4866 members in 2021. An initiative was taken to launch an exclusive Credit Card for SMEs and members were enabled to receive economic updates and alerts on new business developments via email and SMS (v) The Bank has assisted SME customers with financial literacy programmes (vi) A range of new financial and non-financial products and services were launched including the Anagi Business Loan for women SMEs, Anagi Instant Loan for salaried women, Anagi Credit Card, insurance for women customers and entrepreneurship skill development programs for women Read more Joint Message from the Chairman and his Successor on pages 14 and 15, Managing Director/Group Chief Executive Officer's Review on pages 16 to 19, Management Discussion & Analysis on pages 38 to 103, Financial Statements from pages 186 to 336. > Connecting with Stakeholders Commercial Bank of Ceylon PLC Annual Report 2021 21
  24. HOW DID THE BANK RESPOND TO STAKEHOLDERS WHAT ARE THE KEY TOPICS RAISED AND FEEDBACK PROVIDED ENGAGEMENT MECHANISM AND FREQUENCY EMPLOYEES SOCIETY REGULATORS AND POLICY MAKERS Engagement mechanism Frequency Engagement mechanism Frequency Engagement mechanism Frequency Managers ' Conference Annually Delivery channels Continuous Annually Town hall meeting Annually As required Regional review meetings Quarterly Press releases, conferences and media briefings Supplier relationship management Directives and circulars As required Branch marketing meeting Monthly Informal briefings and communications As required Meetings and consultations As required Public events As required Press releases As required Corporate website Continuous Periodic returns As specified Submissions to policymakers As required Responses to consultation papers on Directions and other regulations As specified Training programmes As required Intranet Continuous Special staff events Annually Trade union discussions As required Employee satisfaction survey As required Performance and reward management Training and development Career advancement opportunities Work-life balance Retirement benefit plans Diversity and inclusion Safety at workplace Stable performance of the Bank Responsible financing Commitment to community Financial inclusion, recruitment Microfinance and SME Ethics and business conduct Environmental performance Employment opportunities (i) A group of identified potential branch (i) Launched “Agri Leasing” facilities at low Managers were enrolled to a Leadership rentals and flexible payment plans, taking Development Program conducted by the into consideration the seasonal income Postgraduate Institute of Management (PIM) patterns of farmers and cultivation months to support the agronomy of the country (ii) Special Virtual training programs were conducted targeting Branch Managers, (ii) The Bank has further expanded its portfolio Assistant Branch Managers, and Junior of green buildings to include the Jaffna Executive Officers covering technical and Branch and the Trincomalee branch soft skills (iii) Financial literacy programmes for SMEs and (iii) Work from home arrangements were Micros facilitated for employees by providing (iv) Donation of 253 fully-equipped IT necessary IT infrastructure and laboratories to schools and other implementing guidelines on remote institutions and partnering the working “Smart Schools Project” to introduce (iv) All employee engagement and a comprehensive digital Learning development programs were migrated to Management System (LMS) to 65 schools in digital platforms, ensuring collaboration the country and ongoing interaction (v) Donation of critical medical equipment to (v) The Bank remains committed to the government hospitals principles of equal opportunity irrespective of gender, age, race, disability or religion in all its HR management processes Compliance with directives and codes Microfinance and SME development Stability of the financial system Migration to cashless payment platforms Supporting economic recovery and growth (i) Remaining compliant with regulatory requirements by maintaining internal capital targets that are more stringent than the regulatory requirements (ii) Timely submission of regulatory reports and press releases (iii) Timely payment of tax payments and furnishing of tax returns (iv) Adhering to the Ministry of Health guidelines and protocols to ensure the safety and wellbeing of customers and employees (v) Re-launched a dedicated loan scheme namely Diribala Green Development Loan Scheme targeting financing of Solar Power Systems of SMEs/ Business clients to support the Government’s strategy towards promoting the renewable energy sector (vi) All expectant mothers across the Bank were granted special leave from May 01, 2021 onwards, to ensure their safety against the third wave of the pandemic (vii) The Collective Agreement with the Bank’s branch of the Ceylon Bank Employees’ Union (CBEU) was renewed in 2021 for a further 3-year period Read more Joint Message from the Chairman and his Successor on pages 14 and 15, Managing Director/Group Chief Executive Officer's Review on pages 16 to 19, Management Discussion & Analysis on pages 38 to 103, Financial Statements from pages 186 to 336. 22 Commercial Bank of Ceylon PLC Annual Report 2021 > Connecting with Stakeholders
  25. Material Matters The COVID-19 pandemic has changed people ’s lives and livelihoods fundamentally and perhaps irreversibly. It has also impacted the banking industry in a number of dimensions, ushering in a new competitive landscape, stifling growth in some traditional product areas, prompting a new wave of innovation, recasting the role of branches whilst accelerating digitization in almost every sphere of banking. Having navigated the immediate pressure of the COVID-19 crisis, banks play a pivot role in shaping the recovery and helping customers rebuild their financial security and business health. This requires banks to refocus on understanding their customers’ needs, and in parallel, nimble adaptations of strategies and business models to ensure efficiency and resilience, and creativity in confronting challenges and seizing new opportunities presented by the changing environment. In adapting the Bank’s strategy to face the “new normal”, and play a significant role in shaping the recovery, the Bank analysed its external environment to identify matters arising from changes that were brought forth by the pandemic and emerging trends that were relevant to key stakeholder groups, as given below: Figure 03: Material Matters POLITICAL Investors ECONOMIC SOCIAL TECHNOLOGICAL ENVIRONMENTAL 1 Lack of desired 2 Economic 3 Growing 6 Lack of desired 7 Depreciating 8 Demand for 9 Compliance 10 Downgrading of 11 Demand for more 12 Higher level of policy consistency level of transparency and accountability slowdown due to pandemic currencies against USD the Sovereign rating and its cascading effect on the banking industry influence of social media 4 Unorthodox competition and financial disintermediation non-financial information and long termism transparency and accountability upturn in private sector credit and improvement in asset quality 14 New Banking Act 16 Changing customer expectations 19 Import 17 Migration towards digital platforms 23 Technology 24 Health and 25 New working safety requirements and regulations such as FATCA1, GDPR2, and BEPS3 threats 21 Need to enhance 22 Staff recruitment productivity 18 Compliance 20 Cybersecurity restrictions Employees guidelines to counter impacts of the pandemic regulatory capital requirements 15 Envisaged 5 Directions and with new Basel requirements 13 High CAPEX Customers LEGAL/REGULATORY and retention becoming more challenging driving change in job skills cultures Commercial Bank of Ceylon PLC Annual Report 2021 23
  26. POLITICAL Society and environment ECONOMIC SOCIAL TECHNOLOGICAL ENVIRONMENTAL 26 Geopolitical 27 Declining worker 28 Need to commit 29 Increasing 30 Corruption 31 Declining global 32 Increasing 33 Increasing 34 Increasing drug 35 Pandemics conflicts remittances to Sustainable Development Goals (SDGs) competitiveness of Sri Lanka pedaling and drug and alcohol addiction Business partners demand for green banking and green lending hampering world trade and economy 37 New technological collaborative approach The process followed is summarized below: frequency and magnitude of natural disasters and poor disaster preparedness conflicts 36 A more In the backdrop of these circumstances, during the year, we revisited the process of identification of material matters through a refreshed materiality assessment, to gain deeper insight and understanding into key areas of concern for stakeholders. The assessment also took into consideration the impacts of the COVID-19 pandemic. LEGAL/REGULATORY advances such as AI, Robotics, blockchain Even as these trends present risks, opportunities or both, the impact of these trends is felt by the stakeholders and the Bank alike on varying degrees. The risks emanating from the pandemic were felt across all of stakeholders at different magnitudes, and they outweighed the risks presented by other emerging trends. The matrices that follow, illustrate the topics that are material to the Bank according to their impact on stakeholders and the Bank itself. The Bank defines material matters as those that significantly affect the Bank’s ability to create value over the short, medium and long term. The materiality of each matter have been determined by its relevance, the magnitude of its impact, and the probability of occurrence. Figure – 04: Materiality determination and integration Identification of Material Matters to Address We identify matters that most impact the execution of our strategy. Relevant matters are those that have, or may have, an effect on the Bank’s ability to create value to our stakeholders. 24 Commercial Bank of Ceylon PLC Annual Report 2021 Prioritization of material matters We prioritize matters that most significantly impact our ability to effectively execute our strategy in delivering long-term value and influencing the decision of key stakeholders. > Material Matters Integration and execution Those matters that are material to the value creation process were then integrated into strategy formulation process in settling KPIs, driving behaviours, measurement of performance and determine the remuneration packages of our staff.
  27. Table – 04: Material Matters, Risks, Opportunities, and how we manage Material Matters Risks Opportunities How we manage GRI Disclosure Digital The younger generation is more Transformation inclined to technology and their preference for personalised, convenient, and secure service is on the rise. The pandemic has sparked higher trajectory in the migration towards the use of digital products and services, increasing the need to continue digital innovation. Digital channels allow speedier and round the clock delivery of service at the finger tip of customer, leading to increased level of transactions and expanding reach. The Bank takes a proactive approach on this sphere and has been many times the first in the market to launch new digital channels refer the section on and products. Please “Leading through Innovation” on pages 54 to 58 for more details. Cyber Security Cyber threats continue to increase globally and the need to protect the integrity and privacy of data is becoming important than ever before. The pandemic has fuelled the risk of cyber attacks and thefts. Having a robust cyber security programme boosts customer confidence in embracing and using digital platforms and provides a distinctive advantage over competition in the digital banking space. A high importance is placed on this critical aspect. Internationally recognised certifications we hold vets the robustness in our security systems. For more details refer the sections “IT Operations please and Security” on page 58 and section “IT risk” in Risk Governance and Management report on pages 175 and 176. Downgrading of sovereign rating Reduction of international trade transaction volumes hampers the ability to raise foreign currency in the international market Healthy mix of foreign currency portfolios and the Bank's regional presence supporting foreign currency liquidity supports the Bank's ability to sustain its foreign currency transactions. The Bank's strength in the foreign currency mix in the balance sheet, built over the years and our regional presence has helped sustain our foreign currency operations. The section “Managing and Funding Liquidity” on page 41 provides insight on how the Bank managed the impacts of this material aspect. Transparency and Accountability Non-disclosure of adequate information may give rise to reputation risks and regulatory pressures. Increased transparency helps reduce risks of unwarranted suspicion and helps achieve faster resolution of issues and reputation-related risks. The Bank's approach on transparency and accountability is discussed in detail in the section “Annual Corporate Governance Report” on pages 117 to 128. Adoption of digital means for remote working results in increasing technology related skills and rethinking working conditions that may improve work-life balance and reduction in costs. Putting the safety of our employees first, our focus was more on providing a safe working environment for the staff and looking after the employees and their families affected by the pandemic. Getting employees adjusted to new ways of working and working conditions, the Bank invested in its Human capital. For more details please refer section “Operational Excellence” on pages 59 to 63. Digitalised processes freeing up employees from tasks, enabling higher customer Need to upskill the human capital interactions, establishing new to be on par with the technological connections. changes. Increased demand for forward looking strategic direction by investors over traditional past performance reporting Talent Management Among the risks brought about by the pandemic are the health and safety of the workforce, sustaining critical operations, sudden adjustments in the new working environment top the list. Staff recruitment and retention is becoming more challenging. New Regulations, Compliance requirements, and directives Increased costs in implementation, Good governance is the modification, and monitoring of bedrock of a sustainable process. business and helps boost stakeholder confidence. Climate Change Increasing frequency and magnitude of natural disasters may cause deterioration of asset quality, operational and reputational risks. The Bank may outpace the competition by responsible lending through Social and Environmental screening. > Material Matters Increasing awareness and tendency towards renewable energy and greening of buildings and processes bring about green financing opportunities. Initiatives in countering impacts of carbon emissions. GRI 418: Customer Privacy GRI 401: Employment GRI 404: Training and Education GRI 405: Diversity and Equal Opportunity GRI 403: Occupational Health and Safety The Bank is committed to being compliant to the letter and spirit and believes in commitment to good governance provides a strong footing for sustainable development. Please refer section “Annual Corporate Governance Report” on pages 117 to 128. Though the Bank’s own footprint is GRI 302: Energy minimal, we endeavour to minimise the GRI 305: Emission same through adopting green processes, moving to green buildings, and generating solar energy for our operations. However, the bank could influence a much higher impact through our lending to renewal energy generation, greening of processes, and screening for environmental impacts on businesses we lend to. How we do this is more described on pages 42 to 44 and page 63. Commercial Bank of Ceylon PLC Annual Report 2021 25
  28. Material Matters Risks Opportunities How we manage GRI Disclosure Partnerships for Interruption to critical services Collaboration with Fin-Tech Goals could disrupt smooth execution of could open up new avenues to the Bank ’s operations. reach untapped markets and evolve alongside changing Unorthodox competition and customer expectations. financial disintermediation may threaten the survival. Advancement in new technologies such as Artificial Intelligence, Robotics, and Block Chain could be used to boost operational excellence. The Bank’s continued it efforts on building win-win partnerships and constantly seek avenues to turn the risks of evolving new technology for the development of our own products, services, and delivery. Described more on section “Leading through Innovation” on pages 54 to 58, section “Partnerships for the Goals” on page 65 and Events 2021 on pages 100 to 103. Being Socially Responsible Growing influence of social media and increasing awareness on socially accepted norms expected from business, if not properly managed could lead to losing social license to operate. Social acceptance of being responsible augments the Bank's leadership position within the banking system contributes to sustainable development. We believe in sharing the value created with the society we operate in through our CSR Trust, conducting capacity building programmes, and supporting the preservation of environment. refer section “Community Please Sustainability” on page 65. Macroeconomic and Geopolitical risks Though the severity has reduced overtime the pandemic-led disruptions continue to prevail with economies continuing to slowdown. Increased collaboration Discussed within the section “Risk with business community Governance and Management” on pages especially with SMEs and 159 to 178. micro sector, through the extension of reliefs on best repayment, rescheduling and education leads to stronger and sustainable relationships. Geopolitical tensions may impact certain sectors of the economy. GRI 201: Economic Performance GRI 203: Indirect Economic Impact GRI 207: Tax Social distancing has increased the demand for digital products and with already sound digital infrastructure the Bank is poised for a higher share of the digital banking sphere. Moderate High Low Importance to the Bank 26 Moderate 33,37 Importance to stakeholder 3,4,7,11, 23,36 14,18,26 21,23,34 1,2,5,6,12, 15,16,19, 20,24,35 7,8,9,22,25, 27,29 30,31,32 4,10,17,37 Moderate High Low High Moderate Importance to stakeholder 15,16 Low 6, 21,28 High Risks to be mitigated Opportunities to be capitalised Commercial Bank of Ceylon PLC Annual Report 2021 Low Importance to the Bank > Material Matters
  29. The Bank ’s strategies are reshaped to fit the time and are embedded in the Corporate Plan for execution by the Management together with underlying KPIs for measurement of successful implementation. Success in the Bank’s value creation journey under the four strategic imperatives is outlined in the section on “Management Discussion and Analysis” on pages 38 to 85. Management approach The Bank manages its material topics through its strategic planning process. This includes assigning responsibility to the heads of the relevant divisions of the Bank and allocating the required resources based on the significance of each material topic towards achieving the aforesaid strategic imperatives. To ensure achievement of its objectives with regard to its material topics, the Bank has embedded goals and targets, where relevant, into the KPIs of the Key Management Personnel and are reviewed at regular intervals. Many policies have been instituted to guide its people to conduct activities in a responsible, transparent, and ethical manner in managing the material topics. The Board of Directors has duly adopted these policies, which are reviewed at predetermined intervals to stay current with the changing environment. The Integrated Risk Management Department monitors timely revision of these policies and reports to BIRMC. Where relevant grievance mechanisms have been established with assigned responsibility to the relevant divisional heads to manage, address and resolve grievances. The Bank’s lending to its customers and dealings with its business partners are screened for social and environmental aspects. Internal and external auditing and verifications are carried out to ensure adherence to internal controls, policies and procedures laid down to achieve the objectives of material topics. Findings are reported to the Board of Directors and/or to the respective Management Committees on a periodic basis for information and corrective action where necessary. The awards and accolades received by the Bank over the years, amply demonstrate the effectiveness of this management approach. > Material Matters Table – 05: GRI Disclosure on Material Matters Material topic GRI Disclosure Page No. 1. Lack of desired level of policy consistency 2. Economic slowdown due to pandemic 4. Unorthodox competition and financial disintermediation 5. Directions and guidelines to counter impacts of the pandemic GRI 201: Economic Performance 28 to 32 6. Lack of desired level of transparency and GRI 203: Indirect Economic Impact accountability GRI 207: Tax 10. Downgrading of the Sovereign rating and its cascading effect on the Banking industry 40 to 53 40 to 45 and 232 and 233 12. Higher regulatory capital 15. Envisaged upturn in private sector credit and improvement in asset quality 16. Changing customer expectations 40 to 51 17. Migration towards digital platforms 54 to 58 19. Import restrictions GRI 201: Economic Performance 20. Cyber security threats GRI 418: Customer Privacy 58 21. Need to enhance productivity GRI 404: Training and Education 63 GRI 405: Diversity and Equal Opportunity 61 23. Technology driving change in job skills 24. Health and Safety 28 to 32 GRI 401: Employment 59 to 63 GRI 404: Training and Education 63 GRI 405: Diversity and Equal Opportunity 61 GRI 403: Occupational Health and Safety 59 and 60 28. Need to commit to Sustainable Development Goals (SDGs) 65 29. Increasing frequency and magnitude of natural disasters and poor disaster preparedness GRI 302: Energy GRI 305: Emissions 33. Increasing demand for green banking and green lending 63 63 and 64 49, 63 35. Pandemics hampering world trade and economy 28 to 31 37. New technological advances such as AI, Robotics, Blockchain 54 to 58 Commercial Bank of Ceylon PLC Annual Report 2021 27
  30. Operating Context and Outlook This Annual Report is meant to be read in the backdrop of the global and local developments elaborated below that contextualise the Bank ’s performance. Global economy The global economy experienced a rebound in growth in 2021 aided by accommodative fiscal and monetary policies. Global growth is expected to moderate in 2022 and inflation is expected to persist longer. Higher interest rates experienced globally will make borrowings more expensive, especially for countries borrowing in foreign currencies and at short maturities. The global economy enters 2022 in a weaker position than previously expected. COVID-19 variants continue to evolve and countries are  imposing restrictions. Russia just invaded Ukraine. The Russian Invasion of Ukraine – global implications The Russian invasion of Ukraine has sent the Brent Crude oil price above USD 100 per barrel mark (as at February 24, 2022). The price of gold too has recorded an increase with investors moving on to safe haven assets. The conflagration is also likely to disrupt supply chains. The EU accounts for 27% of Russian exports. China accounts for about half of that. Russia is a key supplier of natural gas and oil. Russia and Ukraine together account for a quarter of the world’s wheat supply. Further, Russia is one of the world’s key suppliers of industrial metals. demand side. In line with these inflationary pressures, a gradual rise in interest rates could be observed and this is expected to continue in the period ahead. On the external front, exports recorded a commendable performance in 2021 and imports too increased significantly. In line with these developments, the trade deficit widened notably applying downward pressure on the Sri Lankan rupee. The Russian Invasion of Ukraine – implications for Sri Lanka Sri Lanka’s expenditure on oil imports was set to rise in 2022, but the Russian invasion of Ukraine will aggravate the situation. In 2022, Sri Lanka’s exports (mainly tea exports) to Russia will be adversely affected due to the economic sanctions imposed against Russia by the US and its allies. Tourist arrivals to Sri Lanka from Ukraine (an emerging source market) are likely to be adversely affected in 2022 due to the Russian invasion of Ukraine. Russia has been the top source market in terms of tourist arrivals in recent times. The tourist arrivals from Russia may also be adversely affected due to the war. Bangladesh Economy In Bangladesh, after almost a decade of robust growth, reaching a high of 8.15% in 2019, momentum was severely blunted by the COVID-19 pandemic during 2020, and growth slowed to 3.5%. In 2021, however, the economy rebounded to some extent Rising energy prices and supply disruptions will result in higher and more broad-based inflation than anticipated, notably in the United States and many emerging market and developing economies. The ongoing concerns about China’s real estate sector and slower-thanexpected recovery of private consumption also have limited growth prospects. Sri Lankan economy In Sri Lanka, the economy is estimated to have recorded a growth of around 4% in 2021. A marginal drop in the growth rate is expected in 2022. In 2021, a buildup in inflationary pressures could be observed stemming from both supply side and 28 Commercial Bank of Ceylon PLC Annual Report 2021 and grew by 5.5%. The Government projects a 7.2% GDP growth for 2022, and a return to pre-pandemic levels by 2023. The monetary policy stance and monetary and credit programs outlined for 2021 were mostly successful in terms of injecting sufficient liquidity into the system, accompanied by a softer market interest rate regime aimed at containing inflation while ensuring stability in both the local and the foreign currency markets. The CPI-based average inflation remained at mid-single digit level in 2021 hovering around the target of 5.80% and is expected to remain above 6.00% during the year 2022. Credit to the private sector saw an uptick in 2021. Both the DSE and the CSE bourses remained buoyant during 2021. The Russian Invasion of Ukraine – implications for Bangladesh The most immediate impact on the Bangladesh economy is likely to be a surge in energy prices. This will increase the prices of fertilizer which can cause a crisis situation requiring Government intervention. Wheat imports from Russia and Ukraine too may be affected. Rising imports payments, fall in export receipts, pressure on exchange rate, rising commodity prices leading to inflation can be expected. In the long term, ongoing Russian projects in Bangladesh in the power and gas sectors may be affected with the sanctions on Russia over banking transactions and disruption of key material supplies.
  31. Global Economy Indicator Growth 2021 2022 OUTLOOK Rebounding growth at 5 .9% est. (IMF) Graph – 01: Global economic growth 2020 2021 2022 % 9 6 3 0 -3 -6 Global economy Advanced economies Emerging markets Growth to moderate to 4.4% The Russian invasion of Ukraine will have a serious economic impact, which will worsen the longer it continues. This crisis comes at a delicate time, when the global economy is recovering from the ravages of the COVID-19 pandemic and threatens to undo some of that progress. The immediate global implications of the war will be higher inflation, lower growth, and some disruption to financial markets as deeper sanctions take hold. (Source: IMF) (Source: IMF) Fiscal and Monetary Policy Accommodative fiscal and monetary policies Gradual withdrawal of accommodative fiscal and monetary policies. A less accommodative monetary policy in the United States is expected to prompt tighter global financial conditions, putting pressure on emerging market and developing economy currencies. Higher interest rates will also make borrowing more expensive worldwide, straining public finances. For countries with high foreign currency debt, the combination of tighter financial conditions, exchange rate depreciations, and higher imported inflation will lead to challenging monetary and fiscal policy trade-offs. Interest Rates Low interest rates Gradual rise of interest rates Inflation Rising energy prices and supply disruptions have resulted in higher and more broad-based inflation Higher inflation expected as a result of the Russian invasion of Ukraine Energy and Commodity Prices Rise in global energy and commodity prices Surge in energy and commodity prices expected as a result of the Russian invasion of Ukraine. Russia is the world’s third largest producer and second largest exporter of oil and the world’s second largest natural gas producer. Russia and Ukraine together account for a quarter of the world’s wheat supply. Russia is one of the world’s key suppliers of industrial metals such as nickel, aluminum, and palladium. Economic sanctions against Russia by the US and its allies could cause disruptions to the world’s oil, gas, wheat and metals supplies. Supply Chains Rise in supply chain disruptions Supply chain disruptions to worsen due to the Russian invasion of Ukraine and economic sanctions against Russia. Trade Global trade is estimated to have reached about USD 28 Tn. in 2021, indicating an increase of 23% with respect to 2020 (UNCTAD) The outlook for 2022 remains very uncertain (UNCTAD). Equity Market A strong year for global equities Outlook looks bright for global equities (Bloomberg). COVID-19 By the end of the year, more than 5.4 million people died of COVID-19 Faster vaccine production and distribution of vaccines seem to protect against severe illness. About 48% of the population globally has been fully vaccinated However, the emergence of new COVID-19 variants could prolong the pandemic and induce renewed economic disruptions. Geopolitical Geopolitical risks remain elevated Geopolitical risks remain elevated Cyber attacks An increase in the spread and destructiveness of cyber attacks The spread and destructiveness of cyber attacks will further increase. Climate issues More adverse climate shocks The frequency and magnitude of climate shocks are expected to increase. > Operating Context and Outlook Commercial Bank of Ceylon PLC Annual Report 2021 29
  32. Sri Lankan Economy Indicator Growth 2021 2022 OUTLOOK Rebounding growth at 4 .0% est. (CBSL) Marginal decline in growth is expected Graph – 02: Quarterly GDP Growth (constant 2010 prices) % 16 8 0 -8 -16 -24 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2019 2020 2021 (Source: Department of Census and Statistics) Fiscal & Monetary Policy Accommodative fiscal and monetary policies Gradual withdrawal of accommodative fiscal and monetary policies Interest Rates Low interest rates Gradual rise of interest rates Graph – 03: Interest rates T bill 12M AWFDR AWPLR AWLR % 15 12 9 6 3 0 Jan. 2018 Jan. 2019 Jan. 2020 Jan. 2021 Jan. 2022 (Source: Central Bank of Sri Lanka) Inflation Rising inflation Inflationary pressures to remain Graph – 04: Inflation – CCPI and NCPI CCPI – Headline CCPI – Core NCPI – Headline NCPI – Core % 15.0 12.0 9.0 6.0 3.0 0 Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec. Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec. Jan. 2020 2020 2020 2020 2020 2020 2020 2020 2020 2020 2020 2020 2021 2021 2021 2021 2021 2021 2021 2021 2021 2021 2021 2021 2022 (Source: Department of Census and Statistics) Energy and Commodity Prices Rise in energy and commodity prices Surge in energy and commodity prices expected as a result of the Russian invasion of Ukraine and economic sanctions against Russia. Supply Chains Rise in supply chain disruptions Supply chain disruptions to worsen due to the Russian invasion of Ukraine and economic sanctions against Russia. Trade A notable improvement in export performance was observed while expenditure on imports increased significantly. Trade outlook remains uncertain. Equity Market Strong performance recorded mainly driven by low interest rates and local investors Stock market performance likely to be checked due to an anticipated rise in interest rates COVID-19 By end of year, nearly 15,000 deaths were caused by COVID-19 With greater numbers being vaccinated, domestic lockdowns are not expected to take place. Therefore, domestic economic activity is likely to continue without disruptions. About 64% of the population has been fully vaccinated 30 Commercial Bank of Ceylon PLC Annual Report 2021 Sri Lanka’s exports (mainly tea) to Russia will be adversely affected due to the economic sanctions imposed against Russia by the US and its allies. Russia is one of the biggest destinations of Ceylon tea. > Operating Context and Outlook
  33. Financial Industry ISSUES FACED SPECIFICALLY BY SRI LANKA Rating downgrades over concerns about sovereign debt sustainability amidst deteriorating fiscal position With comfortable levels of capital and liquidity , the Banking Sector continued to remain resilient amidst the COVID-19 pandemic. However, the financial services sector had to contend with the following issues: Prolonged moratoria granted to the pandemic-affected sectors CC in Dec 2021 CCC in Jan 2022 Previous Rating: CCC in Nov. 2020 Shortfall in foreign currency liquidity Proposed one off Surcharge Tax and increase in other taxes likely to impact profit retention and capital adequacy Increasing stock of credit to Government and State-owned business enterprises by licensed banks Previous Rating: CCC+ in Dec. 2020 Emerging threats to operational resilience including IT and cyber security Traditional financing challenged by the emerging Fintechs Caa2 in Oct 2021 Previous Rating: Caa1 in Sep. 2020 Implementation of the consolidation programme of the nonbanking sector has been slow Debt Issue: Deteriorating external financial position. Exchange Rate: The Sri Lanka rupee depreciated by 6.5% against the US dollar in 2021. It is expected to significantly depreciate if the Government decides to float the rupee. However, this process may be sequenced so that there will not be a sudden shock impact. Graph – 05: USD/LKR Rate (inverted scale) USD 175 180 185 190 195 200 205 Jan. Mar. May Jul. Sep. Nov. Jan. Mar. May Jul. Sep. Nov. Jan. 2020 2020 2020 2020 2020 2020 2021 2021 2021 2021 2021 2021 2022 (Source: Central Bank of Sri Lanka) Foreign Currency shortage created pressure on exchange rate to depreciate and shortage in certain goods. Remittances and Tourism Income which are two of the main foreign income earners were badly affected due to the pandemic. Russia was the second largest source market in terms of tourism arrivals to Sri Lanka during 2021 with a total count of 16,894. Meanwhile with 7,037 tourists, Ukraine became the fifth largest source market for 2021. Ukraine closing its air space and international sanctions on Russian air space will certainly have an adverse impact on Sri Lanka's tourism industry. Power crisis may lead to a disruption in export activity – this in turn can aggravate the dollar crisis. The change from chemical to organic fertilizer has created a shortage in rice and vegetables thus contributing to very high food inflation. > Operating Context and Outlook Commercial Bank of Ceylon PLC Annual Report 2021 31
  34. The Bank CBC performance compared to the Banking Sector – End Sep 2021 Banking Sector * CBC Gross Loans and Advances 10,355 1,051 Deposits 12,466 1,420 Assets 16,494 1,930 Assets and Liabilities (Rs. Bn.) Profitability (%) Return on Assets (ROA) Before Tax 1.7 1.8 15.1 15.5 4.8 4.9 Core Capital (Tier 1 Capital) Adequacy Ratio 12.9 12.2 Total Capital Adequacy Ratio 16.2 16.1 36.3 47.1 Return on Equity (ROE) Assets Quality (%) Gross Non-performing Advances Ratio Capital Adequacy (%) Liquidity (%) Current & Savings Deposits to Total Deposits *Banking Sector = Licensed Commercial Banks  + Licensed Specialized Banks Source: CBSL, CBC Interim Financial Statements 32 Commercial Bank of Ceylon PLC Annual Report 2021 > Operating Context and Outlook
  35. BUSINESS MODEL FOR SUSTAINABLE VALUE CREATION The Bank has a robust business model that leverages on its strengths for sustainable value creation . It draws “inputs” from Financial, Manufactured, Intellectual, Human, Social and Network, and Natural Capitals as inputs, converts such inputs to “outputs” through its two primary activities of financial intermediation and maturity transformation, leading to outcomes for the benefit of the stakeholders who own and provided capital inputs. Integrated reporting based on the International Integrated Reporting Framework requires the disclosure of the business model as one of the content elements in an integrated report. Accordingly, the narrative given below provides a guide to the visual depiction of the Business Model on pages 34 and 35 and the Statement of Financial Position on pages 36 and 37. Inputs Inputs refer to the "capitals" or stocks of value the Bank uses as resources for undertaking its activities, or, in other words, the capitals from which the Bank derives value. These input capitals include not only financial capital reflected in the Statement of Financial Position, but also what might be termed “off-balance sheet” or "hidden" capitals, like the institutionalised knowledge of the Bank, the brand and reputation the Bank has built over years, or the strength of its stakeholder relationships. These inputs are then put to work in the Bank’s business activities – literally capitalised – to generate outputs (the Bank’s key products and services) and outcomes (the value created by the Bank for itself and for its stakeholders as a consequence of the outputs). As the Bank’s business model demonstrates, this is a dynamic process where capitals are constantly circulating and value is continuously being created and transformed. An integrated report is nothing but the story of this dynamic process across a single year and a snapshot of the Bank’s capital position Refer page 37). at the year end ( Financial intermediation and maturity transformation As a commercial bank, financial intermediation and maturity transformation are the two primary value driver activities around which the business model of the Bank revolves. Financial intermediation refers to the role the Bank plays as a conduit between depositors and borrowers, allowing deposits to be channelled into investments and assets. Maturity transformation refers to the process of converting short-term funds into long-term lending and investments. These two activities which ensure the efficient allocation of financial resources, are essential for the economic development of the society at large. Statement of capital position The activities the Bank undertakes in furtherance of financial intermediation and maturity transformation, and the consequent interactions, interconnectivities and tradeoffs among the capitals in this dynamic process, serve to augment the capitals and reflect the value created over the year, as reflected in the Statement of the Capital Position of the Bank as at January 1, 2021 and December 31, 2021 given on pages 36 and 37. Besides the value derived as reflected in the enhanced positions of the other capitals, the two broader categories of income – net interest income from fund-based operations and fee and commission income from fee-based operations – enable the Bank to enhance its financial capital. Fund-based operations involve the process of mobilising funds from depositors and borrowings from other sources in order to lend and invest; this process generates interest income and incurs interest expenses. The interest margin, which is the difference between the lending rate and the borrowing rate, compensates the Bank for the credit risk, funding risk and interest rate risk. All other services provided by the Bank not involving funds are fee-based operations. Reflecting efficient financial intermediation, the Bank generated 70.69% of its total operating income by way of net interest income (2020: 66.15%). Gearing Financial intermediation and maturity transformation cause the business model of the Bank to substantially differ from other corporates. Being a commercial bank funded primarily through customer deposits, the Bank resorts to the process of gearing in order to compensate for the relatively lower Return on Assets (ROA) and generate returns to the investors attractive in terms of Return on Equity (ROE). Gearing involves expanding the business volumes by mobilising more and more funding from depositors and other providers of funds to the Bank and lending or investing such funds to grow the loan book and investment portfolios on the strength of a given amount of capital. Gearing primarily remains the foundation of the Bank’s business model, which enables the Bank to operate at around 10 times higher business volumes compared to the shareholders’ equity. It is the license to mobilise deposits from the public that has made it possible. However, the Bank is well aware that gearing exposes it to a multitude of internal and external risks. In addition, certain emerging global developments are also threatening to disrupt this business model. As explained later in the report, the Bank has established a sound risk management framework with necessary oversight of the Board of Directors and thereby has been able to successfully manage such risks. Stakeholder returns As shown in Table 06 on pages 36 and 37, Commercial Bank has been able to improve its profitability over the years while prudently maintaining gearing at acceptable levels. This improvement in profitability reflects the net impact of the value we have been able to create by delivering value to and by deriving value from our stakeholders. From investors’ perspective, this value creation is reflected in the returns the Bank has been able to generate for them in terms of earnings, dividends and appreciation in market price of shares. The market capitalisation of the Bank’s shares remained the highest among the Banking, Finance and Insurance institutions as at end 2021 while its shares ranked 9th among all listed companies in the Colombo Stock Exchange as at end 2021. Further details on the performance of the Bank’s shares are found in the section on “Investor Relations” on pages 86 to 99. While growing organically in the domestic market, the Bank has taken steps to leverage inorganic and regional growth opportunities, primarily to geographically diversify its risk exposures and sources of revenue and thereby enhance its sustainability of operations and long-term value creation. These efforts have now made the Bank a well-established regional bank. Commercial Bank of Ceylon PLC Annual Report 2021 33
  36. Business Model Figure – 05 1. INPUTS 2. VALUE DRIVER ACTIVITIES “Raw materials” for the value driver Refer activities drawn from capitals. page 36 of the Statement of Capital Position for the opening capital position as at January 1, 2021 of different capitals built by the Bank over the past 100 years. Include primary value driver activities that promoted growth, support value driver activities that promoted positive stakeholder interactions and other value driver activities that minimised risk. It is the inputs from the capitals together with relationships, interactions, interdependencies, and trade-offs among capitals that generated outputs, leading to creation of value reflected in capitals. Financial capital Shareholders’ funds Borrowed funds Financial covenants Customer deposits Subordinated debt Vision gem na e 40) a g M Manufactured capital Intellectual capital alue Driver Activit p or t V ies Su p i Se rv Financial intermediation Gover Accepting Deposits Granting Loans BANK (Interest expense) (Interest income) Depositors Borrowers Prudent Human capital an d rv Se Services and supplies Relationships Assurance services Collaborations and alliances Customers Contribution to the Bank’s CSR Trust Maturity transformation ice s Cu st om Natural capital Utilities Refinance funding for solar/ digitisation projects Social and Environmental Management System (SEMS) Repayment of loans ts Social and network capital Withdrawal of deposits c du Pro 0) e4 pag fer re th ( Grow Skills and experience Competencies Creativity Commitment Healthy workforce Loyal employees er Ce ntr icit y (A detailed account of activities undertaken during the year to deliver value to stakeholders that enhanced capitals is given in the MD&A on pages 38 to 103) sses Internal Proce (ref er p age 4 6) i on vat o n n hI Leading Throug Strategic I peratives m Operating Environment that provides context for value creation 34 Commercial Bank of Ceylon PLC age 41) rds lue Driver Ac da n ary Va tivit ta i es Prim S e c na Brand loyalty Institutionalised knowledge Best practices Data analytics Trained employees Awards and accolades a l ta r p pi (refe a C (refer nce St pag ruc e 12 tu 0) re Property, plant and equipment Investments in process improvements Information and Communication Technology Public goods Funding an Managementd Liquid (refer i p ty ent Annual Report 2021
  37. 3 . OUTPUTS 4. OUTCOMES Products and services and externalities generated through the value driver activities. Consequences of our activities and outputs manifested in capitals as value created. Please refer page 37 of the Statement of Capital Position for the closing capital position as at December 31, 2021 of different capitals. Financial capital Prudent growth Profits, taxes and dividends Being well capitalised, funded and liquid Optimum risk-return trade-off Market capitalisation Mission Manufactured capital an Ch Op er ati on al E (offering omni-channe n e ls l ex pe r i en ce ) r page 59) ery liv xce llen ce (re fe De an d nce e 159) rna er pag ove t (ref k G en Risagem an M Digital leadership Omni-channel presence Growth in capacity Safe work environment Enhanced productivity Intellectual capital Loans and advances, investments, deposits, forex products, remittance services, fee based services, International Trade related products and services, unfunded facilities, REPO transactions, advisory services Leading through Innovation Creativity New products Simplicity Compliance Human capital Operational excellence Empowerment and engagement Training and development Motivation and productivity Cordial industrial relations Social and network capital Customer centricity Growth in customer base Customer satisfaction Customer convenience Strong supplier relationships CSR activities 4) e5 ag p fer (re Natural capital Green processes and facilities Solar power generation Saving of non-renewable energy sources Environmental protection Improvements in quality of life (KPIs depicting the value derived as outcomes are given in Financial Highlights on page 10) > Business Model Commercial Bank of Ceylon PLC Annual Report 2021 35
  38. Statement of Capital Position Table 06 Financial capital Indicator of value derived Value derived as at January 1 , 2021 Shareholders’ Funds (Rs. Bn.) 157.146 Subordinated liabilities (Rs. Bn.) 38.247 Deposits from customers (Rs. Bn.) 1,265.966 Borrowings from banks/other borrowings (Rs. Bn.) 87.451 Market share in total assets (%) 11.90 Market capitalization (Rs. Bn.) 93.669 CSE ranking in market cap (No.) 5 Price to Book Value Highest among the Banking Sector Growth in gross income (%) 0.68 Net interest margin (%) 3.17 Return on average-shareholders’ funds (%) 11.28 Activities undertaken to create Financial Capital * Grew the business volumes prudently through robust and efficient financial intermediation and maturity transformation, thereby strengthening the leadership position Value derived as at December 31, 2021 Growth in value created 164.894 38.303 1,443.093 4.93% 0.15% 13.99% 73.777 11.17 94.193 9 Highest among the Banking Sector 7.46 3.51 -15.64% (0.73) 0.56% – 14.66 3.38% Value derived as at December 31, 2021 Growth in value created – 6.78 0.34 Indicator of value derived Branch network (No.) Value derived as at January 1, 2021 287 Number of ATMs - In Sri Lanka 656 Number of CRMs - In Sri Lanka 250 Bank on Wheels (No.) Investment in capital expenditure (Rs. Bn.) Percentage of fully depreciated assets Activities undertaken to create Manufactured Capital * 3 2.25 38.56% 287 Maintained profitable mix of owned and rented buildings Delivery channels Conducted cost-efficient transport arrangements Improved procurement services – 663 1.07% 275 10.00% 3 – 3.41 53.77% 43.74% 5.18% Value derived as at December 31, 2021 Growth in value created Intellectual capital Indicator of value derived Brand equity (Rs. Bn.) Value of intangible assets (Rs. Bn.) Receipt of awads and accolades World's Top 1000 Banks Fitch rating Employees serving for > 20 years (No.) Value derived as at January 1, 2021 Activities undertaken to create Intellectual Capital * 44.009 Invested in centralisation 43.657 -0.80% 1.233 Improved processes and procedures 1.725 39.90% Most awarded Bank in Sri Lanka Included in 2020 AA- (lka) 809 Developed new products and services Expanded network, conducted research and development Deepened technological expertise Supported knowledge sharing initiatives * Please refer Management Discussion and Analysis for details of the activities undertaken. 36 Commercial Bank of Ceylon PLC Annual Report 2021 Most awarded Bank in Sri Lanka Included in 2021 AA- (lka) 797 -1.48% Interactions and Manufactured capital
  39. Human capital Indicator of value derived Number of employees Number of new recruits Value derived as at January 1 , 2021 5,057 95.31 Return to work from maternity (%) 100.0 Profit per employee (Rs. Mn.) 3.238 Total training hours Value derived as at December 31, 2021 Growth in value created 5,072 0.30% 226 43.04% 95.89 58 bps 158 Retention ratio (%) Average service period Activities undertaken to create Human capital * 14 years and 5 months 43,961 Total e-training hours 7,161 Staff welfare cost per employee (Rs. Mn.) 0.062 Improved quality of new recruits Conducted employee surveys Invested in training and development Enriched career development Reinforced performance management and appraisals 100.0 0.00% 4.654 43.75% 13 years and 2 Reduced by 1 year months and 3 months 79,928 81.82% 7,756 8.0% 0.065 4.65% Social and Network capital Interconnectivities Indicator of value derived Number of customers Value derived as at January 1, 2021 Over 3.5 Mn. Market share in imports (%) 11.34 Market share in exports (%) 18.77 CASA ratio (%) Number of suppliers Number of correspondent banks CSR Trust investment in society (Rs. Mn.) 42.72 Over 1,250 Activities undertaken to create Social and Network capital * Promoted financial inclusion Value derived as at December 31, 2021 Growth in value created Over 3.5 Mn. Co-created products and services Collaborated with business partners – 13.06 172 bps 16.75 -202 bps 47.83 511 bps Over 1,400 200+ 60 7.14% 751.6 19.00% Improved capacity of SMEs 56 Expanded Bank's footprint Supported the community 633.6 Natural capital Indicator of value derived Energy consumption (GJ) Solar panel installation locations (No.) Number of facilities subjected to SEMS screening Value derived as at January 1, 2021 Activities undertaken to create Natural capital * 45,045 60 Growth in value created 42,906 Energy saved by 4.75% 61 1.67% Screened loans through SEMS Promoted paper reduction and recycling 9,938 1.34% 603,131 Increased usage of renewable energy 862,437 42.99% No. of accounts linked to mobile banking 519,687 Switched to energyefficient appliances 589,826 13.50% Solar power generated as a % of energy consumption 12.46% 14.14% 168 bps No. of accounts linked to internet banking > Statement of Capital Position 9,807 Value derived as at December 31, 2021 Commercial Bank of Ceylon PLC Annual Report 2021 37
  40. MANAGEMENT DISCUSSION AND ANALYSIS Value Creation and Capital Formation Figure – 06 Delivering value to Stakeholders Value driver activities Bank Deriving value from Leads to internal capital formation Leads to external capital formation Total capital of the Bank Financial Capital Manufactured Capital Intellectual Capital Human Capital Social & Relationship Capital Natural Capital Business domain of the Bank This Integrated Report demonstrates both the value created by the Bank in the past for the benefit of its stakeholders, which is reflected in various forms of capitals as explained below, and, more importantly, the Bank’s continued ability to create value in the short, medium, and long term on the strength of those capitals. One of the foundational principles of Integrated Reporting is conceptualizing an organisation’s value creation process through a “multi-capital” model. By reflecting on value creation beyond financial value, the Bank is better able to capture and disclose a wide array of information about the duality of the process of value creation, viz. delivering value to and deriving value from stakeholders. Both these aspects are closely inter-related as the ability of the Bank to create value for itself is inextricably linked to the value it creates for its stakeholders. The more value the Bank delivers to its stakeholders, the more value it can derive in return. Delivering value essentially involves creating financial and non-financial value for the benefit of the stakeholders such as investors, customers, employees, business 38 Commercial Bank of Ceylon PLC partners, Government institutions & regulators, and the society and environment, which will in turn drive the Bank’s future earnings, enabling it to create value for itself. This process leads to capital formation in the form of Financial Capital, Manufactured Capital, Intellectual Capital, Human Capital, Social and Relationship Capital, and Natural Capital. It is these capitals that drive the Bank to sustainably create value into the future.  This duality of the process of value creation is depicted in Figure 06 above. A snapshot of the value the Bank has been able to create over its existence of 100 plus years as reflected in the six capitals is given in the Statement of Capital Position on pages 36 and 37. It is these strong and robust capitals, unparalleled among the private sector banks, that will fuel the Bank’s growth and ability to create value in the future. Nevertheless, the reader will note that this Management Discussion & Analysis is structured along the lines of four Strategic Imperatives viz. Prudent Growth, Customer Centricity, Leading Through Innovation and Operational Excellence ( Refer Figure 07 Annual Report 2021 on page 39). In order to create value and grow its stocks of capitals, the Bank executes numerous strategic actions (broadly referred to as value driver activities in the Business Model on pages 34 and 35) to address its strategic imperatives. It is these strategic actions and the resultant interactions, relationships and interconnectivities that drive the capital growth reflected in the Statement of Capital Position. As such, we believe that this structure based on strategic imperatives is a perfect complement to the multi-capital model by reporting on how the Bank created value during the year under review, along with its plans to create value in the short, medium, and long term.
  41. Strategic Imperatives Figure – 07 Strategic Actions Strategic Actions Creating long-term value by keeping the interests of all stakeholders at heart for sustainable value creation Growing corporate customer base by being a trusted partner and providing better business solutions Focusing on pure banking by remaining true to our original ideals of being a banker first and foremost Remaining relevant to mass market customers by offering a seamlessly integrated omnichannel banking experience Managing risks prudently by strengthening risk governance and management to enhance asset quality and minimise operational losses Augmenting SME customer value proposition by providing greater opportunities for growth through networking and education Remaining well capitalised and liquid by maintaining sound capital and optimum liquidity in the spirit of their requirements Strengthening ties with micro customers by driving responsible lending and financial inclusion through closer interaction Being well diversified by minimising concentration into any particular geography, customer, product, sector or currency Enhancing focus on high networth customers by driving stronger relationships and greater engagement Making responsible investments by financing Green projects and employing a Social and Environmental Management System to assess sustainability in all lending activities Supporting the community by investing in innovative solutions for the well-being of both existing and potential customers Prudent Growth Growing the business astutely with a long-term perspective Stakeholders to whom value was delivered and from whom value was derived Activities Activities leading to value creation are detailed under the four strategic imperatives on pages 40 to 65. Leading through Innovation Customer Centricity Capitals in which the outcome is reflected Investors Customers Employees Business partners Government institutions and regulators Society and environment Innovating to enhance the quality of stakeholder interactions and experience Strategic Actions Fortifying digital leadership by leveraging platforms and technologies to align with changing customer aspirations Creating complete digital banking platforms integrated with all system networks and eco-systems to provide a onestop-shop experience for customers across all segments Increasing the proportion of digital usage by facilitating and encouraging digital transactions and interactions Segmenting customers through data analytics to identify and serve unique banking needs and deliver personalised user experiences Redesigning conventional banking processes as digital processes to create end-to-end digital solutions Providing the experience, simplicity, and convenience that customers value most today Financial Capital Manufactured Capital Intellectual Capital Human Capital Social & Relationship Capital Natural Capital Operational Excellence Enhancing operational efficiencies for better productivity and customer service Strategic Actions Centralising work processes to enable branches concentrate more on business development and managing customer relationships Re-engineering business processes to deploy technological advancements for meeting changing business needs and service standards Optimising resources by maintaining an optimum mix of CAPEX and OPEX models Investing in employees to better align them with the changing needs and to improve productivity Safeguarding the environment by continuously reducing our carbon footprint to contribute to the fight against climate change Commercial Bank of Ceylon PLC Annual Report 2021 39
  42. Prudent Growth As the largest private sector commercial bank in Sri Lanka , which has engendered the trust of over 3.5 million customers, Commercial Bank is deeply aware of its fiduciary responsibility of governing the Bank’s affairs meticulously and ensuring it is adequately capitalised. The COVID-19 pandemic has reshaped the global economy and society, accelerating consumer behaviour shifts and causing significant earnings challenges and extensive risk of financial distress for both consumers and businesses. Such a context has highlighted the magnitude of the Bank’s role in aiding recovery by supporting its customers, forming mutually beneficial partnerships and mobilising its workforce and its resources at the service of society. Recognising that Prudent Growth represents value creation for all its stakeholders through different time frames – the short, medium, and long term, the Bank drives growth by focusing on agility of operations, innovation, evolution of the workforce, managing risks and exemplary governance. Prudent Growth provides the orientation for the Bank’s other three strategic imperatives covered in this discussion – Customer Centricity, Leading Through Innovation, and Operational Excellence. Prudent Growth is fundamentally about maximising current profitability without hindering the Bank’s future sustainability. The Bank remains steadfast in its determination to think and act with the long-term sustainability of future generations in mind. Prudent Growth includes balancing trade-offs between capitals, by giving equal focus to sound investments in institutional or human capital, as to immediate gains in financial capital, which elevates the Bank’s ability to adapt to changing financial landscape. Investments made without regard to social and environmental justice, could adversely impact the wider society causing a negative spillover effect to the Bank’s reputation. The Bank remains resolute in its efforts to ensure the decisions taken are prudent, framed by an astute and educated estimation of the future. Therefore, Prudent Growth signifies growth that is: healthy, sustainable, resilient, responsible, and ethical, ensuring transparency, accountability, governance and long-term sustainability in its operations. Thus Prudent Growth emphasises pure banking which comprises of a welldiversified asset and customer base; sound capital, optimum liquidity, and robust risk management framework; astute corporate governance; socially and environmentally responsible lending and operating practices; and conducting business with transparency, honesty and integrity. 40 Commercial Bank of Ceylon PLC Our commitment to prudent growth z Comfortable levels of capital adequacy z Optimum levels of liquidity z Social and Environmental Table – 07: Growth in deposit base and lending portfolio over the past decade 2021 (Rs. Bn.) 2011 (Rs. Bn.) 10-year CAGR 1,443.093 323.755 16.12% Gross Loans and advances 1,078.685 289.803 14.05% Deposit base Management System (SEMS) z Robust Risk Management Framework Remaining Well Capitalised z Compliance with laws and regulations, A strong base of capital is essential for a bank’s sustainability. A crucial aspect of its success is the base of confident shareholders whom the Bank can rely on for more capital whenever the need for a capital infusion arises. The capital acts as a cushion or a shock absorber against unexpected losses and as a regulatory restraint on unjustified asset expansion. Capital is needed for a bank to acquire the required fixed assets to establish, perpetuate, and expand business. Though necessary and justifiable, new impediments have been created to the growth of the banking industry through tightened regulatory requirements and more stringent reporting standards – all in the interest of various stakeholders, depositors in particular. Banks are being more conservative in their approach and are bearing the brunt of higher costs and lower returns. This is due to more restrictive capital definitions, difficulty in raising fresh capital due to lackluster market conditions, comparatively higher risk-weighted assets, additional capital buffers and higher capital adequacy ratios (CARs) required under Basel III regulations, higher impairment provisioning under SLFRS 9, and higher taxes. In such a landscape, Banks consider it a priority to proactively manage the capital at its disposal to remain solvent. The capital requirements are assessed through the Internal Capital Adequacy Assessment Process (ICAAP) and the annual strategic planning and budgeting exercise. The Bank uses tools such as Risk Adjusted Return on Capital (RAROC), prudent capital allocation, controlled growth in risk-weighted assets, expansion of fee-based services, timely pricing/re-pricing of its assets and liabilities, prudent dividend policy, welldiversified products and services portfolio and capital instruments to manage its capital requirements. The Bank consistently maintains capital adequacy ratios, well in excess of minimum requirements. both in letter and in spirit z Robust Corporate Governance Framework z Highest market capitalisation in the Banking sector in the Colombo Bourse z First private sector bank to venture overseas z First private sector bank to cross Rupees One Trillion in assets, deposits and loans z Included in the Top 1000 Banks consecutively for eleven years z Transparency in reporting and disclosures z Conservative risk profile z First Carbon Neutral Bank Creating Long Term Value Through Prudent Growth, the Bank has built a strong deposit and lending franchise with a wide national footprint and a regional presence. This has enabled the Bank to access resources unavailable to its competitors, and offer a unique value proposition to its stakeholders. The Bank’s moderate risk appetite has created a reputation for stability, earning the trust and confidence of the public, resulting in a high deposit growth. In 2021, the Bank’s deposit base grew by 13.99% YoY to Rs. 1.443 Tn. resulting in, the Bank’s CASA ratio improving to 47.83% in 2021 from 42.72% in 2020, the best in the Banking Sector. Annual Report 2021
  43. Capital management objectives Given below are the objectives of the Bank ’s Capital Management efforts: z Remaining compliant with regulatory requirements by maintaining internal capital targets that are more stringent than the regulatory requirements z Maximum profitability through optimum capital usage z Supporting future business expansion z Supporting desired credit rating In 2020, the Bank received a strong affirmation by completing a USD 50 Mn. private placement of shares with International Finance Corporation (IFC), which was the first foreign equity placement of shares by the Bank. This was also the first post-pandemic equity placement by the IFC, and one of the largest foreign investments into Sri Lanka since the start of the pandemic. For more information on Bank’s Capital Management, please refer page 177 on Risk Governance and Management Section, Note 67.5 on pages 335 to 336 and page 366 for Annex: 2, Disclosure 7 on Summary discussion on adequacy/meeting current and future capital requirements. Managing Funding and Liquidity Funding and liquidity are critical factors for the financial services industry, especially considering the circumstances that led to the financial crisis in 2007 and the events that followed. Having sufficient liquidity available to meet its commitments is essential to the Bank. Since there were no internationally agreed-upon standards for funding and liquidity, Basel III regulations introduced measures to strengthen the funding and risk management of banks, to promote resilience in a bank’s short-term and long-term liquidity risk profile through the introduction of the Liquidity Coverage Ratio (LCR, 2015) and the Net Stable Funding Ratio (NSFR, 2019) respectively. These measures are designed to prevent banks from relying excessively on short-term wholesale funding to support long-term assets. Just as much importance is given to capital, the Bank accords importance to ensuring that it has sustainable sources of funding and that it maintains adequate levels of liquidity at all times. The fact that the Bank does not compromise on liquidity in its drive to generate returns for investors, has greatly contributed towards public confidence in the Bank. The Assets and Liabilities Committee (ALCO) of the Bank meets fortnightly to actively monitor the funding, > Prudent Growth liquidity requirements and pricing of assets and liabilities. It extensively deliberates on developments that affect funding and liquidity, such as market liquidity, managing foreign currency funding position of the Bank, current and perceived interest rates and exchange rates, changes in policy rates, credit growth and facilities in the pipeline, alternative investment options for its excess funds given the low growth in the loans and advances owing to the pandemic and adverse economic conditions prevailing in the country, capital market developments, projected capital expenditure and alternative funding options etc. The Bank has further strengthened its funding and liquidity over the past several years by encouraging the use of electronic cash and cards to reduce cash holdings by offering an array of digital products and establishing credit lines with strong overseas counterparties enabling it to access foreign currency funds at attractive rates. The Bank faced immense challenges in managing the foreign currency liquidity during the year, due to the macro-economic impacts faced by Sri Lanka. Sharp drop in the foreign currency reserves of the country, and the successive sovereign downgrades created a challenging environment for the Bank to access foreign currency funding, while the reduction in the foreign exchange flows from both tourism and worker remittances created a trade imbalance in the economy leading to a shortage in foreign exchange. The Bank proactively responded to the issues by adopting new strategies in managing foreign currency liquidity and trade flows, working closely with its corresponding banks and its trade finance customers to manage and address the concerns and requirements. The Bank also reached out to new funding partners and established new funding lines under challenging circumstances. The Bank’s Bangladesh Treasury was highly supportive in facilitating access to several funding sources which were previously untapped to obtain required liquidity. Furthermore, the Bank’s presence in Myanmar enabled to source Foreign Currency funds from Myanmar as well. The Bank’s funding sources for onward lending, in order of their assessed stability include: z Retail deposits mobilised through the branch network z Low-cost foreign currency borrowing (provided the interest and swap cost attached to such borrowing is cheaper as compared to the cost of wholesale deposits) z Selected long-term wholesale deposits z Re-purchase agreements z Subordinated debentures Funding and Liquidity Management Objectives The objectives of the Bank’s funding and liquidity management efforts include: z Honouring customer deposit maturities/ withdrawals and other cash commitments efficiently under both normal as well as challenging operating conditions z Remaining compliant by maintaining internal funding and liquidity targets which are more stringent than regulatory requirements z Maximising profitability by optimal usage of liquid assets z Funding future business expansion at optimum cost z Supporting desired credit rating z Ensuring compliance with Basel III funding and liquidity requirements ( Refer Annex: 2, Basel III – Disclosures under Pillar 3 as per the Banking Act Direction No. 01 of 2016 on pages 361 to 374) The Bank monitors and manages its funding and liquidity ratios on a daily basis to ensure adequate funding is available to maintain liquidity at the desired levels. Being a Truly Diversified Entity Commitment to diversification is another important dimension of the Bank’s Prudent Growth strategic imperative. Diversification, which is a risk management tool, helps the Bank to avert excessive concentration, reduce performance volatility and ensure stable and sustainable value creation by remaining more agile in weathering and responding to changing market conditions. The Bank has successfully achieved a high level of diversification in its operations across many parameters, including: z Geographically (Sri Lanka, Bangladesh, The Maldives, Myanmar and BPOs in several other countries) z Customer profile ( Refer customer segmentation – Table 08 on page 46) z Multiple banking channels ( Refer channel mix – Table 09 on page 46) z Currency wise product mix ( Refer Note 34.1 (b) on page 247 and Note 46.1(b) on page 276) Commercial Bank of Ceylon PLC Annual Report 2021 41
  44. z Products and services portfolio (A comprehensive suite catering to the requirements of all segments of customers from infants to senior citizens) – (Please refer Note 34.1 (a) on page 247 and Note 46.1 (a) on page 276) Refer the figure 08 below for details) and funding Refer diversification by product ( page 173) Socially and Environmentally Sustainable Lending Refer Note 61 to the Financial – Statements on pages 298 and 299) In comparison to many other industries, banking has a minimal environmental footprint of its own as it consumes few natural resources and creates minimal emissions and waste. This is evidenced by the fact that there are no mandatory requirements for environmental certifications that banks have to obtain. Nevertheless, the Bank makes a conscientious effort to reducing Green House Gas (GHG) emissions in its operations continuously. z Economic sector (A well-spread sector diversification of assets by economic sector with no excessive concentration to any refer Note 34.1 particular sector – Please (c) to the Financial Statements on page 247) z Multiple funding channels( z Sources of revenue (An acceptable mix of z Maturity profile (No serious mismatches in maturity profile, particularly given the growing core component of CASA balances fund-based and fee-based revenue with significant market share in country’s imports and exports as well as a market maker refer in Treasury operations – Please Note 13.1 and Note 14.1 to the Financial Statements on pages 222 and 224) Figure 08: Diversification OPERATING SEGMENTS DEPOSITS AND FUNDING Contribution to Group's Total Operating Income CASA NBFI, Real Estate and Services – 2.40% 47.83% (2021) Dealing/Treasury – 26.06% 2020 - 42.72% Personal Banking – 45.28% International operations – 12.30% Deposits Mix – Bank Time deposits – Rs. 752 Bn. 72% Corporate Banking – 13.96% 28% Savings deposits – Rs. 550 Bn. 78% 22% Current accounts – Rs. 141 Bn. Contribution to Group's Total Assets 60% NBFI, Real Estate and Services – 0.65% Local Currency 40% Foreign Currency Dealing/Treasury – 37.51% Personal Banking – 28.70% Deposits by Type of Currency – Bank Bangladesh Taka – 8% International Operations – 12.38% Others – 3% United States Dollar – 16% Corporate Banking – 20.76% Sri Lanka Rupee – 73% Funding Structure – Bank 74% Deposits to Total Assets 42 Commercial Bank of Ceylon PLC Annual Report 2021 > Prudent Growth 15% Borrowings to Total Assets Capital to Total Assets Other Liabilities to Total Assets 9% 2%
  45. The Bank recognises that it has a vital role to play as an advocate and driver of sustainability in Sri Lanka , in its capacity as a Domestic Systemically Important Bank, and a financial intermediary with a wide national reach and influence. In partnership with the members of the Sri Lanka Banks’ Association, the Bank was involved in one of the core groups that formulated the Sustainable Banking Initiative (SBI) in Sri Lanka, which addresses the integration of social and environmental concerns into the Banks’ core business activities. Since 2002, the Bank has been a member of the UN Global Compact, which specifies value systems and principles for operating businesses sustainably. Recognised as the most progressive banking institution in Sri Lanka and its commitment to preserving the environment through responsible lending protocols, Commercial Bank was one of the Banks that pioneered a mandatory social and environmental screening process for its project lending activities. It was also the first bank in Sri Lanka to have identified Green Financing to be of a wider scope and ventured into Green Financing in a more focused manner. It further revolutionised digital banking by introducing features in its “Flash” mobile application to measure and offset customer impact on the environment. LOANS AND ADVANCES From financing renewable energy projects, including the first commercially viable wind power project and the first commercial scale solar power project in Sri Lanka, the Bank has diversified its Green Financing portfolio with the support of special credit lines and development of a Green Financing strategy and internal taxonomy. The Green Financing portfolio supports projects that focus on climate mitigation, climate adaptation and other environment related green objectives. Therefore, it contributes towards the fight against climate change in alignment with the UN Sustainable Development Goals 7 (Affordable and Clean Energy) and 12 (Responsible Consumption and Production). EMPLOYEES Loans and advances by customer type – Bank SME – 23% Age Analysis Male Female Nos. 2,500 Corporate customers – 48% 2,000 1,500 1,000 Retail customers – 29% 500 Loans and advances by product type – Bank 0 Below 30 Years 30 to 50 Years Above 50 Years Others – 11% Personal loans – 5% Housing loans – 7% Long term loans – 41% Trade finance – 9% Above 20 Years – 16% Overdrafts – 10% Short term loans – 17% Loans and Advances by Industry – Bank Wholesale and retail trade 20% Consumption and other 15% Manufacturing 14% Lending to overseas entities 13% Agriculture and Fishing 9% Financial services 7% Tourism 6% Construction Others • • • • Service Analysis Below 5 Years – 24% 16 - 20 Years – 14% 11 - 15 Years – 23% 5 - 10 Years – 23% 5% 11% Professional, scientific, and technical activities • Information technology and Healthcare, social services, and support services communication services Infrastructure development • Education Transport and storage • Arts, entertainment, and recreation > Prudent Growth Commercial Bank of Ceylon PLC Annual Report 2021 43
  46. The Bank ’s Green Financing Vision: Figure – 09 "To grow the Green Financing portfolio to 3% of the loan book by 2025" Composition of the green financing portfolio – 2021 41% Renewable Energy Projects (Solar, Hydro, Wind, Biomass) as at December 31, 2020 - 38% 11% Resource efficiency and recycling projects - Energy, Water, and Material as at December 31, 2020 - 19% Environmentally friendly transportation and related services as at December 31, 2020 - 17% 6% Water saving - consultancy and related service providers 17% Climate Smart Agriculture as at December 31, 2020 - 7% 15% Others In 2021, the Bank disbursed 1,208 green financing loans and leasing facilities to support customers to transition to a low carbon economy. The Bank has adopted the Climate Assessment for Financial Institutions (CAFI) tool, developed by IFC for monitoring and reporting the climate impact data of the Green portfolio. The Bank’s Green Financing portfolio as at December 31, 2021, has contributed in reducing 225,847.33 tonnes of CO2 (equivalent) emissions to the atmosphere. The composition of the Green Financing portfolio is delineated in the Figure 09. Positioning the Bank as a predominant institution in climate financing and its environmental consciousness in the South Asia region, the IFC conferred two awards to Commercial Bank in 2021 for the performance under the CAFI tool. This was in acknowledgement of the Bank’s estimated GHG reduction from its Green Financing portfolio and for completing the highest number of climate finance transactions in 2020 among the IFC’s partnering Banks operating in South Asia. 10% as at December 31, 2020 - 10% In 2020, the Bank issued a Position Statement on Climate Change, affirming its commitment to combating climate change at the highest level of the Bank. This Statement is an articulation and an unification of a multitude of actions the Bank has been implementing continuously, and underscores its added resolve to this challenge. The Bank utilises SEMS to assess and manage its social and environmental risks in its lending in a strategic and systematic manner. In its aim of becoming a leader in building partnerships across sustainable business networks, the Bank makes every attempt to assist customers and suppliers to become compliant with relevant regulations and industry best practices. In this context, the Bank adopts an approach of partnership with its stakeholders in its implementation of SEMS, with the objective of encouraging positive changes. Instead of merely rejecting proposals that do not meet the Bank’s social and environmental standards, the Bank proposes corrective actions to ensure that the Bank’s lending to projects or activities is environmentally sustainable, socially acceptable and economically viable. The Bank also conducts capacity building programs to enhance the knowledge of Bank’s lending officers on social and environmental risk assessment and Green Financing sphere to achieve a socially and environmentally sustainable lending portfolio. as at December 31, 2020 - 8% 44 Commercial Bank of Ceylon PLC Annual Report 2021 > Prudent Growth Figure – 10: Bank’s Sustainability Journey First Sri Lankan Bank to become wholly Carbon Neutral First Bank in Sri Lanka to implement a Social & Environmental Management System (SEMS) in 2010, at a time when it was not a mandatory requirement First Sri Lankan Bank to become signatory to the 10 Principles of the UN Global Compact (UNGC) and still the only Bank on the Steering Committee First Bank in Sri Lanka to venture into Green Financing One of the first banks to receive a Green House Gas (GHG) Emissions certificate Adoption of IFC Performance Standards First Bank in the region and the 4th Bank in the world to introduce a tool (approved by the UNEP) for its retail customers to measure the environmental impact of their spending, via its Flash Digital Bank Account App Core Group Member of the SLBA’s Sustainable Banking Initiative Founder Member of the Business & Biodiversity Platform, Sri Lanka
  47. Ethics and Conduct The Bank remains committed to highest ethical standards and integrity in all activities with direct support from the Board of Directors . Renowned for its compliance to both the letter and spirit of the law, the Bank places a premium on the trust and confidence of its customers and stakeholders – a strength it has carefully cultivated for over a century. Taking a zero-tolerance approach towards bribery, corruption, and fraud, the Bank, its Board of Directors and all of the employees are dedicated to act professionally, ethically and with integrity in all business dealings and relationships with all stakeholders. The provisions of the Code of Ethics is reinforced by the Internal Audit Department of the Bank through its on-site audits and online surveillance. For customers to continue to benefit from the highest levels of integrity, the Bank determines the scope and frequency of audits using a riskbased model. Furthermore, to safeguard the interest of the Bank and all its stakeholders, a Whistleblower Charter is in place to allow employees to report unethical or any known or suspected frauds or misappropriations by staff members to the Group Chief Compliance Officer. All employees and the members of the Board of Directors are trained on Anti Money Laundering (AML), Combating the Financing of Terrorism (CFT), Compliance and Anti-Bribery and Anti-Corruption from time to time. During the year, the Bank continued to further strengthen the related systems, processes, and controls. Anti-Money Laundering The Bank conducts Money Laundering and Terrorist Financing (ML/ TF) Risk assessments according to the established ML/TF Risk Assessment Policy. Considering the risk exposures arising from its customers, delivery channels, products and services and geographical locations in which it operates its business, the Bank conducts risk reviews and reports to the Board of Directors on a quarterly basis. Anti-Bribery and Anti-Corruption The Bank’s reputation can be damaged by bribery and corruption, which is illegal and dishonest. Therefore, the Bank remains committed to countering bribery and corruption in all forms, and promotes a culture of compliance and genuine engagement with anti-bribery and anti-corruption standards. The Bank also seeks to identify and manage risks arising from different jurisdictions, sectors, transactions, business opportunities, and business partnerships. To operate within its risk appetite at all times, the Bank has in place rigorous policies, procedures and controls, and expects all its employees to refrain from giving or accepting bribes, kickbacks or commissions or taking part in any form of corruption. The Anti-Bribery and Anti-Corruption Policy was approved by the Board during the year under review and is made available at the Bank’s website. Furthermore, the Bank has instituted a Whistleblowers Charter and guidelines on accepting and offering gifts or other illegal gratification, collection and borrowing of funds,obtaining undue favours from customers and suppliers, and holding a Directorship,being a Partner,Shareholder in private companies enumerated in the Code of Ethics and Administrative Circulars. In affirming its commitment to the 10th Principle of the UN Global Compact and implementing the Code of Ethics, the Bank expects all employees not only to fight corruption, but also to demonstrate that they do not abuse the power of their position as employees for personal financial or non-financial gain, solicit or accept gifts, compromise employees or the Bank. The Bank also aims to encourage and influence all of its non-controlled interests to have and implement anti-bribery and anti-corruption policies and procedures to an equivalent standard of the proposed Policy of the Bank. These include the Bank’s interests in non-controlled joint ventures, partners, contractors, sub-contractors, vendors, suppliers, service providers, consultants, representatives and others performing work or services for or on behalf of the Bank or any other person associated with the subsidiaries and the associate of the Bank. Figure – 11: Values that Support the Bank’s Brand Transparency: We conduct our activities in an open manner with clarity and make required public disclosures in a timely manner and in greater detail. Fairness: We focus on doing the right thing by all our stakeholders so that their trust in us continues to deepen, enriching invaluable relationships. Honesty: We strive to earn and retain the trust of our stakeholders through transparent actions that inspire them and align with their values. Responsible citizenship: We continue our commitment to the community, focusing on making their lives better and being a force for good. Integrity: We maintain our integrity which is of paramount importance in ensuring that our brand value keeps growing for all stakeholders. Accountability: We live by our brand values, ready to take responsibility for our actions towards all stakeholders. > Prudent Growth Commercial Bank of Ceylon PLC Annual Report 2021 45
  48. Customer Centricity The Bank extends an unparalleled banking experience through a deep understanding of its customers – their needs, their preferences, their concerns – and responding with products and services that meet and even exceed their expectations. In a rapidly changing operating context, it also involves transforming internal mindsets and processes to remain agile and relevant. The Bank carefully segments its diverse customer base and tailors its services to cater to each group. This allows the Bank to deliver a differentiated value proposition that enhances its brand and elevates customer loyalty. Meeting the needs of customers, and providing such personalised support was vital in a year of economic recovery following the COVID-19 pandemic. Customer Segmentation Illustrated below is the customer segmentation, which enables the Bank to gain a deep knowledge and understanding of the customer and better align with their unique banking requirements. Table – 08: Customer segmentation Criteria High net-worth Corporate SME (Small and Medium Enterprises) Micro customers Mass market Annual business Annual business Income/Size of relationship/ Individuals with Business turnover/Exposure banking relationships turnover> Rs. 1.0 Bn. or turnover< Rs.1.0 Bn. above set thresholds Exposure> Rs. 250 Mn. or Exposure< Rs. 250 Mn. Exposure< Rs. 500,000 Individuals not falling into other categories Price sensitivity High High Moderate Low Low Products of interest Investment Transactional, trade finance, and project finance Factoring, leasing and Transactional project financing Transactional Number of transactions Low High Moderate Low Low Level of engagement High High Moderate Low Low Objective Wealth maximisation Funding and growth Background Business community/ Rated, large to medium Medium business Professionals corporates Self-employed Salaried employees Number of banking relationships Many Many Many A few A few Level of competition from banks High High Moderate Low Moderate Funding and growth Funding and advice Personal financial needs Table – 09: Channel mix and target market on perceived customer preference Customer segment 46 Branches Internet banking ATMs Call centre Mobile Banking Relationship managers Business promotion officers Premier banking units √ √ √ √ √ √ High net-worth √ √ Corporates √ √ √ √ √ √ X X SMEs √ √ X √ X √ √ X Micro √ X √ X √ X X X Millennials X √ √ √ √ X X X Mass market √ X √ √ √ X X X Commercial Bank of Ceylon PLC Annual Report 2021
  49. Figure – 12: Customer centricity MOBILE WEB www.combank.lk “To know everything about the Bank” ComBank SimplePay SOCIAL MEDIA CONTACT CENTER JOURNEYS Bank-on-Wheels Automated Field Cash Collection (AFCC) Trilingual multi-channel Integrated Contact Centre is in place Commercial Bank Official Facebook Page Commercial Bank Official Viber Public Chat Page SELF-SERVICE Automated Banking Centers 921 ATMs (including 275 CRMs) (900 ATMs in Sri Lanka 38 CDMs BRANCHES 287 Branches 268 Branches in Sri Lanka 21 ATMs in Bangladesh) 19 Branches in Bangladesh Financial Relief Initiatives z Adjusting the ways of working Responding to the COVID-19 pandemic As a Systemically Important Bank (D-SIB) and the largest private sector bank in Sri Lanka, Commercial Bank is acutely aware of the crucial role it plays in meeting the needs of customers and providing personalised support, as the economy recovers from the pandemic. Being deeply conscious of the socio-economic strain that the pandemic has placed on the customers, the Bank evolved the way in which it operates, interacts and serves its customers over the year. Bank’s response to the COVID-19 pandemic was realised through a series of measures as stated below: z Adhering to the Ministry of Health guidelines and protocols to ensure the safety and wellbeing of customers and employees. z Sustaining and keeping the customers afloat by facilitating debt relief measures for various impacted individuals and entities. > Customer Centricity and service delivery channels and providing the necessary infrastructure to support to customers. Especially with the rapid acceleration into digital channels and adoption of virtual infrastructure by customers, the Bank provided digital tools and concrete payment solutions to adapt their activities. z “Bank-on-Wheels” service with mobile Cash Recycler Machines (CRMs) was launched following the extension of the travel restrictions necessitated by the third wave of the pandemic. Traversing Colombo and its suburbs and many other areas including towns in the Uva, Sabaragamuwa, Northern and Eastern provinces of Sri Lanka, this service facilitated both Commercial Bank customers and non-customers to conduct routine banking transactions in their own neighborhoods. The service was deployed across the Nation, offering services to a larger segment of the populace. A schedule with details of the routes of these units was posted daily on the Bank’s website and social media pages. At a time when Sri Lanka was in total lockdown, with no assurance when the country situation would return to normality, Commercial Bank set the trend in providing financial relief, especially to the SME sector under the Government stimulus package and the Bank’s own support schemes in 2020, which continued through 2021. Establishing a Centralised Credit Processing Unit, the Bank completed its SME Banking Transformation operation and became the largest lender to the SME sector among private sector banks via the “Saubhagya” scheme.  Consolidating its efforts under the umbrella of “Arunella”, a Financial Support Scheme that integrated multiple initiatives and guided by the Central Bank of Sri Lanka (CBSL) directives to provide focused and more efficient relief to customers, the Bank extended relief to diverse customers affected by the pandemic throughout the year 2021. This support scheme included a moratorium scheme, relief to non-performing borrowers, reduction of lending rates in tandem with the downward trend of interest rates in Sri Lanka, concessions for Credit Card holders, concessions and fee waivers and free digital services. It also included two special loan schemes - one for SMEs affected by COVID-19 and the other the “Dirishakthi COVID-19 Support Loan” scheme to assist micro . enterprises disrupted by the pandemic Commercial Bank of Ceylon PLC Annual Report 2021 47
  50. Supporting SMEs and Micro Enterprises Figure – 13: Segment analysis of Moratoriums Granted under COVID-19 – As at December 31, 2021 Total No. of loans 49,566 CORPORATE No. of loans Total Value SME Rs. 217.179 Bn. No. of loans 1,072 9,309 Value Value Rs. 86.974 Bn. RETAIL No. of loans 37,157 Value Rs. 61.292 Bn. Rs. 67.456 Bn. AGRICULTURE MICRO No. of loans No. of loans 1,615 413 Value Value Rs. 0.160 Bn. Rs. 1.297 Bn. Figure – 14: Moratoriums granted under COVID-19 – As at December 31, 2021 Total No. of loans 49,566 PERSONAL BANKING No. of loans 48,478 Total Value CORPORATE BANKING Rs. 217.179 Bn. Value No. of loans 1,088 Value Rs. 151.971 Bn. Rs. 65.208 Bn. Figure – 15: Bank funded loan schemes – As at December 31, 2021 “COVID-19 SUPPORT LOAN” SCHEME “DIRISHAKTHI COVID-19 SUPPORT LOAN” SCHEME FOR MICRO BUSINESS No. of loans No. of loans 290 534 Value Value Rs. 0.013 Bn. Rs. 6.083 Bn. 48 Commercial Bank of Ceylon PLC Annual Report 2021 > Customer Centricity The SME sector, which forms the backbone of the Sri Lankan economy, represents 80% of businesses and provides close to 35% of jobs in Sri Lanka. SMEs and Micro businesses remain the most vulnerable to economic shocks, struggling with funding issues and facing challenges in accessing medium and long-term finance. This was further exacerbated by the impact of COVID-19 on the country’s economy. Recognising that these sectors were in desperate need of relief, the Bank has been a pioneer in providing financial solutions to SME and micro enterprises. In recognition of the Bank’s efforts in identifying the needs of the hour of small and medium enterprises in the country and for providing tailormade products and services to cater to this segment, the UK-based Global Business Outlook (GBO) awarded Commercial Bank as the “Best SME Bank” in 2021. Among all state-owned, private and specialised banks in the country, Commercial Bank was the largest lender to Sri Lanka’s SME sector in 2020, according to the Annual Report of the Ministry of Finance published in 2021. Reaffirming its status as a systemically important bank in Sri Lanka, the Bank lent Rs. 163.98 Bn. or 21.57% of the Rs. 759.7 Bn. in loans provided to SMEs by 19 institutions, representing 23.82% of the total of 245,883 loans granted in the year under review. Furthermore, the Bank was also the highest lender to the ‘Industry’ sector dispensing Rs. 45.9 Bn. or 21.3% of the total via 9,654 loans. The support extended to the SME sector was further strengthened by the USD 50 Mn. loan secured from the CDC Group of the United Kingdom. The facility provides target funding directly to underserved SMEs, boosts jobs and promotes economic and social inclusion across Sri Lanka. The investment enabled the Bank to further strengthen financial support to local SMEs most in need of funding and provide access to necessary working capital.
  51. Figure – 16: Composition of loans granted by Commercial Bank to the SME sector in 2020 100% Accelerated by changing customer habits and increased need for speed, simplicity and efficiency, we create compelling, emotive, digital propositions that facilitate banking at your fingertips, anywhere, anytime. We deliver exemplary digital experiences for our customers through the curation of an unrivaled talent hub, and a modern, scalable technology platform. AGRICULTURE 4.48% SERVICES 14.59% INDUSTRY 28.01% OTHER 52.92% Source: Annual Report 2020– Ministry of Finance, Sri Lanka The Bank rebranded the Microfinance loans as “Dirishakthi” with the aim of positioning the Microfinance product targeting a niche market. Following the rebranding, the maximum loan amount was increased from Rs. 300,000 to Rs. 1,000,000. A total of Rs. 1.140 Bn. was disbursed under the loan product coming under the umbrella of “Dirishakthi” in 2021. Furthermore, the Dirishakthi COVID-19 support loan scheme continued to provide the working capital requirement of micro and small entrepreneurs affected by the . pandemic Obtaining Support of SMEs in promoting Green Initiatives of the Bank Commercial Bank was the first bank in the nation to achieve Carbon Neutral Status. In order to make SMEs and Businesses a part of this initiative and to support Government’s objective of promoting the renewable energy sector, the Bank re-launched a dedicated loan scheme named “Diribala Green Development Loan” Scheme targeting financing of Solar Power Systems of SMEs/ Business clients. The Loan scheme is specially designed to provide medium-term financing with attractive interest rates and flexible repayment plans. > Customer Centricity Supporting the agronomy of Sri Lanka In its commitment to support the agronomy of the country, Commercial Bank continued to partner with several leading corporates to launch “Agri Leasing” facilities at low rentals and flexible payment plans, taking into consideration the seasonal income patterns of farmers and cultivation months. The facilities are designed to increase the productivity of cultivations by providing high-quality machinery and tractors at attractive discounts to farmers. A total of 619 Agri lease facilities amounting to Rs. 1.358 Bn. were disbursed during the year 2021. Offering the lowest gold pawning rate in the country, the Bank launched the Agri Gold Loan facility during the year, to support those engaged in agriculture, fisheries, and livestock farming. This facility ensures privacy, exclusivity, maximum security of jewelry, and instant funds in the time of need and the service is offered without any service charge, stamp duty, or other hidden charges. Non-Financial Support for SMEs and Micros The Bank continued to cater to the SME sector in several other ways beyond direct financial assistance. The membership of ComBank Biz Club, launched with the objective of providing SMEs with extensive networking opportunities and support beyond lending, grew by 830 to 4,866 members by end of 2021. An initiative was taken to launch an exclusive Credit Card for SMEs and members were enabled to receive economic updates and alerts on new business developments via email and SMS and provided free registration for online banking facilities. The Biz Club members are entitled to free financial advisory services and invitations to exclusive business seminars, which are beneficial to the development of their businesses. The Bank has assisted over 9,000 SME customers to date with financial literacy programmes. The total facilities evaluated in 2021 under the new credit-scoring model introduced in 2020 was 2,581. This has facilitated a simplified evaluation process and ensured the lending quality and efficiency. Automated Field Cash Collection (AFCC) which was launched to offer doorstep cash collection services to micro entrepreneurs was expanded to two selected locations in the Northern Region. With a total of four locations, this initiative is used as a launching pad to encourage micros to move in to the digital space. Commercial Bank of Ceylon PLC Annual Report 2021 49
  52. Through a variety of channels , the Bank, conducted awareness, vocational training, and financial literacy programs and workshops for SMEs and micros in diverse sectors of business across the Nation. During the year, the Bank conducted a series of webinars for 512 SMEs including Biz Club members, exporters and women SMEs (WSME). Two webinars were conducted, one on the theme of “Digitalization and use of digital tools in business” for MSMEs and the other on “Export Opportunities to Great Britain” for exporters. “Dirishakthi Value Chain Development Program” was launched to strengthen the rural value chains, focusing on segments such as dairy, tea small holders, coir, spices and ground nut. An in-kind grant was introduced to formulate sustainable solutions to increase efficiency and the productivity of selected value chains. An incentive scheme was introduced under the same program to strengthen the relationships and welfare activities of Community Based Organizations (CBO), considered as business facilitators. A special incentive was given for introducing their members to the Bank for financial services as well. The Bank conducted capacity building programs for micro entrepreneurs under the “Dirishakthi Sustainable Entrepreneurship Development Program” A series of new initiatives were implemented to further support the Bank’s sustainability initiative under financial inclusion. These included providing an opportunity to display and sell products of selected entrepreneurs during the programs, distribution of plants to selected participants, encouraging environmental protection by avoiding one time use plastics and continuous impact assessment of the program for ongoing improvement and development. The Bank conducted nine programs during the year under review, benefitting 696 micro entrepreneurs. In partnership with DirectPay, the Bank expanded its suite of services and products such as micro lending and pay-day loans and offered its merchants and customers effective ways of making supply chain payments. The services include fully-integrated payment Pointof-Sale devices to discover new markets and inventory management solutions with payment integration on Card and LankaQR payments for SME businesses and corporates in Sri Lanka. Additionally, “SimplePay”, a simplified ecommerce platform was launched to enable digital payments especially for SME merchants. 50 Commercial Bank of Ceylon PLC Banking on Women The Bank's commitment to women's empowerment continues to be evident in its products that support women's health and wellbeing, career advancement, education, access to finance, and financial independence. In its efforts to build dedicated products and services to cater to women with the vision to become the “Bank of choice for women” by year 2023, Commercial Bank launched the exclusive Women Banking vertical named “Anagi Women Banking” in October 2021. Women make up the majority of Sri Lanka’s population, and the Bank recognises the important role they play in the economic growth of the country. A range of new financial and non-financial products and services were launched including the Anagi Business Loan for women SMEs, Anagi Instant Loan for salaried women, Anagi Credit Card, insurance for women customers, and entrepreneurship skill development programs for women. Capacity building programs were conducted for 278 women micro entrepreneurs during the year. The number of women SME customers increased to 5,903 in 2021 and the number of facilities granted increased to 16,139 in 2021. Prioritising Customer Experience Adopting a customer centric approach, the Bank remained committed to delivering an excellent customer experience through all decisions that are taken and systems implemented within the Bank. Whilst a full description of the Bank’s digital projects is provided in the next section, some of the broader customer initiatives conducted during 2021 are noted here. The Commercial Bank website; which is the most searched banking website in Sri Lanka, was re-launched as a trilingual resource, with a series of cutting-edge enhancements. An indispensable tool for millions of customers and information seekers, the website provides content in English, Sinhala and Tamil with an ultrasmooth interface with interactive multimedia material, enhanced navigation, experiencecustomisation, smarter search options and tools, and resources that make it extra user-friendly and informative. The revamped website offers further convenience to the growing number of customers visiting the site through their devices for speedy and smooth banking operations. As a leader in technology-enabled convenience in the banking sector, Commercial Bank has enhanced customer service by providing Annual Report 2021 > Customer Centricity access to information in a simplified manner and facilitating visitors to customise their experience online with the Bank. Furthermore, the website is focused on generating more user leads as well. A total of 7,011,270 visitors patronized the site in 2021, reflecting an increase of 5% compared to the previous year. The Home Loans promotion was launched with a special rate of 7% per annum for Government and Public sector salaried employees and at a reduced rate of 8.25% per annum for other sectors, with discounts of up to 40% from selected suppliers of building materials and fittings. Furthermore, the Bank offers the lowest interest rates in the country for long-tenor Home Loans and is the only bank in the country to provide the benefit of fixed interest rates on Home Loans repayable over a period of up to 20 years. A range of flexible repayment plans are offered as well to suit the earnings, projected income, and terminal benefits of the borrowers. An image based customer request process flow was implemented to provide total visibility to customer requests. “The Service Portal” – a Customer Relationship Management solution was introduced to maintain a central repository for customer complaints and improve the overall quality of customer service. Furthermore, a consolidated contact number +94 11 235 3353, was launched for customer convenience. Going forward, the Bank will develop a chatbot to improve customer engagement through cost effective channels, implement an outbound calling facility and strengthen the teams to deliver a unified experience across channels at the Contact Center. Card and Cashless Initiatives The fastest growing cards business in Sri Lanka, the Commercial Bank cards continued to enjoy the market leadership in credit and debit card combined usage. Commercial Bank cards achieved several milestones in 2021. These include, becoming the market leader in e-commerce acceptance (IPGs) in Sri Lanka recording a 65% increase YoY, being the second highest acquirer in overall acceptance in the market and winning the SLASSCOM robotic automation project competition for the Banking and Finance sector for Credit Card process automation. The Bank continued to make significant strides in championing credit and debit card and other cashless payments during the year under review.
  53. The “Q+ Payment App” of the Bank, which is the first payment app to be certified and launched under LANKAQR standards of the CBSL, reached over 100,000 customer registrations in 2021, exceeding the target of 50,000. The app enabled instant settlement of Credit Card outstanding and pre-paid Card top-ups for app users, free of charge. These additions have enabled ComBank Credit Cards to be settled through multiple customer touch points including CRMs,CDMs, ATMs, through the web using Cards or the QR codes, through LankaPay as an interbank transfer or through Commercial Bank’s Digital Banking App; Flash. The new “Q+ Online Pay” facility was launched across 3,300+ merchants to further enhance convenience and to uphold the digital payments among cardholders. Re-imagining customer service using the social media space, we were the first bank in Sri Lanka to launch Viber banking and WhatsApp banking, to enhance customer experience by using new-age communications to offer solutions that are relevant to the times. These ground-breaking products not only promote a cashless ecosystem but encourage non-digital customers to embrace digital banking. The value of issuer transactions recorded a YoY growth of 30% and 59% for Credit and Debit Cards respectively. Self-registration option for Credit Card e-statements was enabled and promoted to enhance customer convenience further. Over 27% of cardholders enrolled for Credit Card e-statements facility as at end 2021. Being the first and only bank in Sri Lanka to issue the UnionPay Credit and Debit Cards in the Island, the Bank enhanced the payment experience of UnionPay QR Wallet holders during the year. In collaboration with UnionPay International (UPI), QR code payment acceptance was enabled in Sri Lanka, becoming the first Sri Lankan bank to issue a unified QR code under LANKAQR specifications that includes the UnionPay QR code. The code can be integrated to local merchant websites to facilitate e-commerce transactions. QR payment was facilitated for other apps as well. An all-in-one POS device was deployed allowing the processing of transactions via VISA, Mastercard, UnionPay, LankaPay and JCB cards as well as QR-based wallet payments under LANKAQR. Furthermore, the device is equipped to accept EMV/Chip, Magstripe, NFC and QR-based transactions, offering customers the convenience of paying via the platform of their choice, quickly and securely. A new dimension in convenience was brought for ComBank credit card holders by facilitating automated utility bill payment, preventing accumulation of arrears due to unpaid bills and saving customers from delinquency fees and disconnection of utility services due to delayed payments. Furthermore, customers can earn Max > Customer Centricity Loyalty Rewards points that can be redeemed at many reputed merchant outlets island-wide. “Call and Convert” – Flexi Payment Plan facility was enabled for the Credit Card holders paying for education, health or insurance-related products and services and for online purchases during the year. A total of 61,648 Easy Payment Plans (EPP) were offered during the year under review. Additionally, VISA ATM Acquiring was enabled in the Maldives and the online payments through Q+ Payment App was launched as well. Figure – 17: Growth in ComBank Debit and Credit cards (based on Usage) 30% YoY Growth Credit card usage (2021) 59% YoY Growth Debit card usage (2021) Commercial Bank of Ceylon PLC Annual Report 2021 51
  54. Network of delivery points in Sri Lanka and Bangladesh Network of delivery points in Sri Lanka Branches ATMs CRMs Branches ATMs CRMs Northern Province 1 . Jaffna District 2. Kilinochchi District 18 12 28 17 2 3 26 Central Province 22 46 23 18 16. Kandy District 15 29 15 3 17. Matale District 3 10 4 18. Nuwara Eliya District 4 7 4 3. Mannar District 1 1 1 4. Mullaitivu District 1 1 1 5. Vavuniya District 2 6 3 1 Branches ATMs CRMs Eastern Province 2 4 Branches ATMs CRMs North-Central Province 8 18 8 6. Anuradhapura District 6 11 6 7. Polonnaruwa District 2 7 2 5 3 North-Western Province 23 57 25 8. Kurunegala District 14 41 16 9 16 9 9. Puttalam District 19 13 19. Ampara District 4 7 4 20. Batticaloa District 5 10 6 21. Trincomalee District 1 2 3 Branches ATMs CRMs 21 Branches ATMs CRMs 10 6 Uva Province 9 18 8 22. Badulla District 6 12 6 23. Monaragala District 3 6 2 7 9 20 8 Branches ATMs CRMs Western Province 133 349 129 10. Colombo District 78 193 80 11. Gampaha District 42 126 38 12. Kalutara District 13 30 17 16 10 11 22 18 11 Branches ATMs CRMs Southern Province 29 59 26 13. Galle District 13 32 12 14. Matara District 10 17 8 6 10 6 15. Hambantota District 19 24 23 25 12 15 13 Branches ATMs CRMs 14 Sabaragamuwa Province 24. Kegalle District 25. Ratnapura District 31 6 14 17 6 10 17 11 268 Cash Deposit Machines CDMs 38 Automated Teller Machines (Off-site = 207) ATMs 625 Envelop Deposit Machines (for cheques) EDMs 28 Cash Recycler Machines (Off-site = 17) CRMs 275 Automated Cheque Deposit Units ACDs 20 Number of Branches 52 16 Commercial Bank of Ceylon PLC Annual Report 2021 > Customer Centricity
  55. Network of delivery points in Bangladesh Narayanganj District Dhaka District Sylhet District Narayanganj Branch Corporate Branch Sylhet Branch Dhanmondi Branch Gulshan Branch Mirpur Branch Motijheel Branch Panthapath Branch Tejgoan Branch Uttara Branch Old Dhaka – SME Centre Progati Sharani – SME Centre Rangpur Shanthinagar – SME Centre Gulshan – OBU Sylhet Rajshahi Dhaka Khulna Chittagong Barisal Gazipur District Chittagong District Tongi SME Centre Chittagong Branch CDA Avenue – SME Centre SME: Small and Medium Enterprise OBU: Off-Shore Banking Unit > Customer Centricity Jublee Road – SME Centre CEPZ – OBU Commercial Bank of Ceylon PLC Annual Report 2021 53
  56. Leading Through Innovation Conventional business models and ecosystems are being rapidly transformed , and the rate of technological change and the rush of new, agile, entrants to the financial landscape has intensified competition and risk over the past few years. Especially following the COVID-19 pandemic, banking has entered a new chapter in its evolution, with consumers being much more aware of digital banking features and many first-time users have . In the grown accustomed to using them post-pandemic “new normal”, the banking landscape is shifting to “digital by choice,” offering customers instant gratification, increased convenience, flexibility, and tailored services they seek. As a pioneer in the digital space, the Bank welcomes these challenges driving inclusion of all consumer segments into a digital economy. Even as the pandemic has accelerated digital transformation and forced radical changes in customer behaviour, customers’ demand for digital products and the comfort and willingness to engage digitally has increased, with significant portions of the economy moved online. In such a milieu, the Bank delivered compelling, emotive digital propositions that elevate customer experience to meet the expectations of this new normal. Especially during the JuneSeptember 2020 period when the entire country was on lockdown and banking was made one of the essential services in the country, demand for continuity of service through digital channels escalated. The investments made by the Bank over the years in building its digital ecosystem provided a strong foundation to meet these challenges and become a pioneer in the digital payment space, spearheading many initiatives and technological innovations, both for retail customers and corporate customers. Digital Road Map 2021 – 2023 Aligned to the Bank’s digital vision of building a digital economy where each customer is engaged at their level of techno-literacy, the Bank’s Digital Road Map is focused on retail customers encompassing products, services, processes and touch points. The digital transformation for the next three years is driven by three goals: z Ensure business growth z Create business value internal systems to be ready to adapt to anticipated changes in the regulatory environment and risk management. Reskilling staff and attracting specialised talent, building partnerships, and developing data capabilities continue to be areas of emphasis. Table 10: Investments in IT infrastructure 2019 Rs. Mn. 2018 Rs. Mn. 2017 Rs. Mn. Investments in Hardware (Computer Equipment) 434.054 505.742 567.689 1,034.115 791.165 Investments in Software (Licenses etc.) 768.047 409.322 387.432 333.181 449.354 1,202.101 915.064 955.121 1,367.296 1,240.519 Migration to digital channels The Bank set up Mini Digital Experience Zones to help customers gradually migrate to digital channels. These zones are strategically placed to attract conventional customers giving them the opportunity to experience the Bank’s digital offerings. Dedicated Digital Assistants were deployed to guide customers through digital services and facilitate handheld migration for customers. The Bank also set up automated banking centres in the branches to help customers adopt digital channels. These electronic spaces is another industry first by the Bank offering basics of digital services, including facilities for customers to submit loan inquiries and requests for fixed deposits. These revolutionary initiatives in the electronic banking space have accelerated customer digital adoption. Furthermore, as per the Bank’s Digital Road Map, the sales management app and retail customer on-boarding app will be launched to increase customer onboarding to the Bank’s digital banking channels. Table 11: Migration to digital channels Indicator/year Number of existing customers migrated to online banking New customer acquisition through digital channels ComBank Digital ComBank Digital, the state-of-the-art integrated online banking platform provides access to a multitude of banking services across multiple devices. It consists of internationally recognized user security features with industry standards. The platform has a range of built-in options enabling customers to self-customize their digital banking preferences, without the assistance of a bank agent. Customers can execute and monitor transactional activities in a fast and secure manner and the platform supports bill payments to more than 80 entities. Accordingly, the Bank will continue to invest in redesigning its conventional banking processes as digital processes, integrating with other ecosystems and upgrading Commercial Bank of Ceylon PLC 2020 Rs. Mn. Total z Enhance digital customer experience 54 2021 Rs. Mn. Indicator/Year Annual Report 2021 2021 2020 2019 212,806 157,599 109,873 12,491 16,327 14,957 During the year under review, several enhancements were effected to elevate the user experience and convenience. These included improving the payment capabilities to Government institutions through the LankaPay Online Payment Platform to institutions such as Board of Investment (BOI), Inland Revenue Department and EPF integration. The platform placed the Bank in the forefront of digital payments, becoming the first bank in Sri Lanka to integrate with the Import and Export Control Department (IECD) for online payments, enabling customers to pay their license fees to the IECD conveniently 24/7.
  57. A dedicated YouTube Channel was launched to increase customer awareness about ComBank Digital in addition to user guides , FAQs hosted in the application, as well as the corporate web site. Early redemption of fixed deposit feature introduced in the platform attracted many users during the pandemic period where the travel restrictions were imposed. Furthermore, instant approval of home loans and leasing will be enabled adding further convenience to customers. Following the implementation of ComBank Digital in the Maldives in 2021, the platform was enabled with customer self-onboarding and cross border remittances. The number of customers using ComBank Digital increased by 55%. Figure – 18: Customer usage of ComBank Digital/ online channels 35% Growth of number of customers on boarded digitally (YoY) Flash Digital Bank Account Flash Digital Bank Account, the Bank’s revolutionary trilingual app, offers unique personal financial management tools that encourage, empower, and embolden users to better engage with their finances, make wise choices about spending and saving and, enrich their financial wellness. A range of features were added to enhance and elevate user experiences during the financial year under review. To create increased value to stakeholders, “Pay with Flash” service was launched, partnering with leading lifestyle partners. An advanced budgeting dashboard "My Portfolio" was launched to provide a single dashboard view of customer's investments and borrowings. Instant mobile reloads and top ups and payment of bills through credit cards was enabled through the app as well. Furthermore, "Need Money" feature was added to enable customers to share their interest on obtaining a personal, educational or housing loan or a leasing facility from the Bank. The app was also equipped with a “Flash Finance SPACE” function to generate such requests. Flash e-Statements was introduced with payment and receipts facility and detailed e-Receipts for Flash transactions with the option to share via email and WhatsApp. The introduction of “JustPay” enables customers to add any bank account to top up Flash and make payments, and functions of “My Payees”and “My Billers” were added to the homepage menu with recent payee and biller templates. The Bank also launched a new website for Flash – www.flashbank.lk in 2021. 2020 – 44% 105% Growth in number of transactions (YoY) 2020 – 46% 109% Growth in value of transactions (YoY) Flash also includes the revolutionary “Save the Environment” feature that promotes an understanding of the social carbon footprint of consumption by assessing each transaction carried out via 2020 – 54% the app. Doconomy, the global impact-tech leader gave an international recognition to Flash Save the Environment initiative positioning the Bank among first few leading banks embarked on climate change. In recognition of the outstanding practices and innovative initiatives in Asia's retail banking sector, the Asian Banking and Finance magazine awarded the Flash Digital Bank Account, the “Digital Banking initiative of the Year” in Sri Lanka at the 2021 Asian Banking and Finance (ABF) Awards. "Instant Loan Facility" for Flash customers against e-FDs will be introduced in the near future as well. In Bangladesh, the Flash platform was introduced to accelerate onboarding of customers by overcoming the limitation of a small branch network. “Flash DKYC” feature is ready to be introduced to accelerate digital onboarding of customers by establishing KYC via a video conference call. Figure – 20: Flash usage 40% Growth in user base (YoY) 2020 – 80% 186% Growth in value of transactions 2020 – 468% 137% Growth in volume of transactions 2020 – 323% 142% Growth in usage of funds transfers Figure – 19: Total financial transactions initiated through digital channels 2020 – 354% 188% Growth in usage of Bill payments Number of transactions* Value of transactions (Rs Bn.)* 37,841,881 2,356.170 2020 2020 23,724,058 1,386.250 % of customer transactions below Rs. 200,000 92% 2020 Growth in number of transactions (YoY)* Growth in value of transactions (YoY)* 60% 70% 2020 10% 2020 2020 – 260% 97% 22% *Total transactions without SLIPS/CEFTS > Leading Through Innovation Commercial Bank of Ceylon PLC Annual Report 2021 55
  58. Q + Payment App Q+ Payment App launched in 2019 is the first QR based Payment App to be certified and launched under LANKAQR, which allows the entire Debit and Credit card base of the Bank to make QR payments and other payments conveniently. This is the only payment app in Sri Lanka that supports LANKAQR, mVisa, Mastercard QR and UnionPay QR transactions and it is certified for use at overseas QR merchants through the Visa, MasterCard and UnionPay networks. The Payment app is enabled to make payments in many categories such as data reloads, pre-paid and post-paid mobiles, fixed telephone lines, utilities, water and electricity (CEB and LECO), pay TV bills, credit card outstanding, pre-paid cards top-up, Insurance, Education and Mobile wallets. The Payment App will be further enhanced with the inclusion of more beneficiary companies to improve the customer experience in the future. Another innovative payment experience was launched for the Bank’s Q+ Payment App customers called “Q+ Online Pay”, which enables Q+ customers to pay for online purchases by entering their mobile numbers at over 3,300+ merchant websites and apps that have “Q+ Payment App” as a payment option. This state-of-the-art payment method allows users to keep their sensitive card and account details away from merchant platforms as Q+ Payment App users are required only to enter a mobile number at the point of purchase. Parallel to the launch of “Q+ Online Pay”, Commercial Bank has added the “Q+ Online Pay” payment option to its credit card settlement webpage, enabling customers to seamlessly settle their credit card outstanding through Q+ Payment App by typing only their mobile numbers. Online Payments – Internet Payment Gateways The Bank has swiftly established itself as a market leader within the growing E-Commerce sphere, with its payment processing services. During the year under review, the Bank initiated multiple measures to enhance the inclusivity, interoperability, functionality and security of cashless payment platforms. In partnership with DirectPay, one of the fastest-growing fintech start-ups in Sri Lanka, the Bank provided Internet Payment Gateway (IPG) support and became the acquiring bank for the cashless payment solutions of DirectPay. In collaboration with UnionPay International (UPI), the Bank issued a unified QR code under LANKAQR specifications that includes the UnionPay 56 Commercial Bank of Ceylon PLC QR code, thereby widening the user base for electronic and digital payments, catering even to foreigners visiting Sri Lanka. Opening its door to the new era of E-Commerce that is faster and more convenient, the Bank became the first in Sri Lanka to deploy EMV 3DS fraud prevention technology for authenticating payments made by credit, debit, and pre-paid cards in collaboration with Visa. As the preferred IPG partner to a cross section of businesses in Sri Lanka, the Bank provides payment processing services via Mastercard Payment Gateway Services (MPGS) and Visa Cyber source platforms that offer tokenization support which has increased customer convenience immensely. These solutions also provide access to a comprehensive set of fraud mitigation tools, supporting both “Mastercard Secure Code” and “Verified by Visa” 3D secure authentication solutions while having the fully-automated process to handle ComBank Easy Payment Plans (EPP). The Bank’s IPG solutions also support device-optimised payment screens which are designed to offer a seamless experience to users of various devices; a feature much requested by the local E-Commerce industry. Figure – 21: IPG usage 65% YoY Growth in IPG Volumes (2021) 37% YoY Growth in IPG Merchants (2021) Point of Sale (POS) Services With the aim of increasing financial inclusivity and digital payment value growth, the Bank introduced low cost, contactless card-based options to customers and enabled merchants to collect their payments conveniently. The variety of Cards offered by the Bank are equipped with “Tap ’n Go” NFC technology and backed by a strong NFC Point-of-Sale (POS) network. The launch of the first LANKAQR supported Android POS device was deployed allowing the processing of transactions via VISA, Mastercard, UnionPay, LankaPay, and JCB cards as well as QR-based wallet payments under LANKAQR. This provides customers a frictionless and cashless payment experience and drastically reduces the waiting time at checkout counters. Positioned as the most advanced Android Annual Report 2021 > Leading Through Innovation POS device in the country, the Android Smart Terminal combines the functionality and portability of an Android terminal with tailored security-certified payments software, facilitating acceptance of transactions via all Card Schemes. Figure – 22: Growth in POS acquiring volumes 97% YoY Growth in POS acquiring volumes (2021) “RemitPlus” for Worker Remittances The Bank’s remittance app, ComBank RemitPlus, was launched in December 2019 to commemorate International Migrant Day. Several enhancements were effected during the year to enhance user experience. “Combank e-Exchange” was relaunched as “ComBank RemitPlus” and the Bank introduced a remittance agent funds management module. Remit Plus payment process was simplified by converting cash to account at branch counters, and incentives were offered to increase worker remittances. The outward USD online payments to other local Banks and Malé operations were automated, whilst offering special rates to the latter. Separate authority levels were assigned for e-Exchange call centre agents to serve customers, 24X7. Remittance Tracker was integrated with Phase ll development of Remit Plus App and Blockchain for remittances-Ripple version 4 of phase ll was upgraded. The Bank enhanced the Blockchain based remittance channel with global remittance companies. Double Vaasi, Western Union and Moneygram, Double Cash & Double Chance promotions were conducted to encourage direct remittances to the Bank, with more winning chances to Bank Remittance customers. WhatsApp Banking Demonstrating its innovative use of new-age communications, the Bank pioneered the ground-breaking product on WhatsApp; the world’s most widely-used messaging platform, becoming the first Sri Lankan bank to offer Banking Services on this platform. Launched in 2020, the platform offers a versatile range of very quick and easy-to-operate banking options for both account holders and non-customers,
  59. Our revolutionary digital banking app , “Flash” enables users to enjoy a complete suite of financial services and wealth management tools in one seamless application. This most advanced banking app is equipped with the QR payment facility and the revolutionary “Save the Environment” feature that promotes environmental consciousness. This app is designed to attract customers, millennials in particular, to adopt digital banking. and importantly, can facilitate opening of accounts for those seeking to become customers. With an estimated,over 6.5 million social media users in Sri Lanka, WhatsApp banking is the most logical path to enhancing access to services, especially as this service does not require the user to be particularly tech-savvy. Account holders can access several services including checking their account balance, viewing account history, or requesting a cheque book, while both customers and non-customers can ask for fixed deposit rates and foreign exchange rates, self-register with the ComBank Digital app, or open a new account through Flash. WhatsApp Banking will function as an interim digital offering through which the Bank can reach busy customers inclined towards digitising their banking experience whilst eliminating the need for customers to visit a branch for basic banking services. Since commencement of operations in January 2021, the number of customer registrations increased to almost 37,000 and total usage was 570,923 for the year ended December 31, 2021. > Leading Through Innovation Viber Banking ePassbook Becoming the first bank to launch Viber Banking in Sri Lanka, the Bank enabled account holders and non-customers alike to seamlessly enjoy real-time banking services delivered through an interactive artificial intelligence (AI) chatbot on Viber. The Bank aims to encourage the Bank’s non-digital customers who are also Viber users to embrace digital banking through ComBank Digital, inspire potential customers with Viber to open “Flash” Accounts, and to invite anyone to obtain hassle-free credit facilities from the Bank. The first digital passbook in Sri Lanka and South Asia, ComBank ePassbook was introduced in 2016 as a pioneering product of the Bank, revolutionising the concept of the “Passbook.” Following the upgrade of self-registration, real time transaction notifications, and biometric login in 2020, new app downloads spiked to 768,000+ during the year 2021. With users in more than 100 countries, the log in rate is 20 per second, averaging more than 1,000 active users per minute, and over 1 million customer registrations. The app enables Sri Lanka being among the top five markets for Viber in the Asia Pacific region with over 15 million registered users, offering banking services on this platform is focused on serving its customers with solutions that are relevant to the times and achieving another milestone in the Bank’s Social Network Banking operations. Commercial Bank of Ceylon PLC Annual Report 2021 57
  60. users to self-add , remove, or group Current Accounts, Savings Accounts, and Credit Cards. Future enhancements to the app will include viewing unlimited transaction history, including unrealized cheques, account holds and the total overdraft limit for current accounts. Furthermore, the app will be facilitated to view details of fixed deposit accounts and loans online, to keep track of details and operate the app in all three vernacular languages. Process Improvements The Bank introduced several new automated processes focused on building robust back-end digital process improvements to enhance customer experience and adapt to the new normal. Noteworthy developments include: z Becoming the first bank in Sri Lanka to accept digital signatures from business customers using LankaSign, to improve the customer experience of the Bank's retail and corporate customers. z Automation of the process of early Redemption of eFD. z The Bank’s core banking system will be upgraded to Signature 15.1 to ensure a robust and stable backend processing system and strengthen the security of the network. z Catering to the increased business demands, a new power system and a new virtual server was installed to the Data Centre to ensure high availability for the Bank’s core system. z A new switch stack and routers were installed to the network and communications system to achieve 99.98% uptime and minimize unplanned down time. z To increase efficiency of the cards operations an ATM reconciliation system was implemented, and the SMS alert registration process, credit card auto recoveries process, and the computing and evaluation process of credit cards were automated. A recoveries software “Smart Collect” was installed to expedite the recoveries process. A workflow system was developed for scanned image processing of a credit card archival and processing of service requests for debit and credit cards. z Following the automation of CRIB reports through robotic process automation (RPA), analysis of CRIB reports was automated to support efficient decision making of the Bank. z An image-based customer request processing flow was implemented to minimize routing of documents and provide total visibility to customer requests. 58 Commercial Bank of Ceylon PLC z A Memorandum Circulation and Approval System was introduced to route selected internal memos through a predefined workflow path and increase efficiency of the approval process. z A Customer Relationship Management solution - “The Service Portal” was launched to maintain a central repository of customer complaints received and the actions initiated. z CRM integration was implemented to enhance customer experience through a 360o view of the customer. IT Operations and Security The Bank’s highest priority is placed on maintaining uninterrupted systems and services for all stakeholders, managing the ever increasing threat landscape to cyber-crimes and loss of information, and ensuring preparedness for the future. The uptime and Service Level Agreements (SLAs) of the entire Branch network for Sri Lanka, Bangladesh, Myanmar, and the Maldives is monitored and maintained by the IT Support unit and this includes over 10,000 IT Equipment, 1,000 touch points and managing BCP Centers. The Network & Communication unit provides secure and reliable communication channels for all stakeholders, both internal and external, across the entire Branch network. The IT Security Unit conducts regular security assessments to identify and assess system and application vulnerabilities and take appropriate remedial action with relevant stakeholders. The Security Information and Event Management (SIEM) solution is implemented and configured to identify security threats and the monitoring of security is done through dashboards and alerts. The Bank successfully maintained the PCI DSS and ISO 27001:2103 certifications during 2021 as well. The ISO 27001:2013 is a key international standard on information security management, which specifies requirements for establishing, implementing, maintaining, and continuously assessing and improving an information security management system against which the Bank had been continually certified for over 10 years. PCI-DSS is the global data security standard adopted by payment card brands for all entities that process, store, or transmit cardholder data and sensitive authentication data. It is one of the most stringent technical standards and its maintenance requires significant expertise and resources. This certification also covers the Bangladesh operations of the Bank. The Bank has installed layered security controls which include Firewalls and other security devices to counter malware attacks in addition to maintaining the controls such Annual Report 2021 > Leading Through Innovation as updating OS and application patches, maintaining backups, restrictions on remote access. To secure IT services, security controls such as threat protection for emails and a multi factor authentication in accessing critical systems has been introduced. The Bank provides tokenization support to its merchants enabling them to facilitate frictionless E-Commerce transactions to their customers. The Bank stores the card details within the Bank’s systems and provision tokens in merchant’s websites ensuring maximum protection to cardholders. The Bank also have enabled EMV 3DS functionality for its cardholders as well as E-Commerce merchants ensuring the highest protection available as per EMVCo standards. Mobile device management has been implemented with device control and hard disk encryption to improve the overall security posture of remote teleworking devices.
  61. Operational Excellence As Sri Lanka ’s largest private sector Bank, the Bank plays a pivotal role in influencing and shaping Sri Lanka’s advancement towards a more sustainable and inclusive economy. Demonstrating its spirit in the face of adversity, the Bank stood through the unprecedented disruptions to the global economy caused by the COVID-19 pandemic and remained well positioned to play an important role in economic recovery and restoration of livelihoods. The Bank adapted to new customer behaviour and preferences, restructured its internal operations, and recalibrated revenue models to successfully scale the challenging year. The Bank’s sustainability vision - “to be a responsible financial service provider by enabling and empowering people, enterprises and communities, towards environmentally-responsible, socially-inclusive and economically-enriching growth” – has never been so relevant. It was the unfailing commitment of the Bank’s employees that enabled the Bank to be there for its customers during the crisis, and therefore in the recovery phases as well. The numerous awards and accolades bears testament to the strength and mettle of the Bank. The Bank’s emphasis on operational excellence has long been the backbone of its success and a crucial factor in its sustained profitability. Speed, accuracy, and quality of delivery is a key differentiator in today’s banking landscape, where competition is fierce and an array of similar banking products and services saturate the market. The Bank continued to assess and streamline processes and make the most productive use of its resources throughout the year to meet customer expectations while remaining cost efficient. While the Bank’s fundamental business of financial intermediation requires adherence to government regulations, having a “Social License," which is tangible evidence of ethical and conscientious behaviour is imperative to operate in a community of stakeholders. In this context, operational excellence encompasses, among other things, investments in the well-being of its stakeholders and environment. This balance of short-term and long-term interests forms the very essence of the Bank’s profitability. Highlights: Cost to income ratio, Income per employee, Profit per employee Advances per employee and Deposits per employee have improved Refer Table 12) during 2021 ( Table 12: Productivity and efficiency ratios 2021 2020 2019 2018 2017 5 year average Cost to Income ratio (Including taxes on financial services) (%) 37.97 39.96 49.41 46.35 51.08 44.954 Cost to Income ratio (Excluding taxes on financial services) (%) 31.61 33.95 38.51 36.85 41.08 36.40 Revenue per Employee (Rs. Mn.) 31.720 29.605 29.377 27.462 22.954 28.224 Profit per Branch (Rs. Mn.) 82.251 57.050 59.320 61.557 59.219 63.879 4.654 3.238 3.363 3.490 3.328 3.615 Profit per Employee (Rs. Mn.) A transformed working environment The Bank continued to offer uninterrupted services to its customers and its stakeholders by taking the necessary measures to strengthen its readiness through the implementation of a comprehensive Business Continuity Management (BCM) framework. The BCM framework and the scope of the Bank’s Pandemic Plan was further expanded during the year under review by introducing additional measures to strengthen the Bank’s ability to deliver its critical and essential services to customers, safeguard employee wellbeing, comply with the regulatory requirements, and adhere to good governance principles. The key objectives of the BCM are to: z Ensure service continuity by identifying working from home whilst following the established health protocols. The following arrangements were made to maintain uninterrupted service whilst minimising staff exposed to the virus. z Providing dedicated transport arrangements to staff in specialised units in order to report to work and reimbursing the personal transport cost of employees reporting to work during COVID-19 related lockdowns. Total staff traveling cost reimbursement amounted to Rs. 165.8 Mn. for the year under review. z Changing the infrastructure of branches in order to enhance the safety of staff and customers by separating counters with a special glass panel.  z Providing safety equipment such as the Bank’s key products, services and the supporting core banking systems, processes and protecting them against disruptions. thermometers, gloves, masks, sanitizers to branches and disinfecting branch premises and ATM cubicles.  z Providing food, lodging, and transport for z Meet the predefined services levels all mission critical staff who were required to report to work during the lockdowns. after a disruption, including systemically important payment and securities settlement systems. z Deploying the Call Tree Notification z Implement an effective incident and crisis management and a business continuity framework that minimises the impact of disruption while ensuring maximum resources availability to resume normal operations. System to convey instructions on logistics arrangements at short notice, and mobilise staff for shift-based work. z Providing transfers to closer work locations z Minimise the financial, legal and other operational risks arising from disruptions or failures. z Protect human life and ensure their safety from hazards or dangers during work. z Safeguard the brand image and reputation of the Bank. Continuing operations while limiting exposure To ensure continuity of operations and prevent infection exposure and spread, the Bank continued to work through split teams working at alternate sites, remote sites and for 328 staff members who faced travelling difficulties during the pandemic period to facilitate smooth functioning of business units. z Expanding the scope of the Surgical and Hospitalization insurance of employees to include COVID cover. This allowed staff members and their immediate family to reimburse the cost of PCR and Rapid Antigen Testing (RAT). It also allows COVID positive staff members and their immediate family members to get treatment at Paid Intermediate Care Centers (ICCs). A total of 915 employees contacted COVID-19 in 2021, of whom 481 were admitted to Intermediary Care Centres (ICCs). To prevent the spread across the Bank, 3,554 PCR and RAT Commercial Bank of Ceylon PLC Annual Report 2021 59
  62. tests were conducted during the year at a cost of Rs 25 .1 Mn. The Bank also spent Rs. 83.4 Mn. to take care of its COVID infected employees admitted to ICCs. Furthermore, dry ration packs were provided to COVID infected employees who were home quarantined, at a cost of Rs. 2.86 Mn.   z A series of special training sessions were conducted to educate outsourced security personnel on necessary COVID safety protocols and guide them to enforce mandatory mask wearing, sanitising and temperature checks at all entry points to the Bank. z Granting special paid leave to staff members with underlying health conditions and expectant mothers to prevent their risk of exposure to the virus. z Fine-tuning the communication plan to support pandemic related communication with staff members. Table 13: Readiness of BCP sites Location Seating Capacity Mount Lavinia 39 Piliyandala 58 Maradana 50 Table 14: COVID-19 related expenses COVID-19 RELATED EXPENSES Face Masks Gloves 2020 Rs. Mn. 14.10 27.10 4.10 4.80 Hand Sanitizer 23. 40 20.50 Infrared Thermometers 0.95 3.50 Reimbursement of PCR and Rapid Antigen Tests Intermediary Care Centers Assistance packs for infected staff members 60 2021 Rs. Mn. 25.10 working. The security of the network was assured through an industry-leading remote access solution offering multiple layers of security. All employee engagement and development programs were migrated to digital platforms, ensuring collaboration and ongoing interaction. Our people rising to the occasion The Bank’s workforce has been its engine of successful value creation. The team of 5,072 diverse and highly competent employees are the greatest asset of the Bank and they have been fundamental in achieving the strategic aspirations of the Bank. During the extraordinary challenging year, the employees demonstrated a great adaptability to maintain business and serve its customers. Their commitment, dedication and efforts have been instrumental in facilitating customer experience, driving loyalty and brand value. Earning the trust and loyalty of its employees and ensuring they remain invested in the business is among the foremost priorities of the Bank. To this end, the Bank’s Human Resources Governance Model and Human Resource Development Policy together provide the foundational framework to develop people as a strategic resource, whilst ensuring every employee has equal opportunity to achieve their personal and professional growth ambitions. To build a strong employee brand and be the preferred employer in the sector, the Bank strives to create an enabling environment where employees can perform exceptionally, fulfill their potential, and feel connected to their purpose, their colleagues, and the organisation. The Bank empowers its people to be adaptive to remain relevant in a rapidly evolving banking landscape by promoting a culture of continuous learning. Table 15: Retention Rate (Maternity Leave) 3.80 83.40 – 2.86 0.50 2021 2020 2019 Availed leave during the year 50 69 84 Due to return during this year 59 73 64 Returned during the year 59 73 64 Returned during prior year 73 64 48 Still employed after 12 months 70 61 45 Number of Employees Working securely from home Return ratio (%) Work-from-home arrangements were facilitated for employees by providing necessary IT infrastructure and implementing guidelines on remote Retained ratio (%) Commercial Bank of Ceylon PLC Annual Report 2021 100.00 100.00 100.00 95.89 95.31 > Operational Excellence 93.75 Focusing on employee morale and safety Health and safety of employees was a foremost priority of the Bank, during the year, and the Bank adopted an array of measures to safeguard its staff from the refer to risk of cross infection (Please section on continuing operations while limiting exposure on page 59 for detailed information). The Bank continued to emphasise clear communication and flexibility to ensure the safety of all employees. Whilst the senior leadership took a hands-on approach, regularly communicating with staff, being personally available, and promoting a culture of openness and honesty about the situation, the Business Heads stayed in constant touch with their teams through formal and informal communications channels. A flexible approach was adopted taking into consideration different family situations and health conditions of the Bank’s diverse, multigenerational workforce. Every effort was made to accommodate employee preferences in working environment in both location and hours. The Bank believes that upholding recognised standards and principles for labour practices, human rights and occupational health and safety is essential to remain productive. Especially in a challenging context, it was important to prevent burnout and exhaustion and bolster morale, and provide employees with an environment where they could flourish and drive the success of the Bank. Even through the difficult circumstances, camaraderie and team spirit of the staff remained strong and their productivity remained high and consistent.
  63. Figure – 23: Employee communication channels Employee surveys Managers’ forum Staff TV Staff notice board Employee suggestion scheme Emails “Speak out” web portal Town hall meetings Circulars Whistleblower charter Trade unions Chat bot E- Magazine Intranet Remuneration and Job Security Understanding the importance of affirming its financial commitments to its staff, especially in time of crisis, more than ever, the Bank placed high priority on continuing remuneration and ensuring job security to its employees. Therefore, despite the challenges arising from the pandemic, all employees were paid their full remuneration throughout 2021. Further, an average salary increment of 10% was granted to all employees. The annual performance appraisal was conducted for all employees and the applicable increments and bonus entitlements were paid as per the Bank’s Pay-for-Performance policy. The Defined Contribution Pension Fund launched in 2020 to commemorate the centenary year covering employees who are not covered by the existing pension fund of the Bank is a significant initiative to enhance the value delivered to its employees. Bank remains committed to the principles of equal opportunity irrespective of gender, age, race, disability or religion in all its HR management processes. The Bank’s Sexual Harassment policy aims to honour the fundamental rights of every employee to work in a safe, dignified and respectful environment free from discrimination, bullying and harassment. Whilst including as part of the orientation training for new recruits, the Bank conducts regular refresher sessions to ensure that all employees remain aware of the contents and interpretation of this policy. All expectant mothers across the Bank were granted special leave from May 01, 2021 onwards, to ensure their safety against the third wave of the pandemic. In recognition of the Bank’s commitment to the principles of equal opportunity in its Human Resources Management processes including recruitment policy, benefits and pay, training and development opportunities, and policies on abuse and harassment, the Bank was honoured at the inaugural Women Friendly Workplace awards by the Satyn Magazine and CIMA in 2021. Table 16: Female workforce As at December 31, No. of female employees Female employees in Senior Management positions as a percentage of total employment (%) 2021 2020 1,201 1,106 0.92 0.92 16.80 21.80 35.5 27.21 – Western Province (%) 75.78 76.22 – Outstations (%) 24.22 23.78 31.00 32.87 Collective Bargaining Percentage of female employees promoted (%) Demonstrating the strong collaborative partnership that Commercial Bank has built with the CBEU over the decades, the Collective Agreement with the Bank’s branch of the Ceylon Bank Employees’ Union (CBEU) was renewed in 2021 for a further 3-year period. All negotiations were conducted in the spirit of compromise with special consideration of the financial and other challenges brought about by the pandemic. The Management continues to maintain cordial relations with the two employee unions, which have yielded many benefits to both employees and the Bank. Percentage of females recruited (%) Percentage of females in key geographical locations (of all female employees in the Bank) Percentage of female exits (includes retirees) Diversity The Bank believes a diverse workforce and inclusive culture will improve the quality of decision-making, drive innovation, enhance resilience and strengthen its ability to serve all customer segments across Sri Lanka. The > Operational Excellence Commercial Bank of Ceylon PLC Annual Report 2021 61
  64. We have one of the largest touch-point networks of any corporate in the country , comprising automated teller machines (ATMs), cash recycler machines (CRMs), cheque deposit machines and account opening kiosks. Enabling self-services at your convenience, we facilitate customers to bank at any time, creating greater efficiency through superior service delivery. Table 17: Employee by Type and Gender As at December 31, 2021 SRI LANKA Female – Permanent – Permanent TOTAL Count Percentage (%) Count Percentage (%) Count Percentage (%) 1,115 23.33 86 29.35 1,201 23.68 1,114 23.31 70 23.89 1,184 23.34 1 0.02 16 5.46 17 0.34 – Contract Male BANGLADESH 3,664 76.67 207 70.65 3,871 76.32 3,663 76.65 180 61.43 3,843 75.77 – Contract 1 0.02 27 9.22 28 0.55 4,779 100.00 293 100.00 5,072 100.00 – Female 149 41.74 6 6.06 155 33.99 – Male 208 58.26 93 93.94 301 66.01 357 100.00 99 100.00 456 100.00 Employees-Bank Outsourced Employees Employees-Outsourced All employees of the Bank are full time employees. Table 18: Employee by Category and Gender – Total Bank As at December 31, 2021 AGE 18-30 YEARS Male Female Male AGE OVER 50 YEARS Female Male TOTAL % Female Corporate Management – – – 23 5 31 0.61 Executive Officers 97 52 1,411 328 190 92 2,170 42.78 Junior Executive Assistants and Allied Grades 993 272 907 297 21 60 2,550 50.28 Banking Trainees 172 94 4 – – – 270 5.32 Office Assistants and Others Total 62 AGE 31-50 YEARS Commercial Bank of Ceylon PLC Annual Report 2021 – – 1,262 418 > Operational Excellence 3 13 1 37 – 2,338 626 271 157 51 1.01 5,072 100.00
  65. Training and Development Training and Development is a vital component of the Bank ’s Human Resource Development Philosophy. Following a robust training and development strategy to provide both individual and collective learning opportunities for its staff, the Bank focuses predominantly on equipping its staff with up-to-date, relevant skill-sets and necessary competencies to thrive in a rapidly changing banking environment. Driving operational excellence, improving product knowledge, customer service, marketing and communication, innovation, leadership development, soft skills, sustainability, industry trends, digital technology adoption and compliance are key areas of emphasis of employee development. Following the pandemic, the majority of training programs were conducted virtually, enabling employees a more "anytime, anywhere" approach of providing multiple continuous training experiences. During the year under review, the Bank embarked on a Leadership Development Program for Regional Managers conducted by an internationally recognised trainer. The Bank also commenced developing a moodle based learning management system, in-house to enhance the learning experience of employees. In addition, an identified group of potential branch Managers were enrolled to a Leadership Development Program conducted by Postgraduate Institute of Management (PIM) where they will be undergoing a continuous professional development program. Special Virtual training programs were conducted targeting Branch Managers, Assistant Branch Managers, and Junior Executive Officers covering technical and soft skills. Further, several virtual training programs were conducted covering areas such as Recoveries and NPL Management, Anti-Money Laundering and Compliance and Credit Risk Management, information security, impairment assessment in view of the new Directions issued by the CBSL on migration of regulatory reporting in line with SLFRS 9 etc. among others. Sri Lanka’s first Carbon Neutral Bank Sustainability is the cornerstone of the Bank’s corporate ethos, influencing every aspect of the organisation. Being the first Bank in Sri Lanka to achieve the carbon neutral status as affirmed by Climate Smart Initiatives (Pvt) Ltd. and being awarded the Best Corporate Citizen Sustainability Award for 2021 by the Ceylon Chamber of Commerce are strong testaments of the Bank’s deep commitment towards best practices in sustainability at every The Bank’s multifaceted employee level. Green initiatives that contributed to its carbon neutrality status and achieving its Green Goals include lending to support ecofriendly operations, migrating customers to paperless banking, reducing consumption of non-renewable energy, water, and other resources in its own operations, and support to community initiatives that help conserve habitats and the environment. The Bank’s sustainable banking practices have been designed on the basis that sustainable success is a balancing act – between continuity and change, stability and disruption, being conservative and bold. It involves enhancing shareholder returns without compromising its responsibility to the society and the environment. Additionally, the Bank has numerous commitments including a mangrove restoration project in Koggala, a marine turtle conservation initiative to protect the biodiversity of the ocean, and support to the “Thuru Mithuru” initiative of the Sri Lanka Army to promote self-sufficiency in essential food. Managing our Footprint The Bank pioneered a mandatory social and environmental screening process for its project lending activities and was the first bank in Sri Lanka to venture into Green Financing. Furthermore, the Bank revolutionised digital banking by 2021 2020 2019 2018 Total training cost (Rs. Mn.) 22.955 15.183 54.695 47.119 Total training hours 79,928 43,961 142,950 130,754 7,756 7,161 1,111 1,309 Percentage of training through e-learning (%) 9.70 14.01 0.77 0.99 Total investment on virtual training (Rs. Mn.) 16.958 3.455 0.315 0.333 > Operational Excellence With Sri Lanka facing growing energy demands and having set a national ambition to become energy self-sufficient by 2030 and reach 100 percent renewable energy generation by 2050, the Bank increased its support towards development of clean energy resources and energy efficiency initiatives. Securing a USD 50 million loan from the CDC Group of UK marked the first climate investment in Sri Lanka by the Group, to bolster the country’s efforts to help reduce greenhouse gas emissions and bring about a cleaner and more sustainable future to the island. This provides the capital that allows the Bank to extend credit toward renewable and climate-supportive projects. Green buildings and initiatives Since being the first Bank to be awarded the Green Building certification by the Green Building Council of Sri Lanka for its Galle Fort branch, the Bank has further expanded its portfolio of green buildings to include Jaffna Branch and the Trincomalee branch. Over the years, the Bank has systematically increased its investment in solar PV systems to meet the energy needs of its branch network. As at December 31, 2021, Rs. 251 Mn., has been invested to commission solar systems at 61 of its branches including branches operating in Bank owned buildings of which 09 are fully powered by solar energy and the remaining partially dependent on the national grid to fulfill their energy requirements. Table 20: Energy consumption Table 19: Training statistics Total e-learning hours introducing features in its “Flash” mobile application to measure and offset customer impact on the environment. Embedding its climate strategy into its core product and service offering, the Bank also finances projects that focus on renewable energy, energy and resource efficiency, waste management, emission reductions, smart agriculture and green buildings. The Bank’s Green Financing is geared towards the fight against climate change, meeting the United Nations Sustainable Development Goals 7 and 12: Affordable and Clean Energy, and Responsible Consumption and Production. Indicator (Gigajoules) 2021 2020 2019 2018 Energy consumption 42,906 45,045 50,296 49,958 Solar Power Generated 6,068 5,613 6,530 1,767 Solar Power Generated as a % of Energy Consumption 14.14 12.46 12.98 3.54 Commercial Bank of Ceylon PLC Annual Report 2021 63
  66. Recognised as the most progressive banking institution in Sri Lanka , we play a vital role as an advocate and driver of sustainability in our Nation. Our commitment to preserving the environment is reflected through our responsible lending protocols which include a mandatory social and environmental screening process and becoming the first carbon-neutral bank in Sri Lanka. Our positioning as a predominant bank in climate financing and environmental consciousness in the South Asia region was affirmed by the International Finance Corporation (IFC) by conferring two Climate Assessment for Financial Institutions (CAFI) awards in 2021. 64 Commercial Bank of Ceylon PLC Annual Report 2021 > Operational Excellence
  67. Aligning with the UN Sustainable Development Goals (SDGs) As a leader in the country’s banking sector, the Bank recognises its position of responsibility as a financial institution in influencing and shaping the transition to a more sustainable green, and inclusive economy. Therefore, the Bank has committed to the global mandate of achieving the United Nation’s Sustainable Development Goals (SDGs) by the year 2030, agreed on by 193 countries, and has also aligned its sustainability priorities and operations with the SDGs. Based on a process of principled prioritisation, the Bank supports 7 out of the 17 SDGs as most aligned to its sustainability and responsible banking ethos and operations, allowing for a more focused and targeted approach yielding a greater impact. schools in the country. The Bank also funds a 150-hour IT hardware course conducted in collaboration with SLT Campus (Pvt) Ltd. and CISCO Networking Academy in selected schools and has partnered with the Academy to offer an “IT Essentials” course for teachers and students free of charge. Playing an active role in supporting people and institutions at the frontlines of the battle against COVID-19, the Bank donated critical medical equipment worth of Rs. 26.3 Mn. to over 25 Government hospitals in 2021 . Recognising that the Sri Lanka’s labour force is one of the most crucial factors in development, the Bank supports young Sri Lankans find rewarding careers in collaboration with the Vocational Training Authority (VTA). Figure – 24 The Bank’s Business Partners Critical to operations Utility services providers Software suppliers Material suppliers Travel and Transport Partnership for the Goals Quality Education Gender Equality Decent Work and Economic Growth Industry, Innovation and Infrastructure Affordable and Clean Energy The partnerships forged over the years and the new collaborations pursued with public, private and non-governmental organisations both locally and internationally, offer vital support in the achievement of its sustainability strategy. The synergies derived through these partnerships in terms of knowledge sharing and capacity building go a long way in augmenting expertise, building the internal capacity and improving the efficacy of the Bank’s sustainability initiatives. The Bank takes pride in being an active member of the following platforms: Extend our reach Correspondence banks Franchise partners Exchange houses FinTech companies z Sri Lanka Banks’ Association Sustainable Banking Initiative – Core Group Member since inception z UN Global Compact Sri Lanka – Steering Committee Member Responsible Consumption and Production Partnership for the Goals Community sustainability The Bank makes a conscious effort to integrate CSR into its core business activities, to create opportunities for shared value. This approach allows the communities to learn, grow and thrive together with the Bank. The Bank’s nationally significant contributions through its CSR Trust, includes education, healthcare, environment and community development. In the past decade, the Bank has contributed immensely to improve the lives of Sri Lankans by reaching out to communities and conducting over 900 CSR projects supporting education, healthcare and culture. The Bank’s largest contribution is towards IT education in Sri Lanka, through the donation of 253 fully-equipped IT laboratories to schools and other institutions and partnering the “Smart Schools Project” to introduce a comprehensive digital Learning Management System (LMS) to 65 > Operational Excellence z Biodiversity Sri Lanka – Founder Member The Bank’s business partners that facilitate the smooth operations of its business, providing technology platforms, market access, and necessary materials and other services required in the normal course of business form important links in the supply chain that ultimately deliver value to all stakeholders. During the year under review, the Bank engaged with an over 1,400 business partners. Working closely to educate suppliers regarding the e-procurement system launched in 2020 to assist suppliers to manage pandemic related challenges, a majority of the critical supplier base was on-boarded to the new fully automated e-procurement system by mid-2021. The Bank also began assessing the level of social and environmental compliance of potential suppliers to confirm their alignment with national regulations and global best practices. Infrequent engagement Premises providers Contractors Professional services providers Maintenance Staff welfare Waste management Communication Human Resource providers Asset suppliers Debt collection agencies Commercial Bank of Ceylon PLC Annual Report 2021 65
  68. Awards and Accolades Strongest Bank in Sri Lanka – 2020 Best Mobile Banking Technology Implementation in Sri Lanka – Flash Digital Bank Account Best Digital Transformation in Banking – Sri Lanka 2021 Best Mobile Banking App – ComBank App – Sri Lanka 2021 Best Private Bank – Sri Lanka 2021 ESQR Quality Achievement Awards 2021 Top 10 Women Friendly Work Places Award Best Trade Finance Bank in Sri Lanka European Quality Award Best Commercial Bank in Sri Lanka 2021 Winner case study under the Banking and Finance category of SLASSCOM’s DIGITAL GENESIS Best Private Bank Sri Lanka 2021 Best Banking CEO of the Year Sri Lanka – Mr S Renganathan Best Bank for SMEs Best Bank for CSR Best Bank in Sri Lanka 2021 CAFI Climate Impact award for Achievement in Green House Gas reduction CAFI Climate Impact award for completing the highest number of climate finance transactions in South Asia in 2020 Best Trade Finance Bank Sri Lanka 2021 Best Digital Bank – Sri Lanka 2021 Best New Mobile APP (ComBank e-Slips) – Sri Lanka 2021 Best Commercial Bank – Sri Lanka 2021 Best Corporate Investment Bank – Sri Lanka 2021 Best SME Bank – Sri Lanka 2021 Best Bank in Sri Lanka 2021 CEO of Commercial Bank of Ceylon, Mr S Renganathan – Best Banking CEO Sri Lanka 2021 Sri Lanka Domestic Trade Finance Bank of the Year Digital Banking Initiative of the Year – Sri Lanka Best Bank in Sri Lanka Top 1000 Banks in the World Strongest Bank Brand in Sri Lanka Best SME Bank – Sri Lanka 2021 Best Foreign Bank – Bangladesh 2021 Listed among the Top 10 Most Admired Companies in Sri Lanka Retail Banking Customer Satisfaction & Happiness Sri Lanka 2021 Commercial Bank of Ceylon PLC Asian Development Bank’s (ADB’s) “Leading Partner Bank in Sri Lanka 2021” Overall Excellence in Annual Financial Reporting Category – Joint Bronze Award Edmund J. Cooray Memorial Trophy for the Best Annual Report – Banking Institutions – Gold Award Best Commercial Bank Sri Lanka 2021 Best Banking CEO of The Year Sri Lanka 2021 – Mr S Renganathan 66 Overall Winner of the Best Corporate Citizen Sustainability Award 2021 Sector Based Sustainability Champion – Financial Sector Governance certificate for Consistent Commitment and Continuous Improvement 2nd Runner-up for demonstrated Resilient Practices for COVID-19 Context Listed among the Top 10 Corporate Citizens in Sri Lanka Annual Report 2021 Corporate Governance Disclosure Award Category – Gold Award Integrated Reporting: Best Disclosure on Capital Management Award Category Bronze Award
  69. Financial Review 2021 This financial review provides details of the Bank ’s financial performance across the year. It is meant to be read in conjunction with the Operating Context and Outlook (pages 28 to 32), which explains the broader global, local, and sector trends that contextualise the Bank’s performance, and the Management Discussion and Analysis (pages 38 to 103), which analyses how the Bank grew its financial and other capitals in Refer relation to its strategic imperatives. ( Business Model for Sustainable Value Creation on pages 33 to 35). Performance of the Bank An overview Total assets of the Bank grew by Rs. 212.995 Bn. or 12.27% (2020: 25.15%) during the year under review and stood at Rs. 1.949 Tn. as at December 31, 2021. The growth in assets was mainly funded by the growth in deposits of Rs. 177.128 Bn. or 13.99% (2020: 20.19%), which reached Rs. 1.443 Tn. as at the year end. Net lending portfolio grew by Rs. 117.773 Bn. or 13.13% (2020: 1.38%) during the year. The profit after tax of the Bank for the year 2021 increased to Rs. 23.606 Bn. from Rs. 16.373 Bn. reported in 2020 recording a growth of 44.17% (2020: -3.83%). This is a significant achievement when viewed in the context of the magnitude of the challenges posed by the operating environment and the increase in impairment provision. Total operating income for the year increased to Rs. 91.395 Bn. from Rs. 74.940 Bn. reported in 2020 by 21.96% (2020: 13.52%) which contributed to the increase in the operating profit before taxes to Rs. 37.810 Bn. from Rs. 28.017 Bn. by 34.96% (2020: -5.13%) despite the increase in the impairment charges and other losses to Rs. 24.692 Bn. from Rs. 21.484 Bn. by 14.94% (2020: 94.22%). Graph – 06: Profit growth PAT (Rs. Bn.) Taxes on Financial Services (Rs. Bn.) Income Tax (Rs. Bn.) Rs. Bn. % 48 48 36 36 24 24 12 12 0 0 -12 2017 PAT Growth YoY (%) 2018 2019 2020 2021 -12 Overall exemplary performance witnessed in both the ASPI and S&P SL20 indices of the Colombo Stock Exchange (CSE) during the year 2021 was not reflected in the banking sector due to the perceived elevated risks associated with the sector arising from the volatile operating environment. However, the price to book value and the market capitalisation of the Bank’s shares remained the highest among peers in the Banking sector. The Bank’s market capitalisation ranked ninth among all listed companies on the Colombo Stock Exchange as at December 31, 2021. With due consideration to the performance of the Bank during the year, the dividend policy and the Bank’s commitment to pay a reasonable dividend to the shareholders, the Board of Directors has recommended a first and final dividend of Rs. 7.50 per share (2020: Rs. 6.50 per share) for the year 2021. Given that the Bank accounted for 98.27% (2020: 98.51%) of the total assets and 97.18% (2020: 95.83%) of the profit of the Group, the analysis below provides a detailed account of the Bank’s financial performance, followed by a brief commentary on the performance of the Bank’s overseas operations, subsidiaries and the associate as given on pages 71 to 73. Income Statement Financial intermediation Gross income grew by 7.46% (2020: 0.68%) to Rs. 160.886 Bn. for the year from Rs. 149.711 Bn. reported in 2020. Both interest income and the fee and commission income recorded growth, which was partly off-set by income from other sources. However, average assets for the year grew by a higher 17.99% (2020: 16.08%) compared to gross income, to Rs. 1.843 Tn. from Rs. 1.562 Tn. reported in 2020. As a result, the financial intermediation margin (gross income /average total assets) decreased to 8.73% (2020: 9.59%), a drop of 86 bps. The financial intermediation margin for the banking sector for the year was 8.53% compared to 9.57% for 2020. Fund-based operations Interest income, which accounted for 81.08% (2020: 81.71%) of the gross income of Rs. 160.886 Bn., increased to Rs. 130.443 Bn. during the year from Rs. 122.330 Bn. in 2020, recording a growth of 6.63% (2020: -4.26%). This was mainly attributable to the growth in average interest-earning assets by Rs. 258.347 Bn. which was partly off-set by the drop in average rate of interest on interest earning assets by 0.81%. The excess liquidity that arose from growth in deposits being higher than the growth in loans and advances, was invested in government securities. As a result, interest income earned from sources other than loans and advances, accounted for 39.38% (2020: 29.88%) of total interest income, an increase of 40.54% (2020: 34.08%). In contrast, interest income from loans and advances decreased by 7.82% (2020: -14.66%) owing to the lower interest rate environment that prevailed during the most part of the year. Interest expenses, which accounted for 50.47% of the interest income (2020: 59.48%), decreased to Rs. 65.832 Bn. during the year from Rs. 72.759 Bn. reported in 2020, recording a negative growth of 9.52% (2020: -9.70%). This was mainly due to timely repricing of liabilities to reflect the decreasing interest rate regime and a significant improvement of the CASA ratio to an industry leading 47.83% by 5.11%. The decline in the average rate of interest on interest-bearing liabilities by 1.29% was partly off-set by a growth in average interest-bearing liabilities by Rs. 222.145 Bn. Consequently, net interest income improved to Rs. 64.611 Bn. from Rs. 49.571 Bn. reported in 2020, recording a commendable growth of 30.34% (2020: 5.01%), accounting for 70.69% of the total operating income (2020: 66.15%). The net interest margin improved by 34bps to 3.51% from 3.17% reported in 2020. Fee-based operations Fee and commission income amounted to Rs. 15.410 Bn. compared to Rs. 11.269 Bn. reported in 2020, recording a growth of 36.76% (2020: -9.17%) due to an increase in income from credit and debit cards related services and trade and remittance businesses during the year. Fee and commission expenses, which relate mostly to credit and debit cards related services too increased to Rs. 3.659 Bn. from Rs. 2.012 Bn. reported in 2020, recording a growth of 81.84% (2020: -4.96%). Consequently, net fee and commission income increased to Rs. 11.751 Bn. compared to Rs. 9.256 Bn. reported in 2020, recording a growth of 26.95% (2020: -10.04%), and it accounted for 12.86% of the total operating income (2020: 12.35%). Other income Total other income of the Bank amounted to Rs. 15.032 Bn. for the year compared to Rs. 16.113 Bn. reported in 2020, and recorded a drop of 6.70% (2020: 89.11%). This was due to net gains from de-recognition of financial assets for 2021 being only Rs. 3.002 Bn. compared to Rs. 6.390 Bn. reported in 2020. However, the negative impact of the above Commercial Bank of Ceylon PLC Annual Report 2021 67
  70. was partly off-set by net other operating income increasing by Rs . 2.251 Bn. or 28.69% (2020: 30.23%) to Rs. 10.095 Bn. from Rs. 7.844 Bn., mainly as a result of an increase in exchange profit due to a 6.50% (2020: 2.81%) depreciation of the Sri Lankan Rupee against the US Dollar during 2021. Net gains from trading increased by Rs. 57.921 Mn. or 3.08% in 2021. Net operating income Total operating income Operating expenses Consequent to the improvements in net interest income and net fee and commission income, which was partly off-set by the negative growth in other income, total operating income grew to Rs. 91.395 Bn. from Rs. 74.940 Bn. reported in 2020 by Rs. 16.454 Bn. or 21.96% (2020: 13.52%). Graph – 07: Total operating income NII Net fee and commission Other income Rs. Bn. 100 80 60 20 2017 2018 2019 2020 2021 Impairment charges Impairment charges and other losses for the year increased to Rs. 24.692 Bn. or 14.94% (2020: 94.22%) from Rs. 21.484 Bn. reported in 2020, the highest ever provision the Bank has made for a single year in its history. This was due to the Bank making additional provisions of Rs. 8.071 Bn. (2020: Rs. 5.189 Bn.) for expected credit losses by way of management overlays to account for potential losses in the loans and advances portfolio that the impairment models may not be capturing due to the high level of uncertainty and volatility that prevailed throughout the year, and a provision of Rs. 6.893 Bn. (2020: Rs. 2.497 Bn.) on account of FCY denominated securities issued by the Government of Sri Lanka consequent to the downgrading of the sovereign rating. Graph – 08: Impairment charges Loans and advances (Rs. Bn.) Other financial investments (Rs. Bn.) Contingent liabilities and commitments (Rs. Bn.) Rs. Bn. 28 21 14 7 0 -7 2017* 2018 2019 2020 2021 *Based on LKAS 39 68 Commercial Bank of Ceylon PLC Total operating expenses for the year amounted to Rs. 28.892 Bn. compared to Rs. 25.440 Bn. reported in 2020 and recorded an increase of Rs. 3.452 Bn. or 13.57% (2020: 0.06%). This was mainly as a result of the increase in personnel expenses by 12.07% (2020: 3.42%) to Rs. 16.321 Bn. from 14.564 Bn. for 2020, following the signing of the new collective agreement effective from January 01, 2021, with the Ceylon Bank Employees Union and the salary increases granted to the executive cadre. In addition, other operating expenses for the year too increased by 19.08% (2020: -8.17%) to Rs. 9.392 Bn. from Rs. 7.887 Bn for 2020. Consequent to the increase in net other operating income and efforts taken to contain the operating expenses despite the inflationary pressures, the Bank’s Cost to Income ratio (excluding Value Added Tax on financial services) for the year 2021 improved to 31.61% (2020: 33.95%). 40 0 The growth in total operating income by Rs. 16.454 Bn. more than off-set the increase in impairment charges and other losses of Rs. 3.209 Bn., resulting in the net operating income posting a growth of Rs. 13.246 Bn. or 24.78% to Rs. 66.702 Bn. for the year compared to Rs. 53.457 Bn. reported in 2020. Profit before and after taxes The growth in net operating income by 24.78% coupled with the increase in total operating expenses being curtailed to 13.57% resulted in operating profit before Value Added Tax on financial services improving to Rs. 37.810 Bn. compared to Rs. 28.017 Bn. in 2020 by Rs. 9.794 Bn. or 34.96% (2020: -5.13%). In line with the growth in operating profit, the Value Added Tax on financial services for the year increased to Rs. 5.809 Bn. compared to Rs. 4.505 Bn. reported in 2020 and recorded an increase of Rs. 1.304 Bn. or 28.94% (2020: -37.35%). Consequently, the Bank’s Cost to Income ratio (including Value Added Tax on financial services) for the year 2021, also improved to 37.97% (2020: 39.96%). As a result, profit before income tax expense for the year increased to Rs. 32.001 Bn. from Rs. 23.511 Bn. reported in 2020 and recorded an improvement of Rs. 8.490 Bn. or 36.11% (2020: 5.25%). Income tax charge for year amounted to Rs. 8.395 Bn. compared to Rs. 7.138 Bn. reported in 2020, an increase of 17.62% (2020: 34.32%). The proportionately lower increase in the income tax charge for the year was primarily due to two factors. Firstly, the income tax provision for the current year has been computed at 24% compared to the rate of 28% used in Annual Report 2021 > Financial Review 2021 2020. Secondly, there was a reversal of an excess provision for income tax made in 2020 during the year under review as the income tax provision for 2020 had been computed at the rate of 28% since the 24% tax rate proposed in the Government Budget 2020 had not been enacted at the time the financial statements for 2020 were finalised. Consequently, the profit after tax for the year recorded a higher growth of 44.17% (2020: -3.83%) and stood at Rs. 23.606 Bn. compared to Rs. 16.373 Bn. reported for 2020. Graph – 09: Profit before and after tax Profit before tax Profit after tax Rs. Bn. 35 28 21 14 7 0 2017 2018 2019 2020 2021 Profitability Reflecting the higher growth in profit after tax and the relatively lower growth in assets and equity during the year, both Return on Assets (ROA) and Return on Equity (ROE) improved to 1.28% (2020: 1.05%) and 14.66% (2020: 11.28%) respectively. ROA (before tax) for the year too improved to 1.74% (2020: 1.51%). Graph – 10: ROA and ROE ROA ROE % 20 16 12 8 4 0 2017 2018 2019 2020 2021 Other Comprehensive Income (OCI) Other comprehensive income of the Bank reported a loss of Rs. 10.705 Bn. during the year as against the profit of Rs. 1.406 Bn. reported in 2020, primarily due to net losses arising from investments in financial assets at fair value through OCI, amounting to Rs. 12.599 Bn. (2020: Rs. -1.401 Bn.). The Bank invested excess liquidity in Government securities and a hike in interest rates on Government securities mainly during the latter part of 2021, caused the above loss. Accordingly, the total comprehensive income of the Bank for the year 2021 decreased to Rs. 12.901 Bn. from
  71. Rs . 17.780 Bn. reported in 2020, a negative growth of 27.44% (2020: -9.64%). Statement of Financial Position Assets Total assets of the Bank grew by a healthy 12.27% (2020: 25.15%) during the year to reach Rs. 1.949 Tn. from Rs. 1.736 Tn. at the previous year end. This growth is well in excess of the industry growth of 12.46%. This was due to the growth in loans and advances portfolio and the excess liquidity being invested in Government securities. Graph – 11: Composition of total assets Net loans and advances (Rs. Bn.) Other interest earning assets (Rs. Bn.) Other assets (Rs. Bn.) Rs. Bn. ROA (%) % 2,000 1.6 1,600 1.3 1,200 1.0 800 0.7 400 0.4 0 2017 2018 2019 2020 2021 0.1 Loans and advances to customers One of the significant achievements during the year was that the loans and advances portfolio of the Bank crossed Rs. 1 Tn. mark and the Bank once again became the first private sector bank in the country to achieve this milestone after being the first private sector bank in the country to cross the Rs. 1 Tn. in total assets (in 2016) and deposits (in 2019). Reversing the trend observed in most parts of 2020, credit to the private sector increased during the year despite the adverse macro-economic environment that prevailed in the country. The gross loans and advances as at December 31, 2021 stood at Rs. 1.079 Tn. compared to Rs. 947.842 Bn. a year ago and the net loans and advances as at December 31, 2021 stood at Rs. 1.015 Tn. compared to Rs. 896.845 Bn. as at end 2020, recording a noteworthy growth of 13.13% (2020: 1.38%), and it accounted for 52.05% (2020: 51.66%) of total assets as at December 31, 2021. The Bank continued to extend concessions and accommodate moratorium requests to the borrowers affected by both the Easter Sunday attack and the . However, loans COVID-19 pandemic and advances under moratoria reduced from Rs. 252.674 Bn. as at December 31, 2020 to Rs. 50.877 Bn. by end 2021 with certain sectors gradually coming out of the Government granted forbearance measures. Asset quality Quality of the loans and advances portfolio is a key determinant of the sustainability of > Financial Review 2021 the Bank’s operations. The conservative risk profile, with a moderate risk appetite and a robust risk management framework, helped the Bank to end the year with improvements in both the gross and the net NPL ratios at 4.62% (2020: 5.11%) and 1.44% (2020: 2.18%), respectively, compared to industry averages of 4.82% and 2.16%, respectively. Cumulative impairment provisions for loans and advances as a percentage of the total loans and advances portfolio as at the end of the year increased to 5.94% (2020: 5.38%), while the total regulatory provisions to gross loans and advances portfolio too improved to 3.52% (2020: 3.32%) as at the year end. Further, the specific provision coverage ratio (based on the regulatory provisions that existed up to December 31, 2021) increased to 68.93% by end of 2021 (2020: 57.42%) compared to 56.40% for the industry. These measures helped the Bank to improve the open credit exposure ratio (which is net exposure on NPLs as a percentage of regulatory capital) to 8.79% at end of 2021 (2020: 11.88%). In addition, both the impaired loans (stage 3) ratio and the impairment (Stage 3) to Stage 3 Loans Ratio too improved to 3.85% (2020: 6.78%) and 42.76% (2020: 30.87%) respectively, by end of 2021. The improvements in both the above ratios were consequent to the Bank re-evaluating the stage assessment criteria for individually impaired credit facilities and making necessary changes to reflect the actual risks associated with customers subjected to individual impairment. Both these ratios are based on the proposed regulatory provisions under the Banking Act Direction of No. 13 of 2021, issued by the Central Bank of Sri Lanka, which became effective from January 01, 2022. The loans-to-customers portfolio of the Bank is fairly well diversified across a wide range of industry sectors with no significant exposure to any particular sector. Please see page 247 for the details. Graph – 12: Deposits and advances Loans and Advances Deposits Rs. Bn. 1,500 1,200 900 600 300 0 2017 2018 2019 2020 2021 Deposits With the solid domestic franchise in Sri Lanka, customer deposits continued to be the single biggest source of funding for the Bank, accounting for 74.03% (2020: 72.92%) of the total assets as at December 31, 2021. Deposits grew by 13.99% (2020: 20.19%) to Rs. 1.443 Tn. as at December 31, 2021. The growth in deposits during the year was Rs. 177.128. Bn., with a monthly average growth of Rs. 14.761 Bn. The CASA ratio too improved significantly to 47.83% (2020: 42.72%) as at December 31, 2021 compared to industry average of 36.01%. Other liabilities The significant increase in deposit liabilities when compared to the lower growth in loans and advances meant that the Bank had excess liquidity during most part of the year. As a result, the Bank reduced its external borrowings during the year which helped the Bank to reduce its interest expenses and improve its net interest income and the interest margins as mentioned earlier. With increased Repo borrowing of Rs. 60.474 Bn., total other liabilities as at the current yearend increased to Rs. 341.226 Bn. from Rs. 313.106 Bn. in 2020. During the year, the Bank raised Rs. 8.595 Bn. through an issue of BASEL III compliant debenture and redeemed debentures amounting to Rs. 9.502 Bn. that matured during the year. Capital The Bank is guided by its Internal Capital Adequacy Assessment Plan (ICAAP) and the Board approved dividend policy in maintaining capital commensurate with its current and projected business volumes. Accordingly, with the improved profitability and the prudent dividend policy helped the Bank to grow its equity capital by 4.93% (2020: 18.01%) to Rs. 164.894 Bn. as at December 31, 2021 from Rs. 157.146 Bn. as at December 31, 2020. With an on balance sheet multiplier (gearing ratio) of 11.82 times (2020: 11.05 times), compared to the industry average of 11.71 times, equity funded 8.46% (2020: 9.05%) of the total assets as at the current year end. The Bank ploughed back Rs. 11.120 Bn. out of profit for the year in 2020 after the payment of cash dividends and is expected to plough back Rs. 18.232 Bn. after the payment of cash dividends for the year 2021. Profits ploughed back include scrip dividends as well. However, the risk weighted assets of the Bank grew by 8.95% (2020: 4.77%) to Rs.1.110 Tn. as at December 31, 2021. Consequently, both the Tier 1 and the total capital ratios stood at 11.923% (2020: 13.217%) (minimum requirement – 9.000% for 2021) and 15.650% (2020: 16.819%) (minimum requirement - 13.000% for 2021) respectively, as at December 31, 2021, which are in excess of the higher capital adequacy requirement imposed on the Bank under the Basel III requirements as a Domestic Systemically Important Bank (D-SIB). The equity multiplier in terms of risk weighted Commercial Bank of Ceylon PLC Annual Report 2021 69
  72. assets to regulatory total capital increased to 6 .39 times from 5.95 times a year ago. As per the CBSL Basel III regulations, the Bank is one of the highest graded D-SIB, showcasing the Bank’s importance to the Sri Lankan economy. Since the proposed surcharge tax, which had not been enacted in Parliament at the time of reporting, potential impact has not been accounted for and the Bank anticipates it to impact the Bank's capital in the coming year, subject to the enactment of the aforementioned tax. Graph – 13: Shareholders’ funds Stated capital Statutory reserves Retained earnings 2018 2020 Other reserves Rs. Bn. 175 140 105 70 35 0 2017 2019 2021 Liquidity The growth in deposits outpaced the growth in loans and advances, causing the Bank to invest the excess liquidity in Government securities. Nevertheless, at a time of unprecedented volatility such as what we currently experience, excess liquidity provides a high level of comfort to the Bank and also, enables the Bank to benefit from the upturn envisaged in credit demand in the years ahead. Given its importance, review of liquidity is a permanent item of the agenda in the fortnightly ALCO meetings of the Bank. Liquid assets ratios of the Domestic Banking Unit (DBU) and the Off-shore Banking Centre (OBC) were 38.73% (2020: 44.99%) and 36.39% (2020: 32.70%) respectively, as at end of 2021, compared to the statutory minimum requirement of 20%. Gross loans to deposits ratio was 74.75% (2020: 74.87%). Available stable funding based on definitions prescribed by the CBSL stood at Rs. 1.447 Tn. as at December 31, 2021 (2020: Rs. 1.289 Tn., leading to a Net Stable Funding Ratio (NSFR) of 157.47% (2020: 157.49%), comfortably above the statutory minimum of 100% (2020: 90%). Demonstrating the availability of unencumbered high-quality liquid assets at the disposal of the Bank, the Liquidity Coverage Ratio (all currency) stood at 242.52% (2020: 422.86%) as at December 31, 2021 as against the statutory minimum of 100% (2020: 90%). Note: All the industry related figures mentioned above have been extracted/computed/annualised based on the information published by the CBSL as at September 30, 2021. Segmental performance The contribution from the Personal Banking Division to the profit before tax of the Group significantly increased to 35.95% (2020: 25.11%), mainly due to the increase in net interest income, while the contribution to the profit before tax of the Group from the Corporate Banking Division significantly reduced to 1.76% (2020: 11.95%), mainly due to higher impairment charges and other losses. In the meantime, the Bank’s Treasury division continued to make a significant contribution to the Group’s profit before tax of 41.82% (2020: 40.78%) during 2021 as well, mainly due to a significant increase in the net interest income. Contribution from the International Operations to the profit before tax of the Group reduced to 18.63% (2020: 20.46%), while its contribution to the total assets of the Group accounted for 12.38% (2020: 11.79%). The quarterly financial performance and the financial position of the Group and the Bank for 2020 and 2021 are given on pages 74 to 79 while the Bank's performance in terms of key indicators is given in the section on "Decade at a Glance" pages 80 to 83. Table 21: Financial soundness indicators Financial soundness indicator (%) 2021 2020 2019 2018 2017 11.92 13.22 12.30 11.34 12.11 11.92 13.22 12.30 11.34 12.11 15.65 16.82 16.15 15.60 15.75 9.26 12.96 20.48 12.71 6.39 4.62 5.11 4.95 3.24 1.88 1.44 2.18 3.00 1.71 0.92 3.85 6.78 N/A N/A N/A 42.76 30.87 N/A N/A N/A Capital Adequcacy (under Basel III) Common Equity Tier 1 ratio (Current minimum requirement – 7.5%) Tier 1 capital ratio (Current minimum requirement – 9%) Total capital ratio (Current minimum requirement – 13%) Non-performing loans (net of interest in suspense and specific provisions) to equity Asset quality: Gross NPL ratio (Based on existing regulatory provisions) Net NPL ratio (Based on existing regulatory provisions) Impaired loans (Stage 3) ratio (Based on proposed regulatory provisions) Impairment (Stage 3) to Stage 3 Loans ratio (Based on proposed regulatory provisions) Total regulatory provisions ratio on gross loans and receivables (Based on existing regulatory provisions) Specific provision coverage ratio (Based on existing regulatory provisions) Provision coverage ratio (Based on SLFRS provisions) Cost of risk of loans and advances Open credit exposure ratio 3.52 3.32 2.37 1.97 1.40 68.93 57.42 39.39 47.21 51.05 5.94 5.38 3.89 3.27 2.29 1.35 1.88 1.09 0.91 0.25 8.79 11.88 17.37 10.21 5.59 70.69 66.15 71.51 70.56 80.00 12.86 12.35 15.59 15.95 17.64 16.45 21.50 12.91 13.50 2.37 17.96 16.99 17.10 17.00 17.33 Earnings and profitability: Net interest income to total operating income Net fee and commission income to total operating income Other income to total operating income Operating expenses to gross income 70 Commercial Bank of Ceylon PLC Annual Report 2021 > Financial Review 2021
  73. Financial soundness indicator (%) Impairment charge to total operating income Cost to income ratio (including taxes on financial services) Cost to income ratio (excluding taxes on financial services) 2021 2020 2019 2018 27.02 28.67 16.76 13.46 1.39 37.97 39.96 49.41 46.35 51.08 2017 31.61 33.95 38.51 36.85 41.08 Financial intermediation margin (Gross income to average assets) 8.73 9.59 11.05 11.28 10.61 Interest margin (Net interest income to average assets) 3.51 3.17 3.51 3.67 3.62 Return on assets (ROA) – before income tax 1.74 1.51 1.66 2.09 2.15 Return on assets (ROA) – after income tax 1.28 1.05 1.27 1.43 1.54 14.66 11.28 13.54 15.56 17.88 38.73 44.99 30.42 24.47 27.28 Return on equity (ROE) Liquidity: Statutory liquid assets ratio (Domestic Banking Unit) – (Current minimum requirement – 20%) Statutory liquid assets ratio (Offshore Banking Unit) – (Current minimum requirement – 20%) 36.39 32.70 25.25 30.20 30.95 Liquidity Coverage Ratio (LCR) – Rupee – (Current minimum requirement – 100%) 425.97 599.38 158.79 236.20 272.15 Liquidity Coverage Ratio (LCR) – All currency – (Current minimum requirement – 100%) 242.52 422.86 224.74 238.69 209.17 Net Stable Funding Ratio (NSFR) – (Current minimum requirement – 100%) 157.47 157.49 137.05 139.18 127.87 CASA ratio (Current and Saving deposits as a % of total deposits) 47.83 42.72 37.10 37.55 39.23 Gross Loans and receivables to deposits ratio 74.75 74.87 87.39 90.56 88.78 133.78 133.56 114.43 110.43 112.64 74.03 72.92 75.92 75.42 74.35 Borrowings to total assets 3.64 5.35 4.41 4.86 4.28 Equity to total assets 8.46 9.05 9.60 9.08 9.37 Assets and funding structure: Deposits to gross loans and receivables Deposits to total assets Performance of the overseas operations, subsidiaries, and the associate Performance of the Bank’s Bangladesh Operations Performance of the Bangladesh Operations will have to be reviewed in the context of the Operating Context and Outlook (pages 28 to 32) of this Report. Commercial Bank of Ceylon PLC (CBC) commenced its operations in Bangladesh (CBC Bangladesh) by acquiring the banking business of Credit Agricole Indosuez, a French multi-national Bank, in November 2003. During the past 18 years of operations, CBC Bangladesh has established its position well above the other Regional Banks operating in the country with 11 Branches, 6 SME Centers and 2 Offshore Banking Units. At present, CBC Bangladesh has its presence in five main districts in the country i.e. Dhaka, Chittagong, Sylhet, Narayanganj and Gazipur. Despite the severe competition among the international and large local banks, CBC Bangladesh has recorded a consistent growth in business, specially by catering to multinationals and large local corporates by offering better services and commitments. With the expansion of the branch network, CBC Bangladesh operations has managed > Financial Review 2021 to attract more SME and Retail clientele to the Bank, enabling it to improve its low cost deposit base resulting in lower cost of funds and improved profitability. Twenty ATM machines have been installed in Bangladesh (including three in off-site locations). In addition, an Automated Banking Centre (ABC) comprising a real time Cash Deposit Machine, Cheque Deposit Machine, KIOSK machine and a digital signage in its Motijheel Branch. During the year 2021, the Bank’s Bangladesh Operations has been awarded many accolades including the following: In addition, a special commendation letter was awarded by the Central Bank of Bangladesh for disbursing the full allocation of the stimulus package to the SME sector. z Most Recommended Foreign Bank in Bangladesh – 2021 by the World Business Outlook, a Singapore-based magazine. z Best Foreign Bank in Bangladesh –2021 by Global Economics Limited, a UK-based magazine. z Best Foreign Bank in Bangladesh –2021 by Global Business Outlook, a UK-based magazine. z Most Sustainable Bank in Bangladesh – 2021 by the International Business Magazine, UAE. A comparison of the performance of the Regional Banks operating in the country reveals that the performance of our Bangladesh Operations to be ahead in many aspects including deposits, advances, asset quality and profitability, a reflection of our excellent service and commitment. Credit Rating Information and Services Ltd. (CRISL) rated CBC Bangladesh operations AAA for the 11th consecutive year based on the financial performance for 2020. Commercial Bank of Ceylon PLC Annual Report 2021 71
  74. The progress of the Bank ’s Bangladesh operations in core banking areas over the past five years is summarised below. Table 22: Key performances indicators – Bangladesh Operations 2021 BDT Mn. 2020 BDT Mn. 2019 BDT Mn. 2018 BDT Mn. Total Deposit 64,959.50 50,997.50 45,362.98 35,221.65 28,808.18 22.95 Gross Advances 58,110.88 55,039.33 47,449.60 38,448.10 32,113.53 18.90 Profit Before Tax 3,035.35 2,898.24 2,744.68 2,440.56 1,758.56 14.63 Profit After Tax 1,744.11 1,709.47 1,697.40 1,407.23 988.4 17.31 Indicator 2017 5-Year CAGR BDT Mn. (%) Table 23: Key Financial Ratios – Bangladesh Operations (based on Management Accounts) Indicator Cost/Income ratio (%) Net Interest Margin (%) Profit Per Employee (BDT Mn.) 2021 2020 2019 2018 2017 23.68 24.76 24.74 25.27 28.62 3.21 4.01 4.27 4.53 4.46 10.25 9.96 8.65 8.16 6.26 ROA (%) 3.20 3.46 3.53 4.31 3.81 ROE (%) 12.24 13.32 14.82 13.97 11.18 CBC Bangladesh has planned major IT projects for 2022 including the introduction of digital onboarding of customers through Flash, upgrading of the Internet Banking System, automation of the Treasury Department, automation of the Regulatory & MIS Reporting, introduction of the Loan Origination System/Document Management System/Card Personalization System/Call Centre Solution/e-Leave and e-Attendance Systems/ WhatsApp & Viber Banking and revamping of Corporate website. Subsidiaries and associate of the Group Given below is a brief overview of the operations of the subsidiaries and the associate of the Bank. Local subsidiaries Commercial Development Company PLC (CDC) Established in 1980 as the Bank’s first subsidiary, CDC owns the Head Office building of Commercial Bank, “Commercial House”, and has two other properties in Negombo and Tangalle. The Bank holds a stake of 90% in CDC. CDC is the only listed Subsidiary of the Group, with a market capitalisation of Rs. 1.632 Bn. as of end 2021. The principal business activities of CDC include renting of premises, hiring of vehicles, outsourcing, non-core staff and provision of other utility services to the Bank. CDC recorded a post-tax profit of Rs. 401.506 Mn. for the year 2021, with a significant increase of 227.54% compared to Rs. 122.582 Mn. reported in 2020. The 72 Commercial Bank of Ceylon PLC increase in profit in 2021 was primarily attributable to improvements in income from core business activities of the Company. Further, the fair value gain recognised on revaluation of investment property in 2021 as against a fair value loss on revaluation of investment property in 2020 too contributed to the increase in profit. CBC Tech Solutions Limited CBC Tech Solutions Limited is a fully owned subsidiary of the Bank and provides Information Technology services and solutions to the Bank, its subsidiaries and to a few selected corporates. The main lines of business of CBC Tech Solutions are providing Information Technology support, supply of hardware, licensed software, hardware maintenance, Point of Sale (POS) maintenance, software development, and outsourcing of professional and skilled manpower to the Bank. At present, the company operates from five regional support centers in Colombo, Galle, Kandy, Jaffna and Badulla to ensure prompt services. In 2021, the company undertook an island wide personal computer maintenance and POS machine troubleshooting project for the Bank. The company also established a regional support center in Badulla to further strengthen its support services. In addition, the company also embarked on new initiatives such as Data Analytics, Cloud services, and customer-centric product development. The company further upskilled its employees and outsourced them to the subsidiaries of the Bank. Annual Report 2021 > Financial Review 2021 One of the key challenges faced by the company in 2021, was to provide islandwide technical support due to the COVID-19 pandemic. This situation was arrested by deploying more resources in regional support centers and by providing first level support to facilitate work-from-home arrangements. The company posted a post-tax profit of Rs. 181.134 Mn. for the year 2021, recording a growth of 91.38% from Rs. 94.648 Mn. reported in 2020. The substantial growth in profit was mainly due to expanded operations of the company and the tax savings accrued from the exemptions granted for companies providing IT related services. The company has prepared a five-year strategic plan clearly articulating its future direction. The strategy includes new business initiatives, revenue lines and partnerships that would ensure a sustainable growth. CBC Finance Limited (CBCF) CBCF (Previously Serendib Finance Limited) is a fully owned subsidiary of the Bank and is a Licensed Finance Company (LFC) under the Finance Business Act No. 42 of 2011. Since the acquisition of the company in 2014 by the Bank, the business plans and strategies of the company were aligned with the Bank’s strategies, governance and risk management policies and practices. Since December 2020, the name of the company was changed from Serendib Finance Limited to CBC Finance Limited to strengthen the synergies with the parent Company, Commercial Bank of Ceylon PLC. The year 2021 was another challenging year for the entire NBFI industry due to COVID-19 related business disruptions and the adverse impact on their customer base. Despite the challenges, the company increased its gross income by 20.39% to Rs. 1,264.114 Mn. Identifying the timely need to be proactive in providing for doubtful customers, the company's impairment provision for the year rose by 84.03% to Rs. 386.483 Mn. Despite the increased impairment charges, the company recorded a profit before tax of Rs. 140.908 Mn. compared to Rs. 110.037 Mn. recorded in the previous year. However, the company’s post-tax profit recorded a negative growth of 11.74% to Rs. 51.612 Mn. as against Rs. 58.477 Mn. recorded in the previous year. This was mainly due to the increased tax expenses as a result of the reversal of deferred tax assets due to the reduction of the income tax rate. Since the commencement of accepting public deposits from the latter part of 2019, the company increased its deposits portfolio to Rs. 5.069 Bn. by end of 2021, reflecting a 50.98% growth over the last year despite
  75. market uncertainties . This enabled the company to further reduce its funding cost during the year under review. For the first time in history, company surpassed the Rs. 10 Bn. mark in total assets during the year with a 21.56% increase to Rs. 10.312 Bn. (2020: Rs 8.483 Bn.), a remarkable achievement during the financial year. In addition, the company’s net loans have grown by approximately 16.19% despite the growth in its core product finance leasing being curtailed due to the regulatory restrictions on the Loan to Value ratio. However, the timely shift towards other products such as mortgage and business loans, paved the way to overcome a possible unfavourable impact. Furthermore, the Gross NPA ratio of the company significantly improved to 13.14% as at December 31, 2021 (2020: 16.52%). Fitch Ratings Lanka Limited rated the company at A(Ika), which is one of the highest ratings given to a finance company in the country backed by the strength of its parent company. During the year, CBCF relocated Embilipitiya, Matara and Anuradhapura branches to provide a better customer experience. The company is planning to embark on a journey of expanding the delivery channels by adding twenty new branches in strategically important business areas and the Central Bank of Sri Lanka has already given the necessary approval to open ten new branches in 2022. Commercial Insurance Brokers (Pvt) Ltd (CIBL) The Bank acquired the 20% stake in CIBL held by the Bank’s subsidiary, CDC, during the year 2020, which together with the stake of 40% already held by the Bank, increased the Bank’s total stake in CIBL to 60%. The principal business activity of CIBL is insurance brokering for all types of insurance through reputed life and general insurance companies in Sri Lanka. CIBL recorded a post-tax profit of Rs. 30.286 Mn. for the year ended December 31, 2021, a negative growth of 5.59% from Rs. 32.078 Mn. recorded in 2020. The CIBL’s total assets stood at Rs. 705.396 Mn. as at December 31, 2021. > Financial Review 2021 Local associate Equity Investments Lanka Ltd. (EQUILL) The Bank owns a 22.92% stake in EQUILL, a venture capital company established 31 years ago. EQUILL invests in equity and equity-featured debt instruments. The company recorded a post-tax profit of Rs. 8.272 Mn. in 2021 compared to the post-tax profit of Rs. 17.006 Mn. reported in the previous financial year. Foreign subsidiaries Commercial Bank of Maldives Private Limited (CBM) In partnership with Tree Top Investments (TTI), CBM was founded in the Republic of Maldives as the second foreign subsidiary of the Bank. TTI contributes vital local market knowledge to the company and has a stake of 45%, while the Bank holds a 55% stake in the company. Established during the latter part of 2016, CBM set up its Head Office and first branch in the capital, Malé. By end 2021, CBM had two branches. While offering an extensive range of financial services, CBM’s goal is to be the most technologically advanced, innovative, customer friendly, and the most sought-after financial service organisation in the Republic of Maldives. In its third year of operations, CBM was awarded for “Excellence in Finance” in the Banking and Finance category at the 2019 Maldives Business Awards. In 2021, CBM was ranked amongst the top leading 100 companies in the Maldives at the “Gold 100 Gala” event organized by the Corporate Maldives and has emerged as winners in the category “Fastest Growing Commercial Bank - Maldives 2021”, awarded by the Global Business Outlook, UK. During the year 2021, CBM recorded a considerable growth in its deposits and advances by 32.95% and 14.30% respectively. Total assets of CBM also recorded a remarkable growth of 29.37% and stood at MVR 2.316 Bn. as at December 31, 2021. In 2021, CBM recorded a post-tax profit of MVR 32.840 Mn., compared to the post-tax profit of MVR 22.723 Mn. reported in 2020. Profit recorded in the current year is the highest profit achieved by the Bank in the operation of its 5-year history. CBC Myanmar Microfinance Company (CBC Myanmar) CBC Myanmar was established in July 2018 with the opening of its Head Office and a branch in Lewe Township in Nay Pyi Taw as a fully owned subsidiary of the Bank with the focus of capitalizing on opportunities in the Microfinance sector. The company obtained a temporary license initially and secured a permanent business license on January 17, 2020. The company started its branch network in Lewe Township and expanded to Aye Lar, Zabuthiri, and Pyinmana townships. CBC Myanmar faced twin blows of the pandemic and the political coup during the financial year ended December 31, 2021. The political unrest created a highly volatile environment as the general public walked out to the streets to voice out against the military regime. The unrest affected all layers of the economy, and the microfinance sector was affected severely as the repayments were hampered due to loss of income. The COVID-19 third wave hit hard on the microfinance sector at the beginning of the second half of the year, and the company was closed for more than one month due to stay-home orders. However, the outlook of the microfinance sector shifted positively during the latter part of the second half of the year and the recoveries improved steadily. The company disbursed MMK 1.317 Bn. in new loans during 2021 despite the challenges in the operating environment and posted a loss of MMK 247.048 Mn. during the financial year ended December 31, 2021 compared to a profit of MMK 91.360 Mn. during the previous financial year. Identifying the need for digital platforms to facilitate recoveries, the company has initiated to partner with leading digital wallet share providers. Commex Sri Lanka S.R.L. (Commex) Commex, a fully-owned subsidiary of the Bank, commenced business under the Authorised Payments Institute (API) license issued by the Bank of Italy in 2016. As a result, Commercial Bank became the first Sri Lankan bank to be licensed by the Bank of Italy to operate as a money transfer company. The license allows Commex to expand across the European Union using passporting rights. During 2021, Commex recorded a loss of EUR 0.481 Mn. The details of the Group companies together with a summary of key financial information for each company is given in the section on "Group Structure" on pages 84 and 85. Commercial Bank of Ceylon PLC Annual Report 2021 73
  76. Summary of Interim Financial Statements – Group and Bank – 2020 and 2021 1st Quarter ended March 31 2nd Quarter ended June 30 2021 2020 2021 2021 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 15,476,721 12,782,660 15,681,311 9,984,100 Net fee and commission income 3,023,322 2,447,061 2,688,925 1,640,638 Other operating income (net) 5,660,582 4,618,052 3,813,475 3,964,571 Less: Impairment charges and other losses 7,156,050 6,653,253 6,498,391 2,607,571 17,004,575 13,194,520 15,685,320 12,981,738 Less: Expenses 8,600,269 7,755,912 8,336,383 7,303,047 Operating profit 8,404,306 5,438,608 7,348,937 5,678,691 Group Net interest income Net operating income Add: Share of profits/(losses) of associate companies (133) (914) 546 177 Profit before income tax 8,404,173 5,437,694 7,349,483 5,678,868 Less: Income tax expense 1,606,916 1,623,311 1,793,203 2,045,674 Profit for the period 6,797,257 3,814,383 5,556,280 3,633,194 Quarterly profit as a percentage of the profit after tax 27.3 22.3 22.3 21.3 Cumulative quarterly profit as a percentage of the profit after tax 27.3 22.3 49.6 43.6 1st Quarter ended March 31 2nd Quarter ended June 30 2021 2020 2021 2020 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 15,051,903 12,425,953 15,226,162 9,701,778 Net fee and commission income 2,886,892 2,293,173 2,570,984 1,527,747 Other operating income (net) 5,692,641 4,600,441 3,806,422 4,039,888 Bank Net interest income 7,052,038 6,544,696 6,306,004 2,895,956 16,579,398 12,774,871 15,297,564 12,373,457 Less: Expenses 8,396,219 7,546,314 8,061,141 7,155,931 Profit before income tax 8,183,179 5,228,557 7,236,423 5,217,526 Less: Income tax expense 1,525,107 1,521,991 1,760,639 1,962,981 Profit for the period 6,658,072 3,706,566 5,475,784 3,254,545 27.3 22.6 22.5 19.9 27.3 22.6 49.8 42.5 Less: Impairment charges and other losses Net operating income Quarterly profit as a percentage of the profit after tax Cumulative quarterly profit as a percentage of the profit after tax 74 Commercial Bank of Ceylon PLC Annual Report 2021 > Financial Review 2021
  77. 3rd Quarter ended September 30 4th Quarter ended December 31 Total 2021 2020 2021 2020 2021 2020 Rs . ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 16,375,248 14,029,002 18,883,052 14,073,040 66,416,332 2,884,472 2,672,054 3,645,475 3,061,922 12,242,194 3,347,432 3,679,491 2,118,308 3,776,897 14,939,797 16,039,011 Other operating income (net) Group 50,868,802 Net interest income 9,821,675 Net fee and commission income 4,342,977 7,471,776 7,142,508 4,686,932 25,139,926 21,419,532 Less: Impairment charges and other losses 18,264,175 12,908,771 17,504,327 16,224,927 68,458,397 55,309,956 Net operating income 8,950,689 7,634,075 9,615,628 8,100,960 35,502,969 30,793,994 Less: Expenses 9,313,486 5,274,696 7,888,699 8,123,967 32,955,428 24,515,962 Operating profit (330) 2,665 1,813 1,970 1,896 9,313,156 5,277,361 7,890,512 8,125,937 32,957,324 2,649,350 1,549,657 2,617,567 2,214,421 8,667,036 6,663,806 3,727,704 5,272,945 5,911,516 24,290,288 26.7 21.8 21.7 34.6 100.0 76.3 65.4 100.0 100.0 Add: Share of profits/(losses) of 3,898 associate companies 24,519,860 Profit before income tax 7,433,063 Less: Income tax expense 17,086,797 Profit for the period Quarterly profit as a percentage of the 3rd Quarter ended September 30 – 4th Quarter ended December 31 100.0 profit after tax – Cumulative quarterly profit as a percentage of the profit after tax Total 2021 2020 2021 2020 2021 2020 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Bank 49,571,341 Net interest income 15,934,934 13,762,118 18,397,613 13,681,492 64,610,612 2,803,989 2,540,162 3,489,598 2,895,323 11,751,463 3,345,805 3,686,508 2,187,582 3,785,715 15,032,450 16,112,552 Other operating income (net) 4,261,500 7,441,088 7,072,801 4,601,958 24,692,343 21,483,698 Less: Impairment charges and other losses 17,823,228 12,547,700 17,001,992 15,760,572 66,702,182 53,456,600 Net operating income 8,818,226 7,427,613 9,425,393 7,815,430 34,700,979 29,945,288 Less: Expenses 9,005,002 5,120,087 7,576,599 7,945,142 32,001,203 23,511,312 Profit before income tax 2,533,250 1,486,601 2,576,156 2,166,250 8,395,152 6,471,752 3,633,486 5,000,443 5,778,892 23,606,051 26.5 22.2 21.2 35.3 100.0 76.3 64.7 100.0 100.0 9,256,405 Net fee and commission income 7,137,823 Less: Income tax expense 16,373,489 Profit for the period Quarterly profit as a percentage of the > Financial Review 2021 – 100.0 profit after tax – Cumulative quarterly profit as a percentage of the profit after tax Commercial Bank of Ceylon PLC Annual Report 2021 75
  78. Statement of Financial Position – Group – 2020 and 2021 1st Quarter ended As at 2nd Quarter ended March 31, 2021 March 31, 2020 June 30, 2021 June 30, 2020 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 51,995,270 69,291,420 67,888,744 52,425,162 79,603,760 38,459,820 84,715,615 57,547,194 13,834,678 28,862,006 7,625,796 26,860,049 Assets Cash and cash equivalents Balances with Central Banks Placements with banks Securities purchased under re-sale agreements Derivative financial assets Financial assets recognised through profit or loss – measured at fair value Financial assets at amortised cost – Loans and advances to banks Financial assets at amortised cost – Loans and advances to other customers Financial assets at amortised cost – Debt and other financial instruments Financial assets measured at fair value through other comprehensive income Investments in subsidiaries Investment in associate Property, plant and equipment and right-of-use assets Investment properties Intangible assets Leasehold property Deferred tax assets Other assets Total assets – 10,448,494 – 7,209,397 3,633,738 2,140,505 3,105,697 1,898,100 25,982,011 25,660,517 34,171,453 32,898,907 829,740 792,189 837,037 776,550 929,618,154 917,442,418 971,894,929 897,297,570 350,832,246 116,242,352 375,044,696 195,822,341 315,079,615 212,994,354 335,866,978 245,777,765 – – – – 63,111 55,907 63,749 53,190 25,674,949 22,051,532 25,232,279 21,993,257 67,116 46,350 67,900 46,350 1,914,792 1,641,425 1,868,300 1,698,360 – 4,187,627 101,251 1,291,100 – 5,173,206 100,889 159,921 20,983,814 25,749,941 21,168,312 24,090,018 1,824,300,621 1,473,271,581 1,934,724,691 1,566,655,020 80,049,153 76,515,510 103,006,874 73,955,005 4,388,511 2,987,717 2,609,946 1,915,067 96,228,787 42,014,953 113,577,165 64,224,587 1,346,539,936 1,120,368,799 1,405,045,018 1,155,219,967 52,098,343 23,473,191 50,377,494 31,578,599 7,588,842 5,324,474 8,775,280 5,221,850 344,928 417,779 344,335 825,722 39,132,442 26,541,214 46,354,848 50,978,826 Liabilities Due to banks Derivative financial liabilities Securities sold under repurchase agreements Financial liabilities at amortised cost – Due to depositors Financial liabilities at amortised cost – Other borrowings Current tax liabilities Deferred tax liabilities Other liabilities Due to subsidiaries Subordinated liabilities Total liabilities – – – – 34,239,946 38,562,279 34,704,218 38,199,628 1,660,610,888 1,336,205,916 1,764,795,178 1,422,119,251 54,564,038 40,916,958 54,565,350 42,971,971 9,287,728 8,387,701 9,287,728 8,391,150 7,254,535 5,864,374 12,848,919 7,414,964 90,696,736 80,208,291 91,273,009 84,077,287 161,803,037 135,377,324 167,975,006 142,855,372 Equity Stated capital Statutory reserves Retained earnings Other reserves Total equity attributable to equity holders of the Group/Bank Non-controlling interest Total equity Total liabilities and equity Contingent liabilities and commitments Net assets value per ordinary share (Rs.) Quarterly growth (%) Financial assets at amortised cost – Loans and advances to banks & loans and advances to other customers Financial liabilities at amortised cost – Due to depositors Total assets 76 Commercial Bank of Ceylon PLC Annual Report 2021 > Financial Review 2021 1,886,696 1,688,341 1,954,507 1,680,397 163,689,733 137,065,665 169,929,513 144,535,769 1,824,300,621 1,473,271,581 1,934,724,691 1,566,655,020 800,865,904 622,815,977 744,326,170 602,842,021 135.49 131.75 140.66 135.83 2.18% 2.63% 4.55% –2.20% 4.66% 4.81% 4.34% 3.11% 3.51% 4.57% 6.05% 6.34%
  79. 3rd Quarter ended 4th Quarter ended September 30 , 2021 September 30, 2020 Rs. ’000 December 31, 2021 (Audited) Rs. ’000 December 31, 2020 (Audited) Rs. ’000 Rs. ’000 93,000,346 44,382,431 69,335,379 51,255,030 49,431,255 83,313,147 56,777,465 115,358,732 20,218,425 17,645,097 12,498,709 16,421,867 2,697,359 445,577 3,000,490 3,271,766 2,011,946 3,245,120 2,636,717 31,522,053 43,470,925 23,436,123 35,189,471 833,952 773,422 999,913,656 899,988,223 1,029,584,075 909,829,172 356,179,525 269,243,315 385,390,598 302,059,529 345,560,552 252,685,502 335,953,802 278,716,794 As at Assets – – – – – 779,705 – 63,096 62,361 60,428 64,155 25,001,485 21,705,618 24,744,634 25,386,630 67,900 46,350 72,400 67,116 2,047,091 1,827,427 2,272,639 1,800,516 – 100,525 8,052,166 2,503,276 – 10,036,105 – 2,735,566 24,600,114 22,879,328 27,083,177 20,195,153 1,962,460,741 1,663,084,470 1,983,491,144 1,762,496,153 Cash and cash equivalents Balances with Central Banks Placements with banks Securities purchased under resale agreements Derivative financial assets Financial assets recognised through profit or loss – measured at fair value Financial assets at amortised cost – Loans and advances to banks Financial assets at amortised cost – Loans and advances to other customers Financial assets at amortised cost – Debt and other financial instruments Financial assets measured at fair value through other comprehensive income Investments in subsidiaries Investment in associate Property, plant and equipment and right-of-use assets Investment properties Intangible assets Leasehold property Deferred tax assets Other assets Total assets Liabilities 80,540,568 82,499,159 73,801,195 88,248,056 3,017,891 1,533,809 2,092,198 1,501,262 132,578,610 81,100,405 151,424,854 91,411,522 1,447,888,478 1,221,756,923 1,472,640,456 1,286,616,399 46,167,470 48,116,673 32,587,051 54,555,933 8,737,272 6,444,772 9,486,772 6,991,005 343,822 421,972 349,106 403,846 31,862,811 37,249,718 33,253,518 33,572,283 – – – – 43,363,999 38,136,630 38,303,466 38,247,138 1,794,500,921 1,517,260,061 1,813,938,616 1,601,547,444 54,565,494 42,971,971 54,566,957 52,187,747 9,287,728 8,391,150 10,590,338 9,285,233 19,680,594 11,213,907 9,890,762 8,124,261 82,402,906 81,537,813 92,426,660 89,595,571 165,936,722 144,114,841 167,474,717 159,192,812 Due to banks Derivative financial liabilities Securities sold under repurchase agreements Financial liabilities at amortised cost – Due to depositors Financial liabilities at amortised cost – Other borrowings Current tax liabilities Deferred tax liabilities Other liabilities Due to subsidiaries Subordinated liabilities Total Liabilities Equity 2,023,098 1,709,568 2,077,811 1,755,897 167,959,820 145,824,409 169,552,528 160,948,709 1,962,460,741 1,663,084,470 1,983,491,144 1,762,496,153 674,796,325 680,543,307 685,379,028 730,561,685 138.95 137.03 140.24 136.42 2.88% 0.30% 2.97% 1.09% 3.05% 5.76% 1.71% 5.31% 1.43% 6.16% 1.07% 5.98% > Financial Review 2021 Stated capital Statutory reserves Retained earnings Other reserves Total equity attributable to equity holders of the Group/Bank Non-controlling interest Total equity Total liabilities and equity Contingent liabilities and commitments Net assets value per ordinary share (Rs.) Quarterly growth (%) Financial assets at amortised cost – Loans and advances to banks & loans and advances to other customers Financial liabilities at amortised cost – Due to depositors Total assets Commercial Bank of Ceylon PLC Annual Report 2021 77
  80. Statement of Financial Position – Bank – 2020 and 2021 1st Quarter ended As at 2nd Quarter ended March 31, 2020 50,223,404 67,909,585 66,211,229 50,830,153 76,341,432 32,656,696 80,197,728 53,453,467 13,313,090 28,287,644 7,082,629 26,427,430 Rs. ’000 June 30, 2021 (Audited) Rs. ’000 June 30, 2020 (Audited) Rs. ’000 March 31, 2021 Rs. ’000 Assets Cash and cash equivalents Balances with Central Banks Placements with banks Securities purchased under re-sale agreements Derivative financial assets Financial assets recognised through profit or loss – measured at fair value Financial assets at amortised cost – Loans and advances to banks Financial assets at amortised cost – Loans and advances to other customers Financial assets at amortised cost – Debt and other financial instruments Financial assets measured at fair value through other comprehensive income Investments in subsidiaries Investment in associate Property, plant and equipment and right-of-use assets Investment properties Intangible assets Leasehold property Deferred tax assets Other assets Total assets – 10,448,494 – 7,209,397 3,633,738 2,140,505 3,105,697 1,898,100 25,982,011 25,660,517 34,171,453 32,898,907 829,740 792,189 837,037 776,550 916,062,889 907,415,058 957,384,317 887,251,878 337,216,097 110,201,662 361,301,611 187,528,301 314,567,633 212,748,101 335,862,629 245,533,383 5,808,429 5,011,284 5,808,429 4,683,429 44,331 44,331 44,331 44,331 23,997,196 20,053,178 23,544,270 19,964,308 – 1,330,727 – – 1,076,363 70,477 – 1,311,076 – – 1,137,090 70,242 3,971,770 1,100,255 4,917,109 20,879,920 25,647,724 21,108,274 23,893,406 1,794,202,407 1,451,264,063 1,902,887,819 1,543,600,372 79,383,054 74,075,132 102,474,262 72,163,605 4,388,511 2,987,717 2,609,946 1,915,067 96,267,906 42,159,141 114,066,400 64,448,218 1,321,759,956 1,104,634,005 1,378,167,491 1,138,170,145 52,098,343 23,473,191 50,377,494 31,578,599 7,381,495 5,053,931 8,532,714 4,938,966 – Liabilities Due to banks Derivative financial liabilities Securities sold under repurchase agreements Financial liabilities at amortised cost – Due to depositors Financial liabilities at amortised cost – Other borrowings Current tax liabilities Deferred tax liabilities Other liabilities Due to subsidiaries Subordinated liabilities Total liabilities – 39,067,270 – 26,300,217 – 46,172,569 410,559 50,610,310 96,676 80,711 98,567 65,786 34,239,946 38,562,279 34,704,218 38,199,628 1,634,683,157 1,317,326,324 1,737,203,661 1,402,500,883 54,564,038 40,916,958 54,565,350 42,971,971 9,024,065 8,205,391 9,024,065 8,205,391 6,637,622 5,768,479 12,200,306 6,968,011 89,293,525 79,046,911 89,894,437 82,954,116 159,519,250 133,937,739 165,684,158 141,099,489 Equity Stated capital Statutory reserves Retained earnings Other reserves Total equity attributable to equity holders of the Group/Bank Non-controlling Interest Total equity Total liabilities and equity Contingent liabilities and commitments Net assets value per ordinary share (Rs.) Quarterly growth (%) Financial assets at amortised cost – Loans and advances to banks & loans and advances to other customers Financial liabilities at amortised cost – Due to depositors Total assets 78 Commercial Bank of Ceylon PLC Annual Report 2021 > Financial Review 2021 – – – – 159,519,250 133,937,739 165,684,158 141,099,489 1,794,202,407 1,451,264,063 1,902,887,819 1,543,600,372 798,522,243 620,610,185 740,650,015 600,818,662 133.58 130.35 138.74 134.16 2.14% 2.57% 4.51% -2.22% 4.41% 4.87% 4.27% 3.04% 3.34% 4.61% 6.06% 6.36%
  81. 3rd Quarter ended 4th Quarter ended September 30 , 2021 September 30, 2020 Rs. ’000 Rs. ’000 December 31, 2021 (Audited) Rs. ’000 December 31, 2020 (Audited) Rs. ’000 As at Assets 91,478,737 43,339,446 68,078,076 50,250,627 45,873,467 79,611,753 52,897,908 110,971,105 19,265,858 17,235,679 11,584,952 15,938,982 2,697,359 445,577 3,271,766 2,011,946 3,245,120 2,636,717 31,522,053 43,470,925 23,436,123 35,189,471 833,952 773,422 - 779,705 984,845,846 888,862,548 1,014,618,580 896,845,453 342,169,712 260,169,367 369,417,889 292,727,566 345,250,606 252,327,507 335,463,338 278,461,369 5,808,429 4,683,429 5,808,429 5,808,429 44,331 44,331 44,331 44,331 23,246,255 19,672,332 23,075,467 23,212,394 – – 1,494,505 1,260,024 – 70,006 7,772,486 2,321,548 3,000,490 – – 1,724,864 – 9,793,129 – 1,232,863 – 2,499,860 24,542,510 22,751,766 27,024,475 19,619,149 1,930,117,872 1,639,051,606 1,949,213,171 1,736,218,021 80,362,973 81,003,276 73,777,420 87,451,306 3,017,891 1,533,809 2,092,198 1,501,262 Cash and cash equivalents Balances with Central Banks Placements with banks Securities purchased under re-sale agreements Derivative financial assets Financial assets recognised through profit or loss – measured at fair value Financial assets at amortised cost – Loans and advances to banks Financial assets at amortised cost – Loans and advances to other customers Financial assets at amortised cost – Debt and other financial instruments Financial assets measured at fair value through other comprehensive income Investments in subsidiaries Investment in associate Property, plant and equipment and right-of-use assets Investment properties Intangible assets Leasehold property Deferred tax assets Other assets Total assets Liabilities 133,030,525 81,145,001 151,911,842 91,437,612 1,420,186,722 1,203,658,867 1,443,093,453 1,265,965,918 46,167,470 48,116,673 32,587,051 54,555,933 8,508,147 6,328,897 9,294,180 6,777,992 – – 31,794,069 36,733,042 – 33,210,883 – 33,037,669 80,785 121,071 48,699 97,015 43,363,999 38,136,630 38,303,466 38,247,138 1,766,512,581 1,496,777,266 1,784,319,192 1,579,071,845 54,565,494 42,971,971 54,566,957 52,187,747 9,024,065 8,205,391 10,204,368 9,024,065 18,916,233 10,707,378 9,028,265 7,596,260 81,099,499 80,389,600 91,094,389 88,338,104 163,605,291 142,274,340 164,893,979 157,146,176 Due to banks Derivative financial liabilities Securities sold under repurchase agreements Financial liabilities at amortised cost – Due to depositors Financial liabilities at amortised cost – Other borrowings Current tax liabilities Deferred tax liabilities Other liabilities Due to subsidiaries Subordinated liabilities Total liabilities Equity – – – – 163,605,291 142,274,340 164,893,979 157,146,176 1,930,117,872 1,639,051,606 1,949,213,171 1,736,218,021 672,716,776 678,379,768 682,399,783 728,711,698 137.00 135.28 138.08 134.67 2.87% 0.18% 3.02% 0.90% 3.05% 5.75% 1.61% 5.18% 1.43% 6.18% 0.99% 5.93% > Financial Review 2021 Stated capital Statutory reserves Retained earnings Other reserves Total equity attributable to equity holders of the Group/Bank Non-controlling Interest Total equity Total liabilities and equity Contingent liabilities and commitments Net assets value per ordinary share (Rs.) Quarterly growth (%) Financial assets at amortised cost – Loans and advances to banks & Loans and advances to other customers Financial Liabilities at amortised cost – Due to depositors Total assets Commercial Bank of Ceylon PLC Annual Report 2021 79
  82. Decade at a Glance SLFRSs As at December 31 , Rs. Mn. CAGR % 2021 2020 2019 Assets Cash and cash equivalents 68,078 50,251 52,535 Balances with Central Banks 52,898 110,971 39,461 Placements with banks 11,585 15,939 24,527 Securities purchased under resale agreements 3,000 Derivative financial assets 3,245 – Other financial instruments – Held for trading 23,436 Financial assets recognised through profit or loss – Measured at fair value – 2,637 – 35,189 13,148 1,831 – 21,468 Loans and receivables to banks – – – Financial assets at amortised cost – Loans and advances to banks – 780 758 Loans and receivables to other customers 13.46 – 1,014,619 Financial assets at amortised cost – Loans and advances to other customers – 896,845 Financial investments – Held to maturity – – Financial investments – Loans and receivables – – 369,418 Financial assets at amortised cost – Debt and other financial instruments – Financial investments – Available for sale Financial assets measured at fair value through other comprehensive income Total financial assets Investments in subsidiaries Investment in associate Property, plant & equipment and right-of-use assets Intangible assets Other assets Total assets 16.01 – 101,145 – 278,461 197,568 1,881,742 1,683,801 1,337,087 5,808 5,808 5,011 44 44 44 23,075 23,212 20,507 1,725 1,233 1,080 9,793 Deferred tax assets – – 335,463 – Leasehold property 292,728 – 884,646 – 2,500 – 294 27,024 19,620 23,323 1,949,213 1,736,218 1,387,346 73,777 87,451 51,506 2,092 1,501 1,495 151,912 91,438 51,220 Liabilities Due to banks Derivative financial liabilities Securities sold under repurchase agreements Due to other customers/deposits from customers 16.12 Financial liabilities at amortised cost – Due to depositors – 1,443,093 – Other borrowings Financial liabilities at amortised cost – Other borrowings Current tax liabilities – 1,265,966 – – 32,587 54,556 23,249 9,294 6,778 4,968 Deferred tax liabilities – – Other provisions – – 33,211 Other liabilities – 1,053,308 33,038 – – 30,497 49 97 54 38,303 38,247 37,887 1,784,319 1,579,072 1,254,184 Stated capital 54,567 52,188 40,917 Statutory reserves 10,204 9,024 8,205 Retained earnings 9,028 7,596 5,144 91,094 88,338 78,896 1,949,213 1,736,218 1,387,346 682,400 728,712 579,999 Due to subsidiaries Subordinated liabilities Total liabilities Equity Other reserves Total liabilities and equity 16.01 Contingent liabilities and commitments CAGR – Compound Annual Growth Rate 80 Commercial Bank of Ceylon PLC Annual Report 2021 > Financial Review 2021
  83. LKASs 2018 2017 2016 2015 2014 2013 2012 39 ,534 33,225 30,194 20,044 20,592 14,262 19,733 54,385 44,801 43,873 28,221 19,634 18,432 18,168 19,899 17,633 11,718 17,194 14,508 4,132 16,163 8,002 41,198 8,946 3,697 9,514 7,910 – 5,520 – 763 – 861,100 – – 2,335 1,053 4,118 460 838 1,351 4,411 4,988 7,656 6,327 6,379 6,041 – – – – – – 641 624 601 551 546 629 – 737,447 – – – 616,018 – – 63,563 60,981 – 48,712 51,824 83,855 – 176,507 – 154,714 – – – 508,115 – – 353,062 337,247 – – – – – – – – 57,724 – 160,023 – 405,431 50,436 – 204,244 – 48,943 – 214,208 – 31,971 – 131,757 – 57,963 – 1,258,987 1,107,482 981,296 855,919 773,345 587,297 492,963 4,264 3,066 2,435 1,237 1,211 289 303 44 44 44 44 44 44 44 15,301 14,635 10,308 9,969 9,953 8,387 8,221 906 777 641 466 439 468 497 72 73 74 74 75 76 – – – – – 964 77 449 23,911 17,297 16,439 12,096 10,543 9,426 9,189 1,303,485 1,143,374 1,012,201 879,805 795,610 605,987 511,743 50,101 57,121 67,609 30,319 25,261 14,194 4,894 8,022 3,678 1,515 1,891 1,193 1,412 84 49,104 49,677 69,867 112,385 124,564 45,519 31,760 850,128 739,563 624,102 529,361 451,153 390,612 – 983,037 – 25,362 – 23,786 – 6,566 4,144 646 3,275 – 24,208 – 19,225 – – 9,270 – – 9,986 – 3,441 – – 11,637 – – 8,654 – 15,823 – 3,002 1,998 1,759 2,802 1,698 231 2,574 1,563 2 2 2 2 2 17,710 15,547 17,444 9,827 10,363 41 75 20 26 19 16 22 37,992 25,166 24,850 11,973 11,045 10,944 1,106 1,185,079 1,036,275 933,847 809,464 725,098 545,043 459,166 39,148 37,144 24,978 23,255 21,458 19,587 18,009 7,354 6,477 5,648 4,922 4,327 4,035 3,433 5,063 4,987 4,464 4,389 4,258 4,233 4,178 66,841 58,491 43,264 37,775 40,469 33,089 26,957 1,303,485 1,143,374 1,012,201 879,805 795,610 605,987 511,743 658,722 564,795 498,305 521,232 352,453 295,452 279,593 > Financial Review 2021 Commercial Bank of Ceylon PLC Annual Report 2021 81
  84. SLFRSs For the year ended December 31 , Rs. Mn. CAGR % Operating results Gross income Interest income Interest expense Foreign exchange profit Commission and other income Operating expenses and impairment Profit before tax Income tax expense Profit for the year 13.37 Annual Report 2021 148,706 127,780 (65,832) (72,759) (80,571) 10,589 8,338 6,726 16,195 17,031 12,082 (43,678) 23,511 22,339 (8,395) (7,138) (5,314) 11.59 23,606 16,373 17,025 14.66 11.28 13.54 7.46 0.68 7.72 1.28 1.05 1.27 2.64 2.34 2.55 73.54 72.96 86.74 15.04 15.56 16.21 11.82 11.05 10.42 6.68 6.81 7.26 37.97 39.96 49.41 38.73 44.99 30.42 36.39 32.70 25.25 N/A N/A N/A N/A N/A N/A 12.05 13.36 12.40 12.05 13.36 12.40 15.70 16.88 16.18 79.30 80.90 95.00 20 15 17 7.50 6.50 6.50 4 5 5 138 135 130 2.24 6.01 > Financial Review 2021 149,711 122,330 (51,429) Dividend per share (Rs.) Price earnings ratio (times) Net assets value per share (Rs.) Earnings yield (%) Gross dividends (Rs. Bn.) to ordinary shareholders Dividend payout ratio (%) – Cash Total dividend payout ratio (%) Commercial Bank of Ceylon PLC 160,886 130,443 32,001 Earnings per share (Rs.) 82 2019 (59,394) Share information Market value of a voting ordinary share (Rs.) CAGR – Compounded Annual Growth Rate 2020 11.37 Ratios Return on average-shareholders’ funds (%) Income growth (%) Return on average assets (%) Ordinary share dividend cover (times) Advances to deposits and refinance (%) Property, plant and equipment to shareholders’ funds (%) Total assets to shareholders’ funds (times) Capital funds to liabilities including contingent liabilities (%) Cost/income ratio (%) Liquid assets ratio – Domestic Banking Unit (DBU) (%) Liquid assets ratio – Offshore Banking Centre (OBC) (%) (As specified in the Banking Act No. 30 of 1988) Group capital adequacy (%) (under Basel II) Tier I Tier I & II Group capital adequacy (%) (under Basel III) Common equity Tier I capital ratio Tier I capital ratio Total capital ratio Other information Number of employees Number of delivery points – Sri Lanka Number of delivery points – Bangladesh Number of automated teller machines 2021 19 19 17 8.96 7.59 6.68 22 32 27 38 46 39 5,072 5,057 5,062 268 268 268 19 19 19 921 906 885
  85. LKASs 2017 2016 2015 2014 2013 2012 138 ,049 114,357 93,143 77,868 72,753 73,736 63,395 117,466 103,034 80,738 66,030 61,832 62,764 52,685 (72,524) (64,011) (47,915) (35,685) (34,610) (36,879) (29,830) 4,687 2018 7,900 588 2,326 2,877 1,481 1,996 12,683 10,735 10,079 8,961 9,440 8,976 6,023 (39,934) (28,400) (25,177) (25,040) (22,407) (22,347) (19,270) 25,591 23,183 20,051 17,143 15,736 14,510 14,295 (8,047) (6,602) (5,539) (5,240) (4,556) (4,065) (4,197) 17,544 16,581 14,512 11,903 11,180 10,445 10,098 15.56 17.88 19.52 16.90 17.01 18.40 20.96 20.72 24.10 19.62 7.03 0.96 16.31 38.24 1.43 1.54 1.53 1.42 1.60 1.87 2.12 2.67 2.62 2.25 2.09 1.99 1.89 1.86 86.96 86.07 82.69 80.84 75.89 77.48 82.01 13.75 14.46 14.07 14.94 14.85 14.65 16.73 11.01 10.68 12.92 12.51 11.28 9.94 9.73 6.42 6.69 5.47 5.29 6.54 7.25 7.12 46.35 51.08 51.06 48.92 49.26 45.59 47.02 24.47 27.28 27.19 26.24 33.15 33.66 25.40 30.20 30.95 30.19 49.13 31.43 29.38 34.16 N/A N/A 11.59 11.55 13.07 13.30 12.63 N/A N/A 16.01 14.28 16.22 16.93 13.84 11.43 12.12 – – – – – 11.43 12.12 – – – – – 15.62 15.70 – – – – – 115.00 135.80 145.00 140.20 171.00 120.40 103.00 17 17 16 13 13 12 12 6.50 6.50 6.50 6.50 6.50 6.50 6.50 7 8 9 10 13 10 9 117 108 88 80 81 72 63 15 13 11 10 8 10 12 6.57 6.48 5.77 5.70 5.70 5.52 5.42 26 26 28 33 35 37 37 37 38 40 48 50 53 54 5,027 4,982 4,987 4,951 4,852 4,730 4,602 266 261 255 246 239 235 227 19 19 19 18 18 18 17 850 775 677 640 625 604 572 > Financial Review 2021 Commercial Bank of Ceylon PLC Annual Report 2021 83
  86. Group Structure Local Subsidiaries COMMERCIAL DEVELOPMENT COMPANY PLC CBC TECH SOLUTIONS LTD . COMMERCIAL INSURANCE BROKERS (PVT) LTD. CBC FINANCE LIMITED CBC FINANCE A Fully Owned Subsidiary of Commercial Bank of Ceylon PLC Incorporated on March 14, 1980 in Sri Lanka February 17, 2003 in Sri Lanka February 18, 1987 in Sri Lanka August 17, 1987 in Sri Lanka 90.00% 100% 100% Principal Business Activities Property development and provision of other utility services Granting of leasing & Providing Information & Communication Technology hire purchase facilities, mortgage loans and other (ICT) related products, loan facilities. Accepting services and solutions to public deposits. corporate sector Business Address 4th Floor, No. 8-4/2, York Arcade Building, Leyden Bastian Road, Colombo 01. “Commercial House”, No. 21, Sir Razik Fareed Mawatha, Colombo 01. No. 187, Katugastota Road, Kandy. No. 347, Dr Colvin R De Silva Mawatha, Colombo 02. Contact Numbers +94 11 244 7300 +94 11 257 4417 +94 11 257 4407 +94 81 221 3498 +94 81 220 0272 +94 11 760 0600 Prof A K W Jayawardane K G D D Dheerasinghe M P Jayawardena D M U N Dissanayaka ** T D Thomas Bank’s Holding 60.00% Insurance Brokering Board of Directors Chairman B R L Fernando Managing Director/ Chief Executive Officer S Renganathan Chief Executive Officer R N De Silva * Keerthi Mediwake * Director A L Gooneratne K D N Buddhipala Dr (Ms) J P Kuruppu D M D K Thilakaratne Director A T P Edirisinghe K S A Gamage R Senanayake U I S Thilakawardena Director L D A Jayasinghe S Prabagar S M S C Jayasuriya D J D P Hettiarachchi Director U I S Thilakawardena D S Bandara W M N S K Weerapana L H Munasinghe L W P Indrajith Ms H D U O Gurnasekara Ms Y A Kularathna Director Director Director Company Secretary L W P Indrajith M P Dharmasiri * Not a Board Member ** Managing Director and Chief Executive Officer Summary of Financial Information Total assets 84 2021 Rs. Mn. 2020 Rs. Mn. 2021 Rs. Mn. 2020 Rs. Mn. 2021 Rs. Mn. 2020 Rs. Mn. 2021 Rs. Mn. 2020 Rs. Mn. 3,785.349 3,449.510 461.022 354.779 10,311.545 8,482.598 705.396 711.027 Total liabilities 457.986 454.405 58.643 107.764 7,058.035 5,284.046 142.943 177.405 Net assets 3,327.363 2,995.105 402.379 247.015 3,253.510 3,198.552 562.453 533.622 Total revenue 632.287 454.906 354.303 348.301 1,264.114 1,049.982 204.239 255.268 Profit before tax 427.265 171.273 156.761 131.533 140.908 110.037 35.784 42.167 Profit after tax 401.506 122.582 181.134 94.648 51.612 58.477 30.286 32.078 Dividend per share (Rs.) 6.50 5.50 50.00 50.00 33.33 35.00 Commercial Bank of Ceylon PLC Annual Report 2021 > Financial Review 2021 – –
  87. Local Associate Foreign Subsidiaries EQUITY INVESTMENTS LANKA LIMITED COMMEX SRI LANKA S .R.L. – ITALY August 8, 1990 in Sri Lanka December 2, 2008 in Italy COMMERCIAL BANK OF MALDIVES PRIVATE LIMITED March 24, 2015 in Maldives CBC MYANMAR MICROFINANCE COMPANY LIMITED April 4, 2017 in Myanmar Incorporated on Bank’s Holding 22.92% 100% 55% 100% Venture Capital Financing Money Transfer and Money Exchange Banking Microfinancing Principal Business Activities No. 108 A, 2/1, Maya Avenue, Colombo 06. No. 34, Via Giacomo Leopardi, Rome, Italy. H Filigasdhoshuge, Ameer Ahmed Magu, K. Male 20066, Maldives. No. 15, Office Street, Ward 4, Lewe Township, Nay Pyi Taw, Myanmar. Business Address +96 03332668 +95 6730566 Contact Numbers K D N Buddhipala Ahmed Nazeer K G D D Dheerasinghe Chairman Ronnie Daniel * Dilan Rajapakse ** R C P Kalugamage Managing Director/ Chief Executive Officer +94 11 2507605 +94 11 5373745 +94 11 5373746 Board of Directors M J C Amarasuriya A H M Riyaz * Chief Executive Officer Deshamanya S E Captain J Premanath S Renganathan Mrs S A Walgama Director J D Peiris U K P Banduwansa S C U Manatunge K A P Perera Director J B Abu Baker Giancarlo Dolente U I S Thilakawardena D J D P Hettiarachchi Director W I Arambage Dr (Ms) Antonia Coppola Dr Ibrahim Vishan Director K C Vignarajah Ms Fareeha Shareef Director M H Wijewaradene Ms Aishath Zahira Director J A D J Christie Nanayakkara Director Mrs R R Dunuwille Mrs N Gamage Ms Aminath Nashadil R C P Kalugamage Company Secretary 2021 Rs. Mn. 2020 Rs. Mn. 2021 Rs. Mn. 2020 Rs. Mn. 2021 Rs. Mn. 2020 Rs. Mn. 2021 Rs. Mn. 2020 Rs. Mn. 374.086 496.708 87.501 588.994 30,042.751 21,712.188 394.538 524.172 125.262 226.199 112.257 503.450 26,258.969 18,572.641 33.976 38.429 248.824 270.509 (24.756) 85.544 3,783.782 3,139.547 360.562 485.743 Net assets 41.059 49.129 13.461 35.342 1,529.550 1,167.493 52.965 102.180 Total revenue 8.272 17.006 (113.941) (75.019) 568.352 382.717 (37.807) 17.181 Profit before tax 8.272 17.006 (113.941) (104.460) 426.986 274.214 (30.370) 12.428 Profit after tax 1.00 > Financial Review 2021 – – – – Total assets Total liabilities Dividend per share (Rs.) Commercial Bank of Ceylon PLC Annual Report 2021 85
  88. Investor Relations Dear Stakeholder , We extend our sincere gratitude to our loyal investors for choosing to invest in the Bank’s capital, both equity and debt, and wish to assure that we are determined to optimise returns for your investments through prudent and sustained growth. As one of the four Domestic Systemically Important Banks and the largest private sector Bank in the country, we are cognisant of our responsibility to present you with timely, relevant, and balanced view of the Bank’s fundamentals in terms of operational results, financial position, and cash flows enabling you to make informed decisions. In this regard, we trust that we were able to fulfil the expectations of our valued investors despite the unprecedented operating environment that prevailed during most part of 2021, and assure that we will continue to discharge our responsibilities in future. We trust that the information presented in this Integrated Annual Report helps investors to comprehend the Bank’s underlying strengths and bolster confidence and loyalty, bringing together a loyal group of investors with a long-term value creation for their investment. As depicted in the section on “Connecting with stakeholders” on pages 20 to 22, the Bank continuously strives to encourage an effective two-way communication with our valued investors, promoting mutual trust and confidence, whilst ensuring the rights conferred on the investors by various statutes to address the material matters. We firmly believe that these initiatives have enabled the Bank to actively engage with our investors in a consistent, comprehensive and accurate manner, often going beyond the minimum regulations and in the underlying spirit, promoting its reputation. The Bank follows a multi-faceted approach to engage with its stakeholders, including the Annual Report, which is the Bank’s main investor communications tool, and the Annual General Meeting, which is an opportunity available for the investor community to engage with the Bank. We believe that these engagements will certainly help our investors to gain an insight into the Bank’s performance, strategic direction, business model of the Bank, governance mechanism and the risk management strategies adopted. Continuing with our efforts as in the past, this year too, the Bank took several initiatives to produce an integrated Annual Report in a concise manner. This can be seen throughout each section of this Report, with due consideration being given to the valuable feedback given by our shareholders in response to the surveys conducted and feedback provided in the past. Continuing this journey, this year too, we have made arrangements to enclose an improved stakeholder feedback form in this Annual Report in order to seek your valuable suggestions and opinion for further improvements. Your comments and opinions are of great value to us and we take a very serious note and actions to produce an improved Annual Report, year on year, taking on board many and incorporating into our strategies for long-term value creation to all our stakeholders. The investor relations section of our website – https://www.combank.lk/financials - is another popular channel available for stakeholders, and the Bank continues to ensure that its pages are updated in a timely manner along with the rest of the site. Figure – 25: Modes of engagement with Investors Annual reports and Annual General Meetings Extraordinary General Meetings Announcements to CSE Interim financial statements Press conferences and releases Corporate website Investor presentations One-to-one discussions Feedback surveys We are confident that the efforts taken by the Bank to have effective communication and active engagement with important stakeholder groups have made the Bank’s shares a creditable investment proposition, despite a very challenging economic and operating environment that prevailed throughout the year due to the continued impact of the COVID-19 pandemic. Graph – 14: Performance of the Colombo Stock Exchange and the Banking Sector in 2021 All share price index (ASPI) S&P SL 20 index Bank index Diversified finance Index 15,000 12,000 9,000 6,000 3,000 0 86 Commercial Bank of Ceylon PLC Annual Report 2021 2 16 30 13 27 13 27 10 24 8 22 5 19 3 Jan. Jan. Jan. Feb. Feb. Mar. Mar. Apr. Apr. May May Jun. Jun. Jul. 17 Jul. 31 14 28 11 25 9 23 6 20 4 18 25 Jul. Aug. Aug. Sep. Sep. Oct. Oct. Nov. Nov. Dec. Dec. Dec.
  89. Performance of the Colombo Stock Exchange (CSE) in 2021 Year 2021 was the highest record-breaking year for the CSE, with record capital raised by companies and a record number of investor participants. Performance indicators such as market capitalisation, and total and daily average turnover recorded the highest-ever values in 2021. The benchmark All Share Price Index (ASPI) logged a market return of 80.5% and reached 12,226 points by the end of 2021 compared to 6,774 points as at end of 2020, registering the highest return recorded since 2010. Compared with the market indices of the Asia-Pacific region, the ASPI consistently maintained its status as the highest yielding index. The S&P SL20 index followed the ASPI and recorded a return of over 60.5% in 2021, increasing from 2,638 as at end of 2020 to 4,232 by the end of 2021, which is the highest-ever recorded. Market capitalization also reached a 10-year high of 36.7% of GDP or Rs. 5.5 Tn. from 19.7% in 2020 or Rs. 2.96 Tn. and 34.5% in 2010 or Rs. 2.2 Tn. Performance of the Banking Sector and Commercial Bank shares in 2021 Despite the exemplary performance in both the ASPI and the S&P SL20 indices as shown in the above graph during 2021, the banking sector shares did not follow the same trend. This was mainly due to the perceived uncertainties specific to the sector, which had a direct impact on the performance of banks. They included many relief programs offered to both affected individuals and corporate customers including the extension of moratoriums by the regulator, restrictions imposed on the payment of cash dividends and the Government tax proposals such as the one off income tax payments and the introduction of new taxes. These factors contributed to the decline in the share price of the Bank’s ordinary voting shares, which traded at a discount to its book value at 0.57 times as at end of 2021 (0.60 times as at end of 2020). Nevertheless, it continued to remain the highest among its peers in the banking sector. The Bank index gained marginally by 3.72% during 2021 and stood at 609.15 compared to 587.30 as at end 2020. The Bank’s public holding (free float) as at December 31, 2021 was 99.77% in voting shares (99.80% in 2020) and 99.86% in nonvoting shares (99.84% in 2020), while floatadjusted market capitalisation (compliant under option-1 of the Rules on minimum public holding requirement of the CSE) remained almost at same levels and stood at Rs. 93.981 Bn. (Rs. 93.483 Bn. in 2020). As shown in Table 37 on page 94, with its shares actively traded in the CSE, investors are provided with a convenient “enter and exit” mechanism. It is pertinent to mention that the number of shareholders holding both voting and non-voting shares of the Bank during the year remained more or less at the same levels, demonstrating the confidence placed by investors in the Bank’s shares despite the challenging conditions experienced during the year 2021. Compliance report on the contents of the Annual Report in terms of the Listing Rules of the CSE We are happy to inform you that the Bank has fully complied with all applicable requirements of Section 7.6 of the Listing Rules of the CSE on the contents of the Annual Report and Accounts of a listed entity. Table 24 given below provides a complete list of disclosure requirements and references to the relevant sections of this Annual Report where the Bank’s compliance with the required disclosures are made together with the relevant page numbers. The pages that follow contain information on the performance of the Bank’s listed securities. Compliance with requirements of the Section 7.6 of the Listing Rules of the CSE Table – 24 Rule No. Disclosure requirement Section/reference Page/s 7.6 (i) Names of persons who during the financial year were Directors of the Bank Governance and Risk Management 122 7.6 (ii) Principal activities of the Bank and its subsidiaries during the year and any changes therein Note 1.3 to the Financial Statements 199 and 200 Group Structure 84 and 85 7.6 (iii) The names and the number of shares held by the 20 largest holders of voting and non-voting shares and the percentage of such shares held Item 4.2 of the “Investor Relations” 93 and 94 7.6 (iv) The float adjusted market capitalisation, public holding percentage (%), number of public shareholders and under which option the Bank complies with the minimum public holding requirement, in respect of voting ordinary shares. Item 4.3 of the “Investor Relations” 94 The public holding percentage (%) in respect of non-voting ordinary Shares. 7.6 (v) A statement of each Directors’ holding and Chief Executive Officer’s holding in shares of the Bank at the beginning and end of the financial year Item 4.4 of the “Investor Relations” 94 7.6 (vi) Information pertaining to material foreseeable risk factors of the Bank Item 5 of the “Investor Relations” 95 > Investor Relations Commercial Bank of Ceylon PLC Annual Report 2021 87
  90. Rule No . Disclosure requirement Section/reference Page/s 7.6 (vii) Details of material issues pertaining to employees and industrial relations of the Bank Item 6 of the “Investor Relations” 95 7.6 (viii) Extents, locations, valuations and the number of buildings of the Bank’s land holdings and investment properties Note 39.5 (a) and (b) to the Financial Statements 261 to 267 7.6 (ix) Note 52 to the Financial Statements 287 and 288 Item 7 of the “Investor Relations” 96 and 97 Item 4.5 of the “Investor Relations” 95 Items 2, 3 and 11 of the “Investor Relations” 90 to 93 and 99 Financial Highlights 10 Items 10 and 11 of the “Investor Relations” 98 and 99 Item 12 of the “Investor Relations” 99 7.6 (xii) Significant changes in the Bank’s or its subsidiaries’ fixed assets and the market value of land, if the value differs substantially from the book value Note 39.5 (b) to the Financial Statements 263 to 267 7.6 (xiii) Details of funds raised through an Initial Public Offering and/or a further issue of Securities during the year Note 52 and 52.1 to the Financial Statements 287 and 288 Number of shares representing the Bank’s stated capital 7.6 (x) A distribution schedule of the number of holders in each class of equity securities, and the percentage of their total holdings as at the end of the year 7.6 (xi) Ratios and market price information: Equity - Dividend per share, dividend payout ratio, net asset value per share, market value per share - highest and lowest values recorded during the financial year and the market value as at the end of financial year - Highest Price, Lowest price, Last traded price Debt - Interest rate of comparable Government Securities, debt/equity ratio, interest cover and quick asset ratio, market prices and yield during the year Any changes in credit rating (for the Bank or any other instrument issued by the Bank) a. the manner in which the funds of such issue/s have been utilized in conformity with the format provided by the Exchange from time to time; b. if any shares or debentures have been issued, the number, class and consideration received and the reason for the issue; and, c. any material change in the use of funds raised through an issue of Securities. In the event the funds raised through the Initial Public Offering and/or the further issue of Securities (as applicable) have been fully utilized by the Bank as disclosed in the Prospectus and/or Circular to shareholders between two financial periods, the entity shall disclose such fact in the immediate succeeding Annual report or the interim financial statement, which ever is published first. 88 Commercial Bank of Ceylon PLC Annual Report 2021 > Investor Relations The Bank did not raise funds through a share issue during the year. Note 51 to the Financial Statements for the details of debentures issued during the year. Item 10 of the "Investor Relations" 286 and 287 98
  91. Rule No . Disclosure requirement Section/reference Page/s Note 53.1 to the Financial Statements 288 Not applicable as the Bank does not have Employee Share Purchase Schemes – 7.6 (xiv) a. Information in respect of Employee Share Option Schemes -The number of options granted to each category of employees during the financial year. -Total number of options vested but not exercised by each category of employees during the financial year. -Total number of options exercised by each category of employees and the total number of shares arising therefrom during the financial year. -Options cancelled during the financial year and the reasons for such cancellation. -The exercise price. -A declaration by the directors of the Bank confirming that the Bank or any of its subsidiaries has not, directly or indirectly, provided funds for the ESOS. b.Information in respect of Employee Share Purchase Schemes (ESPS) -The total number of shares issued under the ESPS during the financial year -The number of shares issued to each category of employees during the financial year -The price at which the shares were issued to the employees -A declaration by the Directors of the Bank confirming that the Bank or any of its subsidiaries has not, directly or indirectly, provided funds for the ESPS 7.6 (xv) Disclosures pertaining to Corporate Governance practices in terms of Rules 7.10.3, 7.10.5 (c) and 7.10.6 (c) of Section 7 of the Rules. Not applicable since the Bank received an exemption in terms of Section 7.10 (c) of the Listing Rules 7.6 (xvi) Related party transactions exceeding 10% of the equity or 5% of the total assets of the Bank as per Audited Financial Statements, whichever is lower The Bank did not have any related party transactions exceeding this threshold during the year 2021 and as at end 2021 (Note 63.6 to the Financial Statements) – 306 Details of investments in a related party and/or amounts due from a related party to be set out separately The details shall include, as a minimum: i. The date of the transaction; ii. The name of the related party; Item 20.3 of the Statement of Compliance 148 iii. The relationship between the Bank and the related party; iv. The amount of the transaction and terms of the transaction; v. The rationale for entering into the transaction. 1. Listed Securities of the Bank The Bank’s ordinary shares (both voting and non-voting) are listed on the Main Board of the CSE under the ticker symbol “COMB”. Refer Table 25 for a summary of listed securities of the Bank). All debentures issued are also listed on the CSE. ( The Business section of most daily newspapers, including the Daily News, Daily FT, The Island and Daily Mirror carry a summary of trading activity and the daily prices of shares and debentures traded (if any) using the abbreviation of Commercial Bank or COMB. > Investor Relations Commercial Bank of Ceylon PLC Annual Report 2021 89
  92. Summary of listed securities of the Bank Table – 25 NUMBER IN ISSUE AS AT December 31, 2021 STOCK SYMBOL December 31, 2020 Equity Ordinary shares – Voting Ordinary shares – Non-voting 1,124,480,528 1,098,934,937 COMB-N0000 69,740,771 67,970,701 COMB-X0000 44,303,400 COMB/BD/08/03/21-C2341-10.75% 50,718,000 COMB/BD/27/10/21-C2360-12.00% Debt Fixed rate Debentures March 2016/21 Redeemed during the year 2021 Fixed rate Debentures October 2016/21 Fixed rate Debentures March 2016/26 17,490,900 17,490,900 COMB/BD/08/03/26-C2342-11.25% Fixed rate Debentures October 2016/26 19,282,000 19,282,000 COMB/BD/27/10/26-C2359-12.25% Fixed rate Debentures July 2018/23 83,938,400 83,938,400 COMB/BD/22/07/23-C2404-12.00% Fixed rate Debentures July 2018/28 16,061,600 16,061,600 COMB/BD/22/07/28-C2405-12.50% Fixed rate Debentures September 2021/26 42,374,700 Fixed rate Debentures September 2021/28 43,580,000 COMB/BD/20/09/26-C2491-09.00% Issued during the year 2021 COMB/BD/20/09/28-C2492-09.50% Equity Securities Features of Ordinary Shares Table – 26 Security Type Quoted Ordinary Shares Listed exchange Colombo Stock Exchange (CSE) – Main Board Featured stock indices All Share Price Index (ASPI) Standard & Poor's Sri Lanka 20 (S&P SL20) GICS Industry Group Banks CSE stock symbol Voting - COMB.N0000 Non Voting - COMB.X0000 International Securities Identification Number (ISIN) Voting - LK0053N00005 Non Voting - LK0053X00004 2. Performance of COMB shares and Returns to Shareholders The investor interest in the shares of the Bank continued during the year compared to pre-pandemic levels, although there was a decline compared to 2020 due to the unprecedented market performance consequent to the market being closed for almost two months and limiting of the share trading hours. This is reflected in the increased number of transactions (Ordinary shares - Voting 174% and Ordinary shares – Non-Voting 245%) compared to 2019 Refer Table 31 on page 92). ( The market price of an ordinary voting share of the Bank decreased by 1.98% (a drop of 14.84% in 2020) from Rs. 80.90 at the end of 2020 to Rs. 79.30 at the end of 2021 (Table 29 on page 91). The Bank continued with its policy of issuing scrip dividends and Employee Share Option Plans. Market capitalisation in terms of Rupees 90 Commercial Bank of Ceylon PLC for both voting and non-voting shares remained almost at the same levels (despite there being a reduction in the market capitalisation in terms of US dollars) and stood at Rs. 94.2 Bn. (USD 470.963 Mn.) in 2021 compared to Rs. 93.7 Bn. (USD 500.902 Mn.) in 2020, and accounted for 1.72% of the total market capitalisation as at end of 2021 (3.16% in 2020). The Bank’s shares ranked ninth among all listed entities and first among the listed corporates in the Banking sector. During most of 2021, the movement of the non-voting share price followed the trend of the voting shares. Graph – 15: Performance of the ordinary shares-voting – 2021 All share price index (ASPI) S&P SL 20 index Bank index Diversified finance CBC Ordinary voting share closing price (Rs.) Index Rs. 15,000 150 12,000 120 9,000 90 6,000 60 3,000 30 Annual Report 2021 0 2 16 30 13 27 13 27 10 24 8 22 5 19 3 Jan. Jan. Jan. Feb. Feb. Mar. Mar. Apr. Apr. May May Jun. Jun. Jul. > Investor Relations 17 Jul. 31 14 28 11 25 9 23 6 20 4 18 25 Jul. Aug. Aug. Sep. Sep. Oct. Oct. Nov. Nov. Dec. Dec. Dec. 0
  93. Graph – 16: Share price trend – Ordinary Shares – Voting 2.1 Movement of COMB Voting Share price over the year Table – 27 Month Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 Jul-21 Aug-21 Sep-21 Oct-21 Nov-21 Dec-21 Highest Price (Rs.) 105.00 100.00 92.50 Lowest Price (Rs.) Price at the month-end (Rs.) 81.00 80.00 83.00 87.30 87.30 92.30 89.00 89.60 86.20 91.20 90.00 82.90 79.00 79.00 87.00 83.00 82.60 82.00 84.50 79.90 76.90 Highest price Lowest price Last traded Rs. 150 120 90 60 99.70 88.80 85.50 80.70 87.00 88.00 85.30 87.00 84.50 88.90 80.10 79.30 30 0 2.2 Share price movement of last five years Table – 28 2018 2019 2020 2021 Graph – 17: Share price trend – Ordinary Shares – Non-Voting 2021 Rs. 2020 Rs. 2019 Rs. 2018 Rs. 2017 Rs. Highest price during the year 105.00 96.00 115.90 142.50 150.00 150 Lowest price during the year 76.90 50.00 88.60 107.50 128.50 120 Last traded price 79.30 80.90 95.00 115.00 135.80 90 Ordinary shares – Voting 2017 Highest price Lowest price Last traded Rs. 60 Ordinary shares – Non-voting Highest price during the year 95.90 87.20 99.40 110.00 118.50 Lowest price during the year 69.60 48.00 74.00 88.00 102.30 Last traded price 72.00 70.10 83.00 95.00 105.00 30 0 2017 2018 2019 2020 2021 2.3 Sustainable value for investors Table – 29 ORDINARY SHARES – VOTING ORDINARY SHARES – NON-VOTING 2021 Trade date 2020 Trade date Rs. Highest price 29.01.2021 Lowest price 23.12.2021 Rs. 105.00 02.01.2020 2021 2020 Rs. Rs. 95.90 19.01.2021 96.00 02.01.2020 76.90 14.05.2020 87.20 69.60 22.12.2021 50.00 15.05.2020 Year-end price 79.30 48.00 72.00 80.90 70.10 2.4 Information on shareholders’ funds and Bank’s market capitalisation Table – 30 As at December 31, Commercial Bank’s market capitalisation ranking Commercial Bank’s market capitalisation (*) % Rank USD Mn. 5,490 1.72 9 470.963 94 2,961 3.16 5 500.902 97 2,851 3.40 4 532.699 118 115 2,839 4.05 3 628.415 107 133 2,899 4.60 4 867.670 Commercial Bank’s Total market capitalisation market capitalisation of the CSE as a % of CSE market capitalisation Shareholders’ funds Commercial Bank’s market capitalisation (*) Rs. Bn. Rs. Bn. Rs. Bn. 2021 165 94 2020 157 2019 133 2018 2017 (*) Market capitalisation includes both voting and non-voting shares. > Investor Relations Commercial Bank of Ceylon PLC Annual Report 2021 91
  94. 2 .5 Number of share transactions (No.) Table – 31 2021 2020 2019 2018 2017 Ordinary shares – Voting 58,754 85,914 21,481 13,364 11,811 Ordinary shares – Non-voting 18,827 21,407 5,452 4,553 4,432 2021 2020 2019 2018 2017 187,853 385,017 89,289 95,286 144,205 15,712 26,614 5,893 10,637 6,717 2.6 Number of shares traded (No. ‘000) Table – 32 Ordinary shares – Voting Ordinary shares – Non-voting Graph – 18: Number of share transactions Shares Voting Shares Voting Shares Non-voting Graph – 20: Shareholders’ funds and Bank’s market capitalization Shares Non-voting Shareholders’ funds No. ’000 No. Mn. Rs. Bn. 100 400 200 80 320 160 60 240 120 40 160 80 20 80 40 0 0 2017 2018 2019 2020 2021 3. Dividends We wish to reiterate that the Bank is fully aware and understands that a declaration of a dividend is fundamental to maintaining a balance between the shareholders’ expectations and the business needs of the Bank. Although the Bank has been paying interim cash dividends up to 2019, the Bank did not pay any interim cash dividends during the past two years. This was in compliance with the requirements of the Banking Act Direction No. 03 of 2021, dated May 13, 2020, Direction No. 01 of 2021 dated January 19, 2021 and Direction No. 11 of 2021 dated July 13, 2021, issued by the CBSL on “Restrictions on Discretionary Payments of Licenced Banks”, wherein licenced banks were instructed to refrain from declaring cash dividends for financial years ended December 31, 2020 and 2021 in view of the possible adverse impact on liquidity and other key performance indicators of banks. However, as per the Banking Act Direction No. 01 of 2021, dated January 19, 2021 and Direction No. 11 of 2021 dated July 13, 2021, issued by the CBSL on the same subject, licenced banks incorporated or established in Sri Lanka were instructed to defer payment of cash dividends until the financial statements for the year ended December 31, 2020 and 2021 are finalised and audited by the external auditors. Accordingly, the Board of Directors of the Bank has now recommended a final dividend of Rs. 7.50 per ordinary share for both ordinary voting and non-voting shares of the Bank. This will 92 Graph – 19: Number of shares traded Commercial Bank of Ceylon PLC 2017 2018 2019 2020 0 2021 2017 2018 Commercial Bank's market capitalization 2019 2020 2021 be paid in the form of a cash dividend of Rs. 4.50 per share and Rs. 3.00 per share by the issue and allotment of new shares for both voting and non-voting shareholders of the Bank for the year ended December 31, 2021. This proposed first and final dividend for the year 2021 will be submitted for the approval of the shareholders at the 53rd AGM, to be held on March 30, 2022. (A dividend of Rs. 6.50 per share was declared and paid by the Bank for the year ended December 31, 2020. It consisted of a cash dividend of Rs. 4.50 per share and balance entitlement of Rs. 2.00 per share satisfied in the form of an issue and allotment of new shares). 3.1 Dividend information Table – 33 Annual Report 2021 2021 2020 First interim paid – – 1.50 1.50 1.50 Second interim paid – – 3.00 3.00 3.00 Final proposed 4.50 4.50 – – – Total 4.50 4.50 4.50 4.50 4.50 Final proposed/allotted 3.00 2.00 2.00 2.00 2.00 Total 7.50 6.50 6.50 6.50 6.50 Cash 5.37 5.25 4.62 4.55 4.48 Scrip 3.58 2.34 2.06 2.02 2.00 Total 8.95 7.59 6.68 6.57 6.48 Cash 22.77 32.07 27.16 25.92 26.42 Cash and Shares 37.94 46.33 39.23 37.44 38.17 Dividends 2019 2018 2017 Cash – Rs. Per share Scrip – Rs. Per share Gross Dividend paid (Rs. Bn.) Dividend payout ratio (%) > Investor Relations
  95. Graph – 21: Dividend per share 4. Shareholders Rs. The Bank had 16,609 ordinary voting shareholders and 5,954 ordinary non-voting shareholders as at December 31, 2021, compared to 16,820 and 5,786 voting and non-voting shareholders as at December 31, 2020 (Table 34). With three new investors joining ranks, the percentage of ordinary voting shares held by the 20 largest shareholders as at end 2021 increased to 74.22% from 71.96% as at end 2020. However, a marginal drop was witnessed in the non-voting ordinary shares held by the 20 largest shareholders from 38.22% as at end 2020 to 37.69% as at end 2021. 8.00 7.50 7.00 6.50 6.00 5.50 2017 2018 2019 2020 2021 Graph – 22: Distribution to shareholders (Dividend paid) and Dividend pay-out ratio Gross Dividend paid (Rs. Bn.) Dividend payout ratio (%) Rs. Bn. % 10 50 8 40 6 30 4 20 2 10 0 2017 2018 2019 2020 2021 0 4.1 Number of ordinary shareholders Table – 34: 2021 2020 Ordinary shareholders – Voting 16,609 16,820 Ordinary shareholders – Non-voting 5,954 5,786 22,563 22,606 As at December 31, Total 4.2 The names, number of shares and percentages of shares held by the twenty largest shareholders (As per rule No. 7.6 (iii) of the Listing Rules of the CSE) Voting shareholders Table – 35 2021 As at December 31, Ordinary shares – Voting 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. DFCC Bank PLC A/C 1 Mr Y S H I Silva Employees Provident Fund CB NY S/A International Finance Corporation Sri Lanka Insurance Corporation Ltd. - Life Fund Melstacorp PLC CB NY S/A IFC Emerging Asia Fund LP CB NY S/A IFC Financial Institutions Growth Fund LP Citibank Newyork S/A Norges Bank Account 2 Sri Lanka Insurance Corporation Ltd. - General Fund Mr K D D Perera Mr D P Pieris Employees Trust Fund Board Renuka Hotels PLC Mr M J Fernando Mrs L E M Yaseen Renuka Consultants & Services Limited Cargo Boat Development Company PLC Hallsville Trading Group INC. Mr S V Somasunderam Sub total Other shareholders Total 2020* Number of shares % Number of shares % 136,272,121 12.12 132,119,619 12.02 111,100,779 9.88 97,441,255 8.87 96,883,940 8.62 94,723,763 8.62 79,992,025 7.11 78,208,480 7.12 56,747,851 5.05 61,403,691 5.59 46,521,219 4.14 45,483,957 4.14 41,238,490 3.67 40,319,015 3.67 41,238,490 3.67 40,319,015 3.67 40,824,369 3.63 45,759,984 4.16 39,793,725 3.54 38,906,463 3.54 35,623,143 3.17 26,696,174 2.37 21,003,054 1.91 19,586,019 1.74 19,159,319 1.74 11,118,680 0.99 9,893,069 0.90 10,108,137 0.90 9,882,761 0.90 10,000,000 0.89 17,077,784 1.55 8,935,921 0.79 8,631,578 0.79 8,017,215 0.71 4,389,182 0.40 7,876,387 0.70 7,564,706 0.69 6,001,380 0.53 834,576,065 74.22 – – – 772,286,695 – 70.28 289,904,463 25.78 326,648,242 29.72 1,124,480,528 100.00 1,098,934,937 100.00 * Comparative shareholdings as at December 31, 2020 of the twenty largest shareholders as at December 31, 2021. > Investor Relations Commercial Bank of Ceylon PLC Annual Report 2021 93
  96. Non-voting shareholders Table – 36 2021 As at December 31, Ordinary shares – Non-voting 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. Employees Trust Fund Board Akbar Brothers (Pvt) Ltd. A/C No 1 GF Capital Global Limited Mr A H Munasinghe Mr M F Hashim M J F Exports (Pvt) Ltd. Janashakthi Insurance PLC - Shareholders Mrs L V C Samarasinha Saboor Chatoor (Pvt) Ltd. Deutsche Bank AG As Trustee To Assetline Income Plus Growth Fund Mr T W A Wickramasinghe, Mrs N Wickramasinghe (Joint) Mr E Chatoor Mr J G De Mel Mr R Gautam Mr J D Bandaranayake, Ms N Bandaranayake & Dr V Bandaranayake (Joint) Mr J D Bandaranayake, Dr V Bandaranayake & Ms I Bandaranayake (Joint) Mr A L Gooneratne Mr K S M De Silva Mr M J Fernando Serendip Investments Limited Sub total Other shareholders Total 2020* Number of shares % Number of shares % 5,425,375 7.78 5,287,676 7.78 3,345,296 4.80 3,117,457 4.59 1,803,067 2.59 1,757,304 2.59 1,694,141 2.43 1,651,143 2.43 1,362,616 1.95 1,282,270 1.89 1,193,037 1.71 1,162,757 1.71 1,098,757 1.58 1,052,622 1.51 997,913 899,345 – – 1,025,906 1.51 1.43 947,600 1.39 1.29 1,770,354 2.60 859,923 1.23 780,000 1.15 825,963 1.18 805,000 1.18 780,974 1.12 590,000 0.87 745,897 1.07 708,999 1.04 742,382 1.06 723,540 1.06 720,767 1.03 702,474 1.03 718,873 1.03 500,628 0.74 706,366 1.01 626,249 0.92 685,247 0.98 801,511 1.18 635,881 0.91 1,167,646 1.72 26,294,442 37.69 25,408,514 37.38 43,446,329 62.31 42,562,187 62.62 69,740,771 100.00 67,970,701 100.00 % Number 16,569 99.77 16,785 99.80 5,949 99.86 5,781 99.84 * Comparative shareholdings as at December 31, 2020 of the twenty largest shareholders as at December 31, 2021. 4.3 Public Shareholding (As per rule No. 7.6 (iv) and 7.13.1 of the Listing Rules of the CSE) Table – 37 2021 2020 Number Number of Shareholders representing the public holding (Voting) Number of Shareholders representing the public holding (Non-voting) Float Adjusted Market Capitalization Rs. Bn. - (Compliant under Option 1) 94 % 93 4.4 Directors’ shareholding including the Chief Executive Officer’s shareholding (As per Rule No. 7.6 (v) of the Listing Rules of the CSE) Table – 38 ORDINARY SHARES – VOTING Justice K Sripavan - Chairman Prof A K W Jayawardane - Deputy Chairman Mr S Renganathan - Managing Director/Group Chief Executive Officer Mr S C U Manatunge Mr K Dharmasiri Mr L D Niyangoda Ms N T M S Cooray Mr T L B Hurulle Ms J Lee Mr R Senanayake Mr Sharhan Muhseen * Mrs D L T S Wijewardena** * Appointed as a Director w.e.f. February 15, 2021 ** Appointed as a Director w.e.f. March 31, 2021 94 Commercial Bank of Ceylon PLC Annual Report 2021 > Investor Relations ORDINARY SHARES – NON-VOTING 2021 2020 2021 2020 14,319 14,000 Nil Nil 13,083 12,792 Nil Nil 432,336 362,010 12,781 12,457 73,038 71,410 Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil 350,274 342,465 54,251 52,875 Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil 2,503 2,448 Nil Nil Nil Nil Nil Nil
  97. 4 .5 Distribution schedule of number of holders and percentage of holding in each class of equity securities (As per rule No. 7.6 (x) of the Listing Rules of the CSE) Table – 39 AS AT DECEMBER 31, 2021 Number of shareholders % AS AT DECEMBER 31, 2020 Number of shares % Number of shareholders % Number of shares % Ordinary shares – Voting 1–1,000 9,159 55.14 2,197,203 0.20 8,801 52.32 2,308,178 0.21 1,001–10,000 5,004 30.13 17,389,250 1.55 5,441 32.35 19,304,413 1.76 10,001–100,000 2,032 12.23 57,783,364 5.14 2,139 12.72 60,718,288 5.53 340 2.05 89,545,274 7.96 364 2.16 95,838,529 8.72 0.45 957,565,437 85.15 75 0.45 920,765,529 83.78 100.00 1,124,480,528 100.00 16,820 100.00 1,098,934,937 100.00 1.16 3,161 54.63 810,631 1.19 100,001 – 1,000,000 Over1,000,000 Total 74 16,609 Ordinary shares – Non-voting 1–1,000 1,001–10,000 3,306 55.53 810,801 1,885 31.66 6,514,550 9.34 1,863 32.20 6,341,366 9.33 10,001–100,000 653 10.97 17,992,665 25.80 654 11.30 18,176,361 26.74 100,001 – 1,000,000 102 1.71 27,447,844 39.36 99 1.71 24,419,830 35.93 Over1,000,000 8 0.13 16,974,911 24.34 9 0.16 18,222,513 26.81 5,954 100.00 69,740,771 100.00 5,786 100.00 67,970,701 100.00 Total 4.6 Composition of shareholders Table – 40 AS AT DECEMBER 31, 2021 AS AT DECEMBER 31, 2020 No. of shareholders % No. of shares % No. of shareholders % No. of shares % 16,353 98.46 892,930,537 79.41 16,534 98.30 838,880,863 76.34 Ordinary shares – Voting Resident Non-resident 256 1.54 231,549,991 20.59 286 1.70 260,054,074 23.66 Total 16,609 100.00 1,124,480,528 100.00 16,820 100.00 1,098,934,937 100.00 Individuals 15,895 95.70 350,776,984 31.19 16,096 95.70 301,468,333 27.43 Institutions 714 4.30 773,703,544 68.81 724 4.30 797,466,604 72.57 16,609 100.00 1,124,480,528 100.00 16,820 100.00 1,098,934,937 100.00 5,883 98.81 65,580,173 94.03 5,707 98.63 63,316,978 93.15 71 1.19 4,160,598 5.97 79 1.37 4,653,723 6.85 Total 5,954 100.00 69,740,771 100.00 5,786 100.00 67,970,701 100.00 Individuals 5,699 95.72 46,434,683 66.58 5,537 95.70 45,572,024 67.05 Institutions 255 4.28 23,306,088 33.42 249 4.30 22,398,677 32.95 5,954 100.00 69,740,771 100.00 5,786 100.00 67,970,701 100.00 Total Ordinary shares – Non-voting Resident Non-resident Total 5. Material foreseeable risk factors (As per Rule No. 7.6 (vi) of the Listing Rules of the CSE) Information pertaining to the material foreseeable risk factors, that require disclosures as per Rule No. 7.6 (vi) of the Listing Rules of the CSE is discussed in the Section on “Risk Governance and Management” on pages 159 to 178. > Investor Relations 6. Material issues pertaining to employees and industrial relations pertaining to the Bank (As per Rule No. 7.6 (vii) of the Listing Rules of the CSE) During the year under review, there were no material issues relating to employees and industrial relations pertaining to the Bank, which warrant disclosure. Commercial Bank of Ceylon PLC Annual Report 2021 95
  98. 7 . Information on movement in number of shares represented by the stated capital (As per rule No.7.6 (ix) of the Listing Rules of the CSE) Table – 41 NUMBER OF SHARES Basis Year Ordinary shares non-voting Cumulative redeemable preference shares 3,000,000 – – 1987 As at December 31, 1987 1988 Bonus issue Voting 2 for 3 2,000,000 5,000,000 – – 1990 Bonus issue Voting 1 for 1 5,000,000 10,000,000 – – 1993 Rights issue Voting 1 for 4 2,500,000 12,500,000 – – 1996 1998 2001 Bonus issue Voting 3 for 5 7,500,000 20,000,000 – – Rights issue Voting 1 for 4 5,000,000 25,000,000 – – Share swap Non-voting 894,275 25,000,000 894,275 – Bonus issue Non-voting 3 for 5 536,565 25,000,000 1,430,840 – Rights issue Non-voting 1 for 4 357,710 25,000,000 1,788,550 – Bonus issue Voting 3 for 10 7,500,000 32,500,000 1,788,550 – Bonus issue Non-voting 3 for 10 536,565 32,500,000 2,325,115 – Bonus issue Voting 1 for 5 6,500,000 39,000,000 2,325,115 – Bonus issue Non-voting 1 for 5 465,023 39,000,000 2,790,138 – 90,655,500 39,000,000 2,790,138 90,655,500 Bonus issue Voting 1 for 3 13,000,000 52,000,000 2,790,138 90,655,500 Rights issue Voting 1 for 4 13,000,000 65,000,000 2,790,138 90,655,500 Bonus issue Non-voting 1 for 3 930,046 65,000,000 3,720,184 90,655,500 Rights issue Non voting 1 for 4 930,046 65,000,000 4,650,230 90,655,500 100,000,000 65,000,000 4,650,230 190,655,500 Issue of cumulative redeemable preference shares 2003 Issue of cumulative redeemable preference shares 2004 ESOP Voting 29,769 65,029,769 4,650,230 190,655,500 2005 ESOP Voting 1,361,591 66,391,360 4,650,230 190,655,500 Bonus issue Voting 1 for 1 66,389,162 132,780,522 4,650,230 190,655,500 Bonus issue Non-voting 1 for 1 4,650,230 132,780,522 9,300,460 190,655,500 ESOP Voting 737,742 133,518,264 9,300,460 190,655,500 (90,655,500) 133,518,264 9,300,460 100,000,000 2006 Redemption of cumulative redeemable preference shares 2007 2008 2009 2010 2008 2009 96 Number of Ordinary shares voting shares issued/ (redeemed) Rights issue Voting 3 for 10 40,288,996 173,807,260 9,300,460 100,000,000 Bonus issue Voting 1 for 3 58,204,268 232,011,528 9,300,460 100,000,000 ESOP Voting 919,649 232,931,177 9,300,460 100,000,000 Rights issue Non-voting 3 for 10 2,790,138 232,931,177 12,090,598 100,000,000 Bonus issue Non-voting 1 for 3 4,030,199 232,931,177 16,120,797 100,000,000 Redemption of cumulative redeemable preference shares (100,000,000) 232,931,177 16,120,797 – ESOP Voting 350,049 233,281,226 16,120,797 – ESOP Voting 540,045 233,821,271 16,120,797 – Share split Voting 1 for 2 117,402,608 351,223,879 16,120,797 – Share split Non-voting 1 for 2 8,060,398 351,223,879 24,181,195 – ESOP Voting 2,081,508 353,305,387 24,181,195 – Redemption of cumulative redeemable preference shares (100,000,000) 232,931,177 16,120,797 – ESOP Voting 350,049 233,281,226 16,120,797 – ESOP Voting 540,045 233,821,271 16,120,797 – Commercial Bank of Ceylon PLC Annual Report 2021 > Investor Relations
  99. NUMBER OF SHARES Year 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Basis Number of Ordinary shares voting shares issued / (redeemed) Ordinary shares non-voting Cumulative redeemable preference shares Share split Voting 1 for 2 117,402,608 351,223,879 16,120,797 – Share split Non-voting 1 for 2 8,060,398 351,223,879 24,181,195 – ESOP Voting 2,081,508 353,305,387 24,181,195 – Scrip issue for final dividend 2010 Voting Scrip issue for final dividend 2010 Non-voting ESOP Voting Rights issue Voting Rights issue Non-voting Share split Share split 2,277,195 355,582,582 24,181,195 – 255,734 355,582,582 24,436,929 – 1,457,645 357,040,227 24,436,929 – 1 for 14 25,502,433 382,542,660 24,436,929 – 1 for 14 1,745,494 382,542,660 26,182,423 – Voting 1 for 1 382,542,660 765,085,320 26,182,423 – Non-voting 1 for 1 26,182,423 765,085,320 52,364,846 – Rs. 2.00 per share 13,587,144 778,672,464 52,364,846 – 1,108,902 778,672,464 53,473,748 – 1,341,768 780,014,232 53,473,748 – Scrip issue for final dividend 2011 Voting Scrip issue for final dividend 2011 Non-voting ESOP Voting Scrip issue for final dividend 2012 Voting Scrip issue for final dividend 2012 Non-voting ESOP Voting Scrip issue for final dividend 2013 Voting Scrip issue for final dividend 2013 Non-voting ESOP Voting Scrip issue for final dividend 2014 Voting Scrip issue for final dividend 2014 Non-voting ESOP Voting Scrip issue for final dividend 2015 Voting Scrip issue for final dividend 2015 Non-voting ESOP Voting Scrip issue for final dividend 2016 Voting Scrip issue for final dividend 2016 Non-voting Rights issue Rights issue ESOP Voting Rs. 2.00 per share Rs. 2.00 per share Rs. 2.00 per share Rs. 2.00 per share 13,076,189 793,090,421 53,473,748 – 1,069,474 793,090,421 54,543,222 – 1,445,398 794,535,819 54,543,222 – 12,504,344 807,040,163 54,543,222 – 1,036,724 807,040,163 55,579,946 – 3,237,566 810,277,729 55,579,946 – 8,118,773 818,396,502 55,579,946 – 719,740 818,396,502 56,299,686 – 2,170,613 820,567,115 56,299,686 – 11,818,040 832,385,155 56,299,686 – 912,967 832,385,155 57,212,653 – 1,136,732 833,521,887 57,212,653 – Rs. 2.00 per share 10,521,802 844,043,689 57,212,653 – 903,357 844,043,689 58,116,010 – Voting 1 for 10 84,649,465 928,693,154 58,116,010 – Non-voting 1 for 10 5,811,601 928,693,154 63,927,611 – 3,278,537 931,971,691 63,927,611 – Scrip issue for final dividend 2017 Voting Scrip issue for final dividend 2017 Non-voting ESOP Voting Scrip issue for final dividend 2018 Voting Scrip issue for final dividend 2018 Non-voting ESOP Voting Scrip issue for final dividend 2019 Voting Scrip issue for final dividend 2019 Non Voting Issue of shares via a Private Placement Voting Scrip issue for final dividend 2020 Voting Scrip issue for final dividend 2020 Non Voting ESOP Voting > Investor Relations Rs. 2.00 per share Rs. 2.00 per share Rs. 2.00 per share Rs. 2.00 per share Rs. 2.00 per share 11,998,388 943,970,079 63,927,611 – 1,085,563 943,970,079 65,013,174 – 1,739,324 945,709,403 65,013,174 – 15,249,529 960,958,932 65,013,174 – 1,241,095 960,958,932 66,254,269 – 293,385 961,252,317 66,254,269 – 22,485,434 983,737,751 66,254,269 – 1,716,432 983,737,751 67,970,701 – 115,197,186 1,098,934,937 67,970,701 – 25,071,337 1,124,006,274 67,970,701 – 1,770,070 1,124,006,274 69,740,771 – 474,254 1,124,480,528 69,740,771 – Commercial Bank of Ceylon PLC Annual Report 2021 97
  100. 8 . Engaging with shareholders During the year, the Bank complied with its Shareholder Communication Policy, which outlines the various formal channels through which it engages with shareholders. It covers the timely communication of quarterly performance of the Group and the Bank as set out on pages 74 to 79 in “Summary of Interim Financial Statements - Group and Bank”. It also records significant events that may reasonably be expected to impact the share price. (More details are given in Financial Calendar on page 181) 9. Quarterly performance in 2021 compared to 2020 (As per Rule No. 7.4 (a) (i) of the Listing Rules of the CSE) Despite the challenges faced during the pandemic, the Bank duly submitted the Interim Financial Statements for the year 2021 to the CSE within applicable statutory deadlines. (The Bank duly complied with this refer requirement for 2020 as well). Please “Financial Calendar” on page 181 for further details. A Summary of the Income Statement and the Statement of Financial Position depicting quarterly performance during 2021 together with comparatives for 2020 is given in Summary of Interim Financial Statement – Group and Bank on pages 74 to 79 for the information of stakeholders. The Audited Income Statement for the year ended December 31, 2021 and the Audited Statement of Financial Position as at December 31, 2021 will be submitted to the CSE within three months from the year end, which is well within the required deadline as required by Rule No. 7.5 (a) of the Listing Rules of the CSE. (The Bank duly complied with this requirement for 2020). This Annual Report in its entirety is available on the Bank’s website both as a PDF file and as well as an interactive version (http://www.combank.lk/newweb/en/investors). Shareholders may also elect to receive a hard copy of the Annual Report on request. The Company Secretary of the Bank will respond to individual letters received from shareholders based on the requests made through the specimen request letter included in the booklet sent to shareholders. 10. Debt securities Details of debentures issued and redeemed by the Bank during the year as well as the balances outstanding is as shown in the Table 42 given below: 10.1 Debenture Composition Table – 42 FIXED INTEREST RATE FIXED INTEREST RATE 2021 Type of Issue Debenture Type CSE Listing 2020 Public Public Public Public Public Public Public Public Public Public Public Public Type "B" Type "B" Type "A" Type "B" Type "A" Type "B" Type "A" Type "B" Type "A" Type "B" Type "A" Type "B" Listed Listed Listed Listed Listed Listed Listed Listed Listed Listed Listed Listed Issue Date 9-Mar-16 28-Oct-16 23-Jul-18 23-Jul-18 21-Sep-21 21-Sep-21 9-Mar-16 9-Mar-16 28-Oct-16 28-Oct-16 23-Jul-18 23-Jul-18 Maturity Date 8-Mar-26 27-Oct-26 22-Jul-23 22-Jul-28 20-Sep-26 20-Sep-28 8-Mar-21 8-Mar-26 27-Oct-21 27-Oct-26 22-Jul-23 22-Jul-28 Interest Payable Frequency Bi-Annually Bi-Annually Bi-Annually Bi-Annually Bi-Annually Bi-Annually Bi-Annually Bi-Annually Bi-Annually Bi-Annually Bi-Annually Bi-Annually Offered Interest Rate 11.25% p.a. 12.25% p.a. 12.00% p.a. 12.50% p.a. 9.00% p.a. Amount (Rs. Mn.) 1,749.09 1,928.20 8,393.84 1,606.16 9.50% p.a. 10.75% p.a. 11.25% p.a. 12.00% p.a. 12.25% p.a. 12.00% p.a. 12.50% p.a. 4,237.47 4,358.00 Not traded Not traded Not traded Not traded Not traded during the during the during the during the during the year year year year year 4,430.34 1,749.09 5,071.80 1,928.20 8,393.84 1,606.16 102.00 100.49 100.00 100.00 100.00 95.00 100.49 95.00 Not traded during the year Not traded during the year 100.00 102.00 Not traded during the year Market Values – Highest (Rs.) – Lowest (Rs.) – Year-end (Rs.) 100.00 100.00 Interest Rates – Coupon Rate (%) 11.25 12.25 12.00 12.50 9.00 9.50 10.75 11.25 12.00 12.25 12.00 12.50 – Effective Annual Yield (%) 11.57 12.63 12.36 12.89 9.20 9.73 11.04 11.57 12.36 12.63 12.36 12.89 Interest rate of comparable Government Security (%) 10.67 10.86 8.45 11.32 10.65 11.42 4.70 6.75 5.00 6.80 5.95 7.15 – Interest Yield (%) N/A N/A N/A N/A N/A N/A 9.80 12.43 N/A N/A N/A 12.49 – Yield to Maturity (%) N/A N/A N/A N/A N/A N/A 9.86 12.37 N/A N/A N/A 12.50 Other Ratios as at date of last trade 98 Commercial Bank of Ceylon PLC Annual Report 2021 > Investor Relations
  101. 11 . Key Shareholder Return Indicators Table – 43 2021 Debt equity ratio (%) 2020 23.74 35.51 138.08 134.67 13.18 10.37 Domestic Banking Unit 38.73 44.99 Off-shore Banking Unit 36.39 32.70 Rupee 425.97 599.38 All Currency 242.52 422.86 157.47 157.49 Net assets value per share (Rs.) Interest cover (Times) Liquid assets ratio (%) (Minimum 20%) Liquidity Coverage Ratio (%) Net Stable Funding Ratio – NSFR (%) 12. Credit ratings 12.1 National Long-term ratings Fitch Ratings Lanka Ltd., has revised the National Long-term Rating of the Sri Lankan financial institutions following the recalibration of its Sri Lankan national rating scale. However, Fitch Ratings reaffirmed the National Long-term rating of the Bank at AA(lka) and its outlook to stable in August 2021. 12.2 Credit ratings – Debentures The credit rating of the Bank’s Subordinated Debentures was also reaffirmed at A(lka) by Fitch Ratings Lanka Ltd., in September 2021. The Bank’s Bangladesh Operation’s credit rating was reaffirmed at AAA by Credit Rating Information Services Ltd., in June 2021 for the 11th consecutive year. > Investor Relations Commercial Bank of Ceylon PLC Annual Report 2021 99
  102. Key Events 2021 JANUARY ComBank launches Sri Lanka ’s first “WhatsApp Banking” facility Demonstrating its innovative use of new-age communications, the Bank has pioneered a groundbreaking product with the world’s most widely-used messaging platform WhatsApp to become the first Sri Lankan bank to offer Banking Services on the platform. ComBank introduces “e-slips” mobile app for paperless cash and cheque deposits ComBank honoured for dedication to women empowerment by Women in Management (WIM) The Bank was presented the award for the ‘Best CSR project on women empowerment by an organisation’, at the 10th edition of the “Top 50 Professional and Career Women Awards, Sri Lanka & Maldives” - an event organised by Women in Management (WIM), a leading organisation in Sri Lanka dedicated to the success of women, together with International Finance Corporation (IFC), a member of the World Bank Group, and the Government of Australia via Australia Aid. MARCH ComBank launches QR-based payment acceptance with UnionPay International The Bank announced that it has collaborated with UnionPay International (UPI) to enable QR code payment acceptance in Sri Lanka, enhancing the payment experience of UnionPay QR Wallet holders. ComBank confirms support to Phase 2 of Koggala Mangrove Restoration Project ComBank wins Green Building – Platinum Award from the Green Building Council of Sri Lanka (GBCSL) Cash and cheques can be deposited paper-free into current or savings accounts at the Bank, following the launch of an innovative new app that generates “e-slips”. FEBRUARY ComBank relocates Trinco branch at purpose-built eco-friendly building The heritage building which is home to the Galle Fort branch won a Platinum award from the Green Building Council of Sri Lanka (GBCSL) for its eco-friendly features after it was recently restored to its original grandeur by the Bank. ComBank receives “10 Most Admired Companies” award by the International Chamber of Commerce Sri Lanka (ICCSL) A protective boundary of 3,750 mangrove saplings is to be planted around Kath Duwa, an island in the Koggala Lake, with the continued support of the Bank to the “Koggala Mangrove Restoration and Conservation Project” of Wildlife and Ocean Resource Conservation (WORC) of Sri Lanka. ComBank adds more options to ComBank Q+ Payment App’s “In-App Bill Payments” feature Sustainability and salubrity were the operative words when the Trincomalee branch relocated to a purpose-built, eco-friendly building on a land owned by the Bank. Customer centricity 100 Leading through innovation Commercial Bank of Ceylon PLC The Bank was presented the award for being one of the 10 “Most Admired Companies in Sri Lanka” in 2019-20 by the International Chamber of Commerce Sri Lanka (ICCSL) in collaboration with the Chartered Institute of Management Accountants (CIMA). Operational excellence Annual Report 2021 Prudent growth Customers can now settle their credit card outstanding and top-up their pre-paid cards instantly and conveniently via the ComBank Q+ Payment App, the Bank’s card-based payment app.
  103. ComBank unveils new look Jaffna branch in Green building The Bank returned to the original location of its Jaffna branch , resuming operations at an address where banking had taken place since the late 1930s. ComBank wins 4 at Best Corporate Citizen Sustainability Awards by the Ceylon Chamber of Commerce (CCC) MAY JULY ComBank offers Credit Card holders auto bill settlement with leading utilities ComBank re-launches www.combank.lk with trilingual content and other enhancements Automated utility bill payment with no intervention by the customer has brought about a new dimension in convenience for ComBank credit card holders by offering them an option to automatically settle their monthly bills to the country’s most-widely used utilities. JUNE SEPTEMBER ComBank launches Corporate Fuel Credit Card & Prepaid Fuel Card The Bank won the Sector Award for Best Performance in the Financial Sector, the category award for Best Performance in Governance, and was presented an award for being among the Top 10 Best Corporate Citizens in Sri Lanka in 2020, in addition to its second runner-up award at the Best Corporate Citizen Sustainability Awards presented by the Ceylon Chamber of Commerce. APRIL Flash Digital Bank Account named “Digital Banking Initiative of the Year” The Bank introduced a Corporate Fuel Credit Card and a Prepaid Fuel Card that can exclusively be used for fuel purchases, and will eliminate the cumbersome fuel allowance reimbursement process currently followed by most companies. ComBank ranked among Top 1000 World Banks for 11th consecutive year ComBank becomes Sri Lanka’s first carbon-neutral bank The Bank announced that its website, now an indispensable tool for millions of customers and information seekers, has been re-launched as a trilingual resource, with a series of cutting-edge enhancements. Flash Digital Bank Account powered by Commercial Bank, was presented the award for the “Digital Banking Initiative of the Year” in Sri Lanka at the 2021 Asian Banking and Finance (ABF) Awards under the ‘Retail Banking Awards – Supporting Projects’ category. ComBank enables bill payments via Cash Recycler Machines The Bank was named among the global giants in banking, becoming the only Sri Lankan bank to be ranked in the ‘Top 1000 World Banks’ announced annually by ‘The Banker’ magazine of the UK, for the 11th consecutive year in 2021. The Bank became the first Sri Lankan bank to achieve carbon neutrality for the entirety of its operations, encompassing all 268 branches and its head office – a monumental milestone in the Bank’s commitment to the environment. The Bank in partnership with Sri Lanka’s leading utility companies, mobile operators and insurance companies launched a bill payment facility through its state-of-the-art Cash Recycler Machine (CRM) network, enabling customers to make their payments conveniently and securely. > Key Events 2021 Commercial Bank of Ceylon PLC Annual Report 2021 101
  104. OCTOBER ComBank expands “Dirishakthi” scheme to transform value chains in rural Sri Lanka The Bank embarked on an initiative to transform the way it supports micro entrepreneurs using its “Dirishakthi” loans programme as the platform for a wider and holistic intervention encompassing financing and empowerment activities. ComBank partners LankaClear to become first Bank to accept digital signatures in Sri Lanka “Flash” Digital Banking app links with global climate impact calculation leader Doconomy The Bank announced a partnership with Doconomy of Sweden, a global leader in impact-tech solutions, to further develop the effectiveness of the Carbon Footprint Calculator in the ‘Flash’ Digital Banking app developed and deployed in Sri Lanka by the Bank. ComBank wins Best Corporate Citizen Sustainability Award 2021 The Bank was declared Sri Lanka’s ‘Best Corporate Citizen’ in 2021 by the Ceylon Chamber of Commerce (CCC), achieving the pinnacle of recognition for sustainability and good corporate citizenship in the country’s corporate sector. ADB honours ComBank as Leading Partner Bank for Trade & Supply Chain Finance NOVEMBER ComBank’s Android POS units accept contactless payments of UnionPay cards The Bank was adjudged the Asian Development Bank’s (ADB’s) ‘Leading Partner Bank in Sri Lanka’ at the 2021 edition of its Trade and Supply Chain Finance Programme (TSCFP) Awards that recognise banks that support trade in Asia and the Pacific. The Bank announced that it is now accepting digitally signed documents from business customers using LankaSign operated by LankaClear, the only commercially operating Certification Authority in the country which complies with the Electronic Transactions Act. ComBank to reward young artists with “Arunalu Siththam” art competition The Bank announced that its Point-of-Sale (POS) devices have been enabled to accept contactless payments via ‘QuickPass’ – the Near Field Communication (NFC) technology of UnionPay cards. DECEMBER ComBank wins Daraz award for “Best Engaging Overall Cards Base” ComBank ranked among Sri Lanka’s 10 most women-friendly workplaces by the Satyn magazine and CIMA The Bank was presented the award for “The Best Engaging Overall Cards Base” at the “Payment Partner Performance Awards 2021” of Daraz, South Asia’s premier online shopping marketplace. The “Arunalu Siththam Children’s Art Competition 2021” conducted under the banner of the Bank’s popular children’s savings account “Arunalu” will present more than Rs. 2 Mn. in 137 cash prizes in addition to 250 merit certificates. Customer centricity 102 Leading through innovation Commercial Bank of Ceylon PLC The Bank’s commitment to the principles of equal opportunity irrespective of gender and other variables in its Human Resources Management processes including recruitment policy, benefits and pay, training and development opportunities, and policies on abuse and harassment, contributed for its ranking among the top 10 most women friendly workplaces in the country. Operational excellence Annual Report 2021 > Key Events 2021 Prudent growth
  105. ComBank opens banking counter at Dept . of Immigration and Emigration The counter will provide advice on foreign currency accounts, remittance services and other products offered by the Bank. ComBank first Sri Lankan bank to win IFC’s CAFI Climate Impact Awards ComBank gifts 100 STEM Smart Classrooms to the Nation The Bank has completed its project to equip 100 schools island-wide with Smart Classrooms that deliver digitised educational content, a commitment it embarked on in its centenary year to transform orthodox educational institutions to STEM (Science, Technology, Engineering, and Mathematics) Centres. Sri Lanka’s first fully carbon neutral Bank, the Commercial Bank has emerged as one of the top banks – and the only Sri Lankan bank – to win two Climate Assessment for Financial Institutions (CAFI) awards from the International Finance Corporation (IFC). ComBank wins its 16th Gold for Best Annual Report in Banking sector The Bank won four awards for its 2020 Annual Report at the CA Sri Lanka awards, including two Gold Awards – the Bank’s 16th Edmund J. Cooray Memorial Trophy for the Best Annual Report among Banking Institutions since 2001, and the Gold for Corporate Governance Disclosure. Reaffirming the Bank’s consistency in financial reporting excellence, the report – themed “A century of experience. A year of reinvention”– was also recognised for “Overall Excellence in Annual Financial Reporting” with a Bronze award and won the Bronze for “Integrated Reporting: Best Disclosure on Capital Management”. > Key Events 2021 Commercial Bank of Ceylon PLC Annual Report 2021 103
  106. GOVERNANCE AND RISK MANAGEMENT Board of Directors and Profiles Mr S C U Manatunge Director and Chief Operating Officer Mr R A P Rajapaksha Company Secretary 104 Commercial Bank of Ceylon PLC Mrs D L T S Wijewardena Director Annual Report 2021 Mr S Renganathan Managing Director / Group Chief Executive Officer Ms N T M S Cooray Director Justice K Sripavan Chairman Mr L D Niyangoda Director
  107. Prof A K W Jayawardane Deputy Chairman Mr T L B Hurulle Director > Board of Directors and Profiles Mr K Dharmasiri Director Ms J Lee Director Mr R Senanayake Director Mr S Muhseen Director Board of Directors of the Bank as at February 25, 2022 Commercial Bank of Ceylon PLC Annual Report 2021 105
  108. Justice K Sripavan Prof A K W Jayawardane Mr S Renganathan Chairman Deputy Chairman Appointed as the Chairman of the Board of Directors w .e.f. December 21, 2020. Appointed as the Deputy Chairman of the Board of Directors w.e.f. December 29, 2020. Managing Director/ Group Chief Executive Officer Appointed as an Independent/NonExecutive Director in April 2017. Appointed as an Independent/NonExecutive Director in April 2015. Appointed as the Chairman of the Board Related Party Transactions Review Committee (BRPTRC) w.e.f. March 28, 2018. Appointed as the Chairman of Board Nomination Committee (BNC), Board Human Resources & Remuneration Committee (BHRRC), Board Credit Committee (BCC) and Board Strategy Development Committee (BSDC) w.e.f. December 31, 2020. Appointed as the Chairman of the Board Technology Committee (BTC) w.e.f. April 29, 2015. Appointed as the Chairman of the Board Integrated Risk Management Committee (BIRMC) w.e.f. December 31, 2020. Skills and experience: Appointed as the Chief Justice of the Democratic Socialist Republic of Sri Lanka on January 30, 2015 and held office until March 01, 2017. Functioned as the Chairman of the Judicial Services Commission of Sri Lanka, Chairman of the Incorporated Council of Legal Education, Chairman of the Sri Lanka Judges’ Institute, Chairman of the Superior Court Complex, Board of Management and Chairman of the Mahapola Trust Fund. Enrolled as an Attorney-at-Law of the Supreme Court of Sri Lanka in 1977. He obtained a Diploma in Industrial Law from the University of Colombo in 1992 and Master of Laws from the University of London in 1994. Member of Sri Lanka Institute of Directors since August 2017. Having joined the Attorney General’s Department in February 1978, he held the posts of State Counsel, Senior State Counsel and Deputy Solicitor General. While being the Deputy Solicitor General he functioned as the Head of the Court of Appeal Unit in the Attorney General’s Department and handled a large volume of work both in the Court of Appeal and in the Supreme Court including Bills and Fundamental Rights Applications. Prior to the elevation to the Court of Appeal Bench he functioned as a Legal Consultant for the National Savings Bank for two years. Appointed as a Judge of the Court of Appeal in May 2002 and was elevated to the post of President of the Court of Appeal in March 2007 by his Excellency the President. Elevated to the Supreme Court Bench in March 2008. Holds 14,319 voting shares. Vice Chancellor of the University of Moratuwa until November 27, 2017 and a Senior Professor in Civil Engineering. An academic of high repute, he brings considerable knowledge and experience of IT to the Board. Holds a PhD in Construction Management and a Master of Science Degree in Construction from the Loughborough University of Technology, UK and a BSc. Eng. Degree in Civil Engineering with first class honours from the University of Moratuwa. Also a Corporate Member, a Fellow and an International Professional Engineer of the Institution of Engineers, Sri Lanka (IESL), CEng, FIE(SL), IntPE(SL), Fellow of the National Academy of Sciences of Sri Lanka, FNAS(SL), Founder Member of the Society of Structural Engineers Sri Lanka MSSE(SL), Fellow of the Institute of Project Managers, Sri Lanka, FIPM (SL) and a life member of Sri Lanka Association for Advancement of Science. Member of Sri Lanka Institute of Directors since December 2015. Previous appointments: Shareholding of Bank: Skills and experience: Graduate Member of the Sri Lanka Institute of Directors since January 2018, GSLID. Other current appointments: Director of Sierra Cables PLC, Chairman of CBC Tech Solutions Limited, Director of Mother Lanka Foundation, a Commission Member of the University Grants Commission, Board Member of National Science Foundation, Arthur C Clarke Institute for Modern Technologies and has served as a member of the Board of Management of several other institutions. Previous appointments: Dean, Faculty of Engineering for six years, First NDB Bank Endowed Professor in Entrepreneurship at the University of Moratuwa, President of the Institution of Engineers, Sri Lanka (IESL) and Director General of National Science Foundation. Shareholding of Bank: Holds 13,083 voting shares. 106 Commercial Bank of Ceylon PLC Annual Report 2021 > Board of Directors and Profiles Redesignated as Group Chief Executive Officer w.e.f. November 15, 2021 Appointed as the Managing Director and Chief Executive Officer in July 2018. Appointed as a Non-Independent/ Executive Director in July 2014. Skills and experience: A senior banker counting over 41 years, led the Bank’s acquisition of the Bangladesh operations of Credit Agricole Indosuez (CAI), Commercial Bank’s first ever acquisition of a banking operation, subsequently building up the same as the first Country Manager. He has also held several other key positions at the Bank including Chief Operating Officer, Deputy General Manager – Personal Banking and the first Chief Risk Officer of the Bank. Fellow of the Chartered Institute of Management Accountants, UK (FCMA), Chartered Global Management Accountant (CGMA), Fellow of the London Institute of Banking & Finance, UK (FLIBF) and a Fellow of the Institute of Bankers Sri Lanka (FIB). Member of Sri Lanka Institute of Directors. Other current appointments: Managing Director of Commercial Development Company PLC, Deputy Chairman of Commercial Bank of Maldives Private Limited, Director of Lanka Financial Services Bureau Limited, Director of Sri Lanka Banks’ Association (Guarantee) Limited. Vice Chairman of International Chamber of Commerce Sri Lanka, Executive Member of The Ceylon Chamber of Commerce, Executive Member of The Council for Business with Britain, Vice President of Sri Lanka India Society, Council Member of the Employers’ Federation of Ceylon and an All-Island Justice of the Peace since 2000. Previous appointments: Member of the General Council of the Institute of Bankers of Bangladesh, Founder President of the Sri Lanka Bangladesh Chamber of Commerce and Industry, Executive Member of the Foreign Investors Chamber of Commerce and Industry in Bangladesh. Shareholding of Bank: Holds 432,336 voting and 12,781 non-voting shares.
  109. Mr K Dharmasiri Appointed as an Independent /Non-Executive Director in July 2015. Skills and experience: A senior banker counting over 37 years at Bank of Ceylon and retiring as its General Manager/Chief Executive Officer, he has diversified experience both within and outside Sri Lanka. Holds a B.Phil. (Econ) and B.Com with first class honours from the University of Colombo. Also an Associate Member of the Institute of Bankers of Sri Lanka. Member of Sri Lanka Institute of Directors since December 2015. Mr T L B Hurulle Member of Sri Lanka Institute of Directors since March 2000. Appointed as an Independent/Non-Executive Director in April 2017. Other current appointments: Skills and experience: Chairman of A Baur & Co. (Pvt) Ltd. Previous appointments: Managing Director/Chief Executive Officer of A Baur & Co. (Pvt) Ltd., Chief Operating Officer of A Baur & Co. (Pvt) Ltd., Director of Baur Asia (Pte) Ltd., Singapore. Shareholding of Bank: Nil. Holds a Diploma in Refrigeration and Air Conditioning from the Southbank University, London, Engineering Apprentices I & II Programme of the University of Moratuwa, Certificate in Science and Technology of Refrigeration, City & Guilds Institute, London and obtained Membership of the Institute of Refrigeration, U.K. in 1977. Member of the Sri Lanka Institute of Directors since 2017 Ms N T M S Cooray Other current appointments: None Appointed as an Independent/Non-Executive Director in September 2016. Independent/Non-Executive Director, Kanrich Finance Limited since 2017 Previous appointments: Skills and experience: Non-Executive Nominee Director on the Boards of Janashakthi Insurance PLC, Sabaragamuwa Development Bank, Merchant Bank of Sri Lanka PLC, BOC Travels (Pvt) Ltd., BOC Property Development & Management (Pvt) Ltd., Ceybank Holiday Homes (Pvt) Ltd., Hotels Colombo (1963) Ltd., Ceybank Asset Management Ltd., Lanka Securities (Pvt) Ltd., Institute of Bankers of Sri Lanka, Lanka Financial Services Bureau Ltd., Lanka Clear (Pvt) Ltd., Bank of Ceylon (UK) Ltd., Credit Information Bureau of Sri Lanka and Managing Director of Nepal Bank of Ceylon Limited in 2002. A senior finance professional with wide experience in the private sector. Hony. Secretary of The Anuradhapura Jaya Sri Maha Bodhi Development Fund. (Act No. 41 of 2006) Other current appointments: Shareholding of Bank: Nil. Mr L D Niyangoda Appointed as an Independent Non-Executive Director in August 2016. Skills and experience: He has a proven track record of over 34 years in the corporate environment and is qualified in various management fields both locally as well as internationally. Consultant, Business and Administration experience for a period of 39 years. Holds a Master of Business Administration from the University of Colombo, Fellow Member of the Chartered Institute of Management Accountants UK (FCMA). Member of Sri Lanka Institute of Directors since July 2006. Other current appointments: Chairman and Managing Director of Jetwing Travels (Pvt) Ltd. and Chairman of Jetwing Hotels Ltd. Previous appointments: Former Chairperson of the Sri Lanka Institute of Directors. Director – Finance and Administration on the Board of J Walter Thompson, Non-Executive Director on the Boards of Capital Alliance Finance PLC, Trade Finance and Investments PLC and served on the Boards of many other private and public companies. A member of the Board of the Management of several other institutions. Appointed as an All-Island Justice of the Peace in 2002. Previous appointments: Director-General, Telecommunications Regulatory Commission (TRC), Designs and Applications Engineer, Metropolitan Refrigeration & Air Conditioning, London, Divisional Manager, Walker Sons & Co. Ltd. and Senior Manager/Engineer at Tudawe Trading Co. (Pvt) Ltd. Awarded the INFOTEL ’92 Pioneers’ award at INFOTEL 2017, was a Member of the Public Representations Committee on Constitutional Reform 2016-17 and a Resource Person in the Budget Committee of Parliament (2017). Shareholdings of Bank: Nil. Shareholding of Bank: Holds 350,274 voting and 54,251 non-voting shares. Holds a Bachelor’s Degree in Agricultural Science from the University of Peradeniya. Former member of numerous professional bodies, including the Council for Agricultural Research Policy of Sri Lanka, Standing Committee of Agriculture and Veterinary Studies, University Grants Commission, Member of Board of Faculty of Agriculture, University of Peradeniya. > Board of Directors and Profiles Commercial Bank of Ceylon PLC Annual Report 2021 107
  110. Mr S C U Manatunge Ms J Lee Chief Operating Officer Appointed as an Independent /Non-Executive Director in August 2020. Appointed as a Non-Independent/ Executive Director and Chief Operating Officer in July 2018. Skills and experience: He was the former Deputy General Manager – Corporate Banking prior to being appointed as the Executive Director/ Chief Operating Officer in 2018. He counts for 32 years of experience at the Bank, having held corporate management/senior positions such as Chief Risk Officer, Head of Credit Risk and Chief Manager – Corporate Banking. He is a Fellow of the Chartered Institute of Management Accountants, UK (FCMAUK) and has obtained a Master of Business Administration (MBA) Degree from the University of Sri Jayewardenepura with a Merit Pass. He is also a Fellow Member of the Institute of Bankers – Sri Lanka (FIB), Fellow of the Institute of Certified Management Accountants of Sri Lanka (FCMA) and a Fellow of the Chartered Management Institute, UK (FCMI). He was instrumental in forming the Association of Banking Sector Risk Professionals, Sri Lanka and was the President in the year 2014. He has also served as a Council Member of the Association of Professional Bankers (APB) and a member of the CIMA – “Thought Leadership Committee”. He was a visiting lecturer for the MBA Degree programme at the University of Colombo. Also a resource person at the Training Centre of Central Bank of Sri Lanka and Institute of Bankers of Sri Lanka. He was adjudged the “Chief Information Security Officer of the Year” at the EC – Council Global CISO Forum held in Atlanta – USA in September 2013 in recognition of his outstanding contribution in strengthening and promoting information security practices and IT Risk Management. He is also a Member of Sri Lanka Institute of Directors since August 2017. Other current appointments: Director of Commercial Bank of Maldives Private Limited. Previous appointments: Director of CBC Tech Solutions Limited. Shareholding of Bank: Holds 73,038 voting shares. Appointed as the Chairman of the Board Investment Committee w.e.f. December 31, 2020. Skills and experience: A pioneer and leading expert in quantitative risk management and its applications to strategy, with over 30 years of experience as a banker, capital markets expert and partner in management consulting firms serving CEOs and Boards in the USA and Asia. Holds an MBA from the Wharton School, a BSc from NYU Stern School of Business in Finance and International Business and has attended the Advanced Management Program and Women on Boards Program at Harvard Business School. Other current appointments: Managing Director of Dragonfly LLC which is a New York based consulting firm providing strategy, risk management and investment advice to Boards, CEOs, and Business heads in the USA, Europe and Asia, covering all sectors - corporates, financial institutions and governments. CEO of Dragonfly Capital Ventures which develops and invests in renewable energy in South East Asia. Serves on the Board of Directors of Temasek Life Sciences Accelerator and is an Entrepreneur-in-Residence. Ms Lee is also on the Board of Directors of DBS Group Holdings Ltd., DBS Bank Ltd. and SMRT Corporation Ltd. She is a member of the Executive Board of the NYU Stern School of Business, which is a private research university based in New York City. Ms Lee is the Vice President of Break Some Glass Inc, WomenExecs on Boards (which is a non-profit Harvard Business School Alumni Network). She is a co‐author of the books “What Every CEO Must Know About Risk” and “RAROC and Risk Management”. Previous appointments: Principal of Bankers Trust, a key member of the pioneering team that developed the first comprehensive daily risk quantification and risk capital methodology in the banking industry.    Partner of Capco, a global business and technology consultancy. Partner of Capital Markets Risk Advisors, a strategy and risk management consulting firm Board Director and Executive Vice President of Solar Frontier KK, a renewable energy subsidiary of Japan-listed Showa Shell Sekiyu KK (now Idemitsu). Senior Fellow of The Wharton School of Business, University of Pennsylvania. Adjunct Professor of Singapore Management University, developed and taught Enterprise Risk Management for 10 years and has also taught Risk Management at Columbia University, New York. Shareholding of Bank: Nil. Mr R Senanayake Appointed as an Independent/Non-Executive Director in September 2020. Appointed as the Chairman of the Board Audit Committee w.e.f. September 25, 2020. Skills and experience: A Fellow Member of CA Sri Lanka with over 30 years of post-qualifying experience and holds a B.Com (Special) degree from the University of Sri Jayewardenepura and a Postgraduate Diploma in Business Management from the PIM of the University of Sri Jayewardenepura. Possesses extensive domain knowledge on the financial services industry, financial management and corporate reporting in particular, including such aspects as risk management, capital management, corporate governance, compliance, sustainability and integrated reporting. He has undergone training on banking and finance with Euromoney and on general management with the National University of Singapore, besides many other local and overseas training programmes. Other current appointments: An Independent Non-Executive Director (from October 2014 to March 2021) and a Non-Independent Non-Executive Director (since April 2021) of CBC Finance Limited, an Independent Non-Executive Director of Senkadagala Finance PLC since April 2017 and a Director of Virtual Capital Technologies (Pvt) Ltd., a software development company that specialises in enterprise solutions in the real estate, retail and telecom spaces catering to the New Zealand and the Australian markets since August 2017. Heads the Smart Academy of the Smart Media The Annual Report Company. Previous appointments: Financial Accountant, Singer Industries (Ceylon) PLC, held several positions from Senior Manager Finance up to Assistant General Manager (Finance & Planning) from 1994 to 2007 at Commercial Bank of Ceylon PLC and Chief Financial Officer at Nations Trust Bank PLC. Shareholding of Bank: Nil. 108 Commercial Bank of Ceylon PLC Annual Report 2021 > Board of Directors and Profiles
  111. Mr S Muhseen Mrs D L T S Wijewardena Mr R A P Rajapaksha Appointed as an Independent /Non-Executive Director in February 2021. Appointed as an Independent/Non-Executive Director in March 2021. Company Secretary Skills and experience: Skills and experience: Senior Investment Banker with extensive experience in areas of Mergers and Acquisitions, Corporate Finance and Capital Markets, who has served in a senior capacity working with company boards and senior leadership teams of financial institutions across Asia to help drive their strategic corporate agenda and roadmap. She is a corporate executive with a proven track record in the IT industry both locally and internationally. She has been serving in various senior positions in the industry for many years and gaining diverse experience in providing technology solutions for high tech startups to large multinational businesses in the world. In his career spanning over 20 years in Investment Banking, he has completed landmark mergers and capital raising transactions in excess of USD 100 billion. The Asia FIG sectors team at Merrill Lynch and Credit Suisse has won the “FIG Asia House of the Year” award from the Asset magazine for several years under his leadership. Multiple transactions he led have been awarded as best country deals and best financial sector capital raise transactions. A Graduate Member of British Computer Society, United Kingdom she gained her Board Executive Education at Harvard Business School, and also earned Strategy Certification for Game Changing Organizations and Artificial Intelligence in impact for business strategies from Massachusetts Institute of Technology, Sloan School of Management. Holds a Masters in Economics from the University of Colombo, a Bachelor of Business Administration (Hons) from Western Michigan University and has completed the Corporate Finance training program with JPMorgan in New York. Other current appointments: Chairman/ Director, Platinum Advisors Pte Ltd., Non-Independent Director, H2O One Pte Ltd., Director, Canary Wharf Holdings Pte Ltd., Independent/Non-Executive Director, Amana Takaful Life PLC, Director, Lankan Angel Network, Sri Lanka. Previous appointments: Previously worked in best-in-class global investment banks, Credit Suisse, Bank of America Merrill Lynch and JPMorgan in leading regional coverage roles. His most immediate previous role was as Managing Director, Head of South East Asia Financial Institutions Group (FIG) and Head of Asia Insurance at Credit Suisse based in Singapore. He was an Associate Director of Deloitte. He was the Team Leader at the National Council for Economic Development (NCED) under the Ministry of Finance as well as a Director at the TAFREN Presidential Task Force for rebuilding the economy after the 2004 Tsunami. Women In Management (WIM) together with IFC and Government of Australia presented her the Best Woman Board Director 2021 (Sri Lanka/Maldives) Award at the WIM Awards 2021 in Colombo. Other current appointments: Chief Executive Officer of Aventude (Pvt) Ltd. (‘Aventude’) which she co-founded in 2018. She is also a director of Aventude Pte Ltd., Singapore. Appointed as Company Secretary in April 2019. Skills and experience: An Associate of Chartered Governance Institute – UK & Ireland, formerly known as Institute of Chartered Secretaries and Administrators (ICSA – UK) and a Graduate of the Institute of Chartered Corporate Secretaries (ICCS) of Sri Lanka counting over 18 years of experience in the field of Company Secretarial Practice including 11 years of experience at the Bank. He is a member of Sri Lanka Institute of Directors since September 2017. Other current appointments: Vice President of the Chartered Governance Institute – UK & Ireland, Sri Lanka & Asia Pacific Branch. Appointed as an All-Island Justice of the Peace in 2019. Previous appointments: Company Secretary of CBC Finance Limited from November 2014 to March 2019. Assistant Company Secretary of the Bank from February 2011 to March 2019. Shareholding of Bank: Nil. Previous appointments: She served as the Vice Chairperson of the Cabinet approved national initiative, Women’s Chamber for Digital Sri Lanka (WCDSL), an initiative to uplift women participation in digital economy of Sri Lanka through ICT education, career empowerment and supportive policies. Shareholding of Bank: Nil. Shareholdings of Bank: Holds 2,503 voting shares. > Board of Directors and Profiles Commercial Bank of Ceylon PLC Annual Report 2021 109
  112. Corporate Management and Profiles S Renganathan Sanath Manatunge Nandika Buddhipala Managing Director / Group Chief Executive Officer Chief Operating Officer Group Chief Financial Officer 41 years in Banking 32 years in Banking FCMA (UK)/CGMA/FCMI (UK)/ FCMA (UK)/CGMA/FLIBF (Fellow of the London FCMA (SL)/FIB (SL)/MBA Merit (University of Sri Jayewardenepura) Institute of Banking & Finance, UK)/FIB (SL) FCA/FCCA (UK)/FCMA/CMA (Aus)/MCISI (UK)/ SA Fin (Aus)/IMA (USA)/BSc, BAd (Special) (University of Sri Jayewardenepura)/ PG Dip in Management (University of Sri Jayewardenepura)/MBA (University of Colombo)/MA in Financial Economics (University of Colombo)/MSc in Financial Mathematics (University of Colombo) 31 years post qualifying experience including 14 years in Banking Isuru Thilakawardena Hasrath Munasinghe S Prabagar Group Chief Human Resources Officer Group Chief Marketing Officer Deputy General Manager – Corporate Banking LL.B (University of Colombo)/MBA (University of Sri Jayewardenepura)/MA (University of Colombo)/Diploma in International Affairs (BCIS)/GSLID (SLID)/Fellow of the Association of HR Professionals FIB (SL)/FCIM (UK)/FSLIM/FCMI (UK)/MSc in Information Technology (University of Moratuwa)/MBA (University of Southern Queensland, Aus)/ACMA/CGMA (UK)/CMA (Aus)/ Post Graduate Diploma in Business and Finance Administration (CA Sri Lanka)/CPM (Asia Pacific Marketing Federation, Sing)/ GSLID (SLID)/ Advanced Diploma in Credit Management (IBSL)/ Diploma in Treasury & Risk Management (IBSL) FCMA (UK)/CGMA/MBA (University of London)/ AIB (SL)/B.Com (Bharathidasan University, India)/DISSCA– CA Sri Lanka/CISA (USA) 31 years of experience including 12 years in Banking 26 years in Banking 28 years of experience including 11 years in Banking 110 Asela Wijesiriwardane Delakshan Hettiarachchi Prins Perera Deputy General Manager – Treasury Deputy General Manager – Personal Banking Chief Treasury Officer BSc (University of Colombo)/MA-Econ (University of Colombo)/ACMA (UK) CIM (UK)/MBA (Cardiff Metropolitan University, FCMA (UK)/CGMA/CPA (Aus)/Master of Financial UK)/AIB (SL) Economics (University of Colombo)/FIB (SL) 25 years in Banking 38 years in Banking Commercial Bank of Ceylon PLC Annual Report 2021 32 years in Banking
  113. Krishan Gamage Prasanna Indrajith Chinthaka Dharmasena Assistant General Manager – Information Technology Operations Assistant General Manager – Finance Assistant General Manager – Services FCA/FCCA (UK)/FCMA (SL)/AIB (SL)/BSc BAd (Special) (University of Sri Jayewardenepura)/ Postgraduate Diploma in Business and Financial Admin. (CA Sri Lanka) BSc (Eng.) Hons in Mechanical Engineering (University of Moratuwa)/MBA (University of Sri Jayewardenepura)/ISO Lead Auditor Certificate/ Visiting lecturer at University of Moratuwa BSc (Eng.) in Electronic and Telecommunication (University of Moratuwa) 23 years of experience in Information Technology including 15 years in Banking 27 years post qualifying experience in Finance 20 years of experience in Manufacturing and Supply Chain Management and 10 years in related fields including 25 years in Banking Banking B A H S Preena Kapila Hettihamu John Premanath Assistant General Manager – Corporate Banking I Group Chief Risk Officer Group Chief Internal Auditor BSc (University of Colombo)/MBA (University of Colombo)/Member (Association Cambiste Internationale) FCCA (UK)/CISA (USA)/CIA (USA)/BSc Applied Accounting (Oxford Brookes – UK)/AIB (SL)/ DISSCA (CA Sri Lanka)/ISO 27001:2013 ISMS Lead Auditor/GSLID (SLID) MBA (University of Colombo)/AIB (SL) 34 years in Banking Mrs Mithila Shamini 26 years in Banking 31 years in Banking M P Dharmasiri Mrs Dharshanie Perera Assistant General Manager – Personal Banking I Assistant General Manager – Planning Assistant General Manager – Personal Banking II AIB (SL)/Dip. in Business Mgmt.(SLBDC)/ Postgraduate Diploma in Business and Financial Admin. (CA Sri Lanka)/MBA (Griffith University, Aus) FCA/ACMA (SL)/AIB (SL)/MSc Mgt (University of Sri Jayewardenepura)/MA Financial Economics (University of Colombo)/BSc BAd (Special) (University of Sri Jayewardenepura) AIB (SL) 35 years in Banking 32 years in Banking > Corporate Management and Profiles 37 years in Banking Commercial Bank of Ceylon PLC Annual Report 2021 111
  114. Ms Tamara Bernard Ms Kelum Amarasinghe Thusitha Suraweera Assistant General Manager – Corporate Banking II Group Chief Compliance Officer Assistant General Manager – Operations AIB (SL)/Masters in Development Studies (University of Colombo)/MBA (University of Sri Jayewardenepura)  Intermediate Diploma in Banking & Finance (IBSL)/Postgraduate Diploma in Strategic Management and Leadership (QUALIFI, UK) Passed Finalist, CIMA (UK) 32 years in Banking 33 years in Banking Mrs Namal Gamage Nalin Samaranayake Varuna Kolamunna Assistant General Manager – Legal Assistant General Manager – Credit Supervision and Recoveries Assistant General Manager – Personal Banking III Attorney at Law and Notary Public/LLM (University of Northumbria, UK)/BA (University AIB (SL)/Postgraduate Executive Diploma in of Kelaniya)/Intermediate Diploma in Banking Bank Mgt./MBA (Cardiff Metropolitan, UK)  and Finance (IBSL) 34 years in Banking  28 years in Banking Vajira Thotagammana S Ganeshan Assistant General Manager – Information Technology (Research & Development) Assistant General Manager – Personal Banking IV/SME BSc (University of Colombo) Intermediate Diploma in Banking & Finance (IBSL)/Postgraduate Diploma in Business Administration (Staffordshire University, UK) 33 years of experience in Information Technology including 28 years in Banking 112 Commercial Bank of Ceylon PLC 33 years in Banking Annual Report 2021 > Corporate Management and Profiles 24 years in Banking Intermediate Diploma in Banking & Finance (IBSL)/Masters of Business Administration (Open University of Malaysia) 31 years in Banking
  115. Senior Management Corporate Banking Sidath Pananwala Mrs Dilrukshi Nanayakkara Mrs Feroza Ameen Mrs Sushara Vidyasagara Head of Corporate Banking I Head of Corporate Banking II Head of Islamic Banking Head of Investment Banking Prasad Fernando LawrianSomanader Ms Dharshini Gunatilleke Geehan Jayawickrama Head of Imports Chief Manager – Exports Chief Manager – Corporate Banking I Chief Manager – Corporate Banking II Personal Banking Amal Alles S B Wasala Sanath Perera Saneth Jayasundara Head of Centralized Credit Processing Unit Senior Regional Manager – Colombo South Senior Regional Manager – Colombo North Senior Regional Manager – Central Commercial Bank of Ceylon PLC Annual Report 2021 113
  116. Janaka Sooriyaarachchi Elmo Sooriyaarachchi Shanthapriya Withanage Sriyan Fernando Regional Manager – Colombo Metro Regional Manager – Uva-Sabaragamuwa Regional Manager – Greater Colombo Chief Manager – City Office Michael De Silva Ramachandren Sivagnanam Mrs Chandani Siyambalagastenne Hemantha Sooriyabandara Regional Manager – North Central Regional Manager – South Western Regional Manager – Northern Regional Manager – Wayamba Mrs Nelum Wasala Roshan Peiris Chief Manager – Centralized Credit Processing Unit Regional Manager – Southern Treasury 114 Mrs Chandrima Leelaratne TivankaDamunupola Hemal Jayasekara Kasun Herath Chief Manager – Treasury Processing Chief Dealer – Treasury Chief Dealer – ALM Chief Dealer – Treasury Sales Commercial Bank of Ceylon PLC Annual Report 2021 > Senior Management
  117. Support Services PradeepBanduwansa Sampath Weerasuriya Tilak Wakista Dr Shanthikumar Fernando Head of Retail Products Digital Channels Head of Security and Safety Head of Premises Chief Manager – Research and Development Mrs Pushpa Chandrasiri Mrs Upulani Gunapala Priyantha Perera Nishantha De Silva Chief Manager – Human Resources Chief Manager – AML/Compliance Chief Manager – Super Market Banking Chief Manager – Card Centre Mrs Charika Jayasekera Mohan Fernando Jagath Weerasinghe Dushmantha Jayasuriya Chief Manager – Retail Credit Approval Chief Manager – SME Banking Chief Manager – Information Technology Chief Manager – Retail Products Ravindra Kodytuakku Upul Perera Chief Manager – Compensation and Benefits Chief Manager – Central Systems Support > Senior Management Commercial Bank of Ceylon PLC Annual Report 2021 115
  118. Bangladesh Operations Najith Meewanage Dilip Das Gupta Kapila Liyanage Ashim Kumar Nandy Chief Executive Officer Senior General Manager Chief Operating Officer Senior Deputy General Manager – Chittagong Binoy Gopal Roy Mostofa Anowar Sohel Shakir Khusru Chirantha Caldera Chief Financial Officer Senior Assistant General Manager – Human Resources Assistant General Manager – Personal Banking Head of Treasury Subsidiary Operations – Local Ruwan De Silva Keerthi Mediwake Upul Dissanayake Thushara Thomas Chief Executive Officer – Commercial Development Company PLC Chief Executive Officer – CBC Tech Solutions Limited Managing Director/ Chief Executive Officer – CBC Finance Limited Managing Director – Commercial Insurance Brokers (Pvt) Ltd. Subsidiary Operations – Foreign 116 Dilan Rajapakse Chamendra Kalugamage Managing Director/ Chief Executive Officer – Commercial Bank of Maldives Private Limited Managing Director – CBC Myanmar Microfinance Company Limited Commercial Bank of Ceylon PLC Annual Report 2021 > Senior Management
  119. Annual Corporate Governance Report Chairman ’s Message Heightened competition from both conventional players and new entrants such as fintechs; the increasingly capital- intensive nature of the business; rapid and disruptive technological developments; demographic and generational changes; and ever tightening regulations: in our contemporary context, the financial services industry faces frictions and forces from an uncertain operating environment. Such an environment exerts even greater pressure on the industry to demonstrate greater accountability, transparency, good governance, and sound financial and risk management to all their stakeholders in order to maintain sustainable operations. Accountability and prevention of corruption is possible only through transparency. Accountability and transparency go hand in hand; the latter in fact enables accountability. The Board acknowledges that transparency and accountability are critical to achieving a high-quality governance mechanism that empowers the stakeholders, especially given the role played by the Bank as a financial intermediary. In its stewardship role, the Board has the ultimate accountability to the Bank’s stakeholders for the activities and performance of the Group. We are aware of the expectations of our stakeholders have of us and of our responsibility to report to them on how we are meeting – and plan to continue meeting – those expectations. Hence, the Board adopts a strategic focus to ensure value creation over the short, medium and long term and takes responsibility for the consequences of the Bank’s actions and the resultant performance; and the Board makes every effort to represent these actions and performance fairly through pertinent disclosures, including those made in this Integrated Annual Report. This requires clarity as to who is responsible for what and to whom at all levels across the Group. In this regard, the Bank has established a number of committees at the Board as well as the Executive level as elaborated in this Governance Report. These committees are guided by the directions/regulations issued by the Central Bank of Sri Lanka from time to time, and a number of Board-approved governing documents such as policies, frameworks, terms of reference, and charters, which are reviewed and approved by the Board at least annually. Similar Board-level as well as Executive-level committees have been established as required in the subsidiaries and the associate, too. Besides the governing documents upholding Board’s roles and responsibilities, Board oversight on reporting, disclosures on related party transactions, performance evaluation and reward structures, and KPIs that target long-term sustainability, are other supporting practices that promote accountability and transparency. This clear, principled governance structure helps the Group in promoting accountability and transparency across all the levels of the Group. During the year under review, the Bank adopted a Board approved Anti-Bribery and Anti-Corruption Policy (https://www. combank.lk/info/file/91/anti-bribery-andanti-corruption-policy) to further enhance our commitment in this regard, which together with the Code of Ethics and the Whistleblowers’ Charter encourage all staff members to be ethical and accountable in their dealings. The Bank also reconstituted the Board- and Executive-level committees during the year consequent to new appointments to the Board and the Corporate Management as well as taking into account the expertise required in the respective committees. Subject to the need to maintain confidentiality, the governing documents that need to be made available to the relevant stakeholders are accessible through the intranet and the Bank’s website, as appropriate. Achieving transparency is a function of providing information, both financial and non-financial, about the activities, performance and governance of the Group – and ensuring that this information is accurate, complete, and made available in a timely fashion to the stakeholders. In order to enhance accountability and uphold transparency, the Bank takes into account materiality, completeness, accuracy, balance, clarity, comparability and reliability when reporting on its performance. Assurance certificates obtained by the Bank on its financials, internal controls, sustainability, integrated reporting, and GRI indicators, etc. further corroborate the Bank’s own efforts. The publication of this Integrated Annual Report, which includes extensive voluntary disclosures that go beyond compliance requirements, is a clear demonstration of our accountability to the stakeholders. We have been gradually expanding our focus and disclosures on environmental, social and governance-related aspects.  The Bank is aware that in addition to its financial performance, the overall efficacy of its long-term value creation will be judged by its contribution to the society and the environment. In our view, these are mutually inclusive aspects, and are equally important components in a comprehensive definition of sustainability. A profitable operation is a precondition for being sustainable; the Bank must be able to sustain its performance into the foreseeable future as a going concern. But the Bank must also conduct its enterprise with due consideration to the society and the environment in which it operates so that benefits accrue to the wider community. These two dimensions are dependent on each other such that both need to be present for an enterprise to be sustainable. It is the sustained performance of the Bank that enables it to give due consideration to the society and the environment; but unless it gives due consideration to social and environmental aspects, the Bank cannot renew its ‘license’ to operate within a community, and cannot, therefore, sustain its performance in the long run. Given that the Bank conducts its operations with the best interests of all the stakeholders at heart and it is backed by exemplary governance practices, as elaborated in this Corporate Governance Report, the Board of Directors is highly confident about the sustainability of the Bank’s operations into the foreseeable future across both dimensions referred to above. Justice K Sripavan Chairman Colombo, February 25, 2022 Commercial Bank of Ceylon PLC Annual Report 2021 117
  120. How we govern (Principles D.5 and D.6)1 As per the disclosure requirements of the Banking Act Direction No. 11 of 2007 on Corporate Governance (the Direction), pages 104 to 158 of this Report elaborate the structure, overarching principles, and components of the Bank’s corporate governance framework. In addition, the Bank has complied with the principles enumerated in the Code of Best Practice on Corporate Governance – 2017 (the Code) issued by CA Sri Lanka. The External Auditors of the Bank, Messrs Ernst & Young have submitted their Assurance Statement to the Central Bank of Sri Lanka (CBSL), post their review of the Bank’s compliance in line with the Direction. Extent of compliance in line with the Direction is disclosed in Annex 1.1 on pages 338 to 349, while compliance with the Code is presented in Annex 1.2 on pages 350 to 355. The Bank has also complied with all the disclosure requirements under the prescribed format issued by the CBSL for publication of Annual Financial Statements, and a comprehensive disclosure statement thereon is given in Annex 1.3 on pages 356 to 360. As the Bank is fully compliant with all the applicable requirements of the Direction, the Colombo Stock Exchange (CSE) has exempted the Bank from disclosure of compliance with the regulations stipulated in Section 7.10 of the Continuing Listing Requirements on Corporate Governance. Bank’s approach to governance As the Bank holds the fiduciary responsibility of accepting and deploying vast sums of uncollateralised public funds, the importance of maintaining public trust and confidence for its long-term success and sustainability cannot be overemphasised. To this end, the Bank considers exemplary conduct on the part of all its employees as absolutely essential to good governance, be it from the Board of Directors at the highest governing body to the members of Corporate Management, or from Senior Management to staff at most junior level. Hence, Commercial Bank has put in place a system of good corporate governance - the system of rules, practices and processes that guides corporate behaviour – which ensures a disciplined approach to making decisions and executing them with the interests of all stakeholders at heart. This system has been the bedrock of over 100 years of existence and sustainable value creation. At Commercial Bank, good corporate governance is not limited to legal and regulatory requirements alone, but is viewed as a collective responsibility that serves as the foundation for financial integrity, sustainable performance, and investor confidence. While it is a strong and highly effective risk management tool, it simultaneously paves the way for the Bank to exploit opportunities. Given this huge responsibility, the Bank has an unwavering commitment to good corporate governance and conducts its affairs with the utmost intellectual honesty, integrity, and diligence whilst being mindful of its obligations to society and the environment. This tone is set at the topmost echelons of the Bank’s Corporate governance and echoes through the entire work culture at the Bank. While the commitment to good corporate governance has been in place for over a century, the underlying framework is regularly reviewed and updated to be in line with the evolving regulations and best practice, thereby consistently and successfully guiding the Board, Board Committees, Management, Management Committee and staff in performing their stewardship roles. This framework is underpinned by the governance principles of leadership, integrity, effectiveness, accountability, transparency, sustainability, and shareholder engagement. These principles guide the Bank's Management in all its decisions relating to Board oversight, delegation of authority, division of responsibilities, resource allocation, risk management, compliance, performance appraisal and compensation, related party transactions, and financial reporting. The heavily awarded and accoladed status of Commercial Bank resulting in it being the most awarded bank in the country, bears testimony to its commitment towards good Refer page 66 for corporate governance ( the details of awards and accolades won by the Bank during the year under review). Objectives of the Bank’s Corporate Governance System As the largest private sector bank in Sri Lanka, Commercial Bank touches the lives of millions of Sri Lankans in various capacities, and these stakeholders in turn have high expectations of their interactions with the Bank. Given that this trust and confidence is imperative for the longterm success of the Bank, the Corporate Governance system has been designed with a view to ensure the following as envisaged in its Business Model: z Adequate oversight on Management to ensure due diligence on key decisions and implementation of strategies as intended with any issues, incidents and risks being quickly identified, assessed, and escalated z Provide efficient decision making for timely and effective outcomes in order to achieve results as expected z Maintain that business as well as support service functions are sufficiently resourced with required competencies and maturity z Ensure the remuneration framework is properly aligned to the long-term success of the Bank z Make certain that activities comply with policies, laws, regulations, and ethical standards in both letter and spirit z Warrant assets are safeguarded z Guide the Bank and its Group companies to be more stable, resilient, and future ready z Create value sustainably for all stakeholders over the short, medium, and long-term In order to achieve the objectives stated above, the Board has ensured the following: z Roles and responsibilities are clearly distributed among the Board, Board Sub-Committees, Management and Management Committees, with approved charters and Terms of Reference which are reviewed annually z Clear reporting lines and frequency of reporting are established z Legitimate needs, interests, and expectations of all the stakeholders are taken into consideration z The highest degree of fairness, transparency, and accountability is upheld z Principles for countering bribery and corruption have been set out, and the management of bribery and corruption risk through the adoption of an Anti-Bribery and Anti-Corruption Policy and communicating same to all staff clearly indicating that zero tolerance for non-compliance has been put in place z Negative externalities to society and the environment are minimised z Lives by the claims made and values associated with the Bank’s brand reputation Key regulatory requirements and voluntary codes relevant to the Bank and elements of its Corporate Governance Framework are depicted in Figure 26 on page 119. z Establish clear ownership and accountability on key and emerging risks z Maintain efficient systems and processes, 1. Principles referred to in this section are the principles in the Code of Best Practice on Corporate Governance – 2017 issued by CA Sri Lanka. 118 Commercial Bank of Ceylon PLC Annual Report 2021 > Annual Corporate Governance Report
  121. Figure – 26: Key regulatory requirements, voluntary codes, and elements of Corporate Governance Framework External Continuing Listing Requirements of the Colombo Stock Exchange which addresses, inter alia, the rights of investors Internal Requirements under Sri Lanka Accounting and Auditing Standards Monitoring Board Elements of Corporate Governance Framework Directions and Circulars issued by the Securities and Exchange Commission of Sri Lanka Articles of Association of the Bank Organisational Structure Shop and Office Employees Act No. 19 of 1954 and amendments thereto addressing the rights and responsibilities of employees Acts, Circulars, Gazettes issued by the Taxation Authorities for banks to act as collecting agents Terms of Reference and Charters of Board and Management Committees Companies Act No. 07 of 2007 and amendments thereto which include provisions for preserving rights of investors Code of Best Practice on Corporate Governance issued by CA Sri Lanka which seeks to address how corporates operate while fulfilling the rights of key stakeholder groups Integrated Risk Management Framework Guidance for Directors of Banks on the Directors’ Statement on Internal Control issued by CA Sri Lanka Banking Act No. 30 of 1988 and amendments thereto which contain provisions for preserving the rights of depositors and rights and responsibilities of regulators Related Party Transactions Policy Governance structure The foundation of the governance structure of the Bank is built on the well-defined roles and responsibilities, greater accountability, and clear reporting lines of the Board, Board Committees, Management, and Management Committees. The Board and Board Committees- assisted by consultants where necessary- are responsible for setting strategy, defining the risk appetite, and exercising oversight while Management and Management Committees are responsible for executing strategy and driving performance. Responsibility and accountability for conducting operations and assuming risk under the purview of the Management lies with the strategic business units and support functions. The governance structure of the Bank is given in Figure 27 on page 120. Board of Directors (Principles A.1, A.1.5, A.4 and A.10) The Board of Directors plays a pivotal role in demonstrating good corporate citizenship, ethical behaviour, transparency, and accountability whilst also warding off all forms of corporate malfeasance. The Board of Directors- the highest decisionmaking authority with responsibility for the sustainability of the Bank- provides leadership by setting strategic direction, defining risk appetite, approving remuneration policies, and making appointments to the Board and Corporate Management. Under the due diligence and oversight of the Board, Corporate Management is responsible for the execution of the strategy, day-to-day operations, and for implementing an effective system of internal control. The Board and Corporate Management have a clear mutual understanding of their respective roles, delegated authority, and boundaries. > Annual Corporate Governance Report Corporate Directors’ Hand Book Board approved policies on all major operational aspects All Directions issued to Licensed Commercial Banks by the Central Bank of Sri Lanka, particularly the Banking Act Direction No. 11 of 2007 on Corporate Governance and other Directions issued by the Central Banks of the countries within which the Bank operates Code of Ethics for all employees Based on trust and respect, the Board and Corporate Management work within a productive and harmonious relationship which is a pre-requisite for good corporate governance and organisational effectiveness. This has proved to be one of the key reasons for the many achievements of the Bank, and has contributed to positioning the Bank as the benchmark private sector bank in the country and also being regarded as one of the two Domestic Systemically Important Banks (D-SIBs) in the country, currently having the Highest Loss Absorbency rate. The Board comprised of twelve Directors at end of 2021 (ten as at end 2020). Each Director is an eminent professional in his or her respective field and holds the skills and expertise necessary to constructively challenge the Management and enrich deliberations on matters set before the Board. They understand and appreciate the dynamism and complexity of the operations of the Bank, its subsidiaries, and the associate, particularly in the wake of emerging global developments threatening to challenge conventional business models. Ten of the Directors (eight as at end 2020) are Independent Non-Executive Directors (INEDs), ensuring a higher degree of autonomy. Directors act in the best interest of the shareholders, avoiding any conflicts of interest. Diversity and inclusion Diversity and inclusion go hand in hand at the Bank, with a wide array of diverse people and voices being inclusively heard in the working environment, all towards the overall progress of the Bank. The Board of Directors mirrors this diversity and inclusion by comprising of members with expertise in accounting, banking and finance, economics, agriculture and chemical industry, engineering, information technology, law, risk management, and international capital markets. Having risen to the highest echelons of Government institutions or private sector organisations, they bring their independent judgement to bear on matters reserved for the Board. Bringing together banking, entrepreneurial, investor, and regulatory perspectives, the Board is able to explore matters from diverse points of view to facilitate long-term value creation. The Company Secretary assists the Board in discharging its responsibilities. The diversity in the Board's composition has enabled it to bring a unique perspective to the Boardroom, enhancing dynamics and effectiveness while promoting healthy and constructive exchange of views, leaving no room for groupthink. Profiles of the Board members which include the qualifications, memberships in Board Committees, and both current and previous significant appointments as well as the profile of the Company Secretary are given on pages 106 to 109. Board process (Principles A.1.6, A.1.7 and A.6) The Board agrees on a schedule of meetings at the beginning of each year and meets at least once a month. Additional meetings are also convened if the circumstances so require. With the assistance of the Company Secretary and in consultation with the Managing Director/Group Chief Executive Officer, the Chairman is responsible for determining and preparing the agenda for the meetings. Board members also have the opportunity to propose items for inclusion in the agenda for discussion. The agenda, together with the accompanying Board Commercial Bank of Ceylon PLC Annual Report 2021 119
  122. papers , is circulated to the members of the Board by the Company Secretary, one week in advance of the dates fixed for the meetings. This provides Board members with adequate time to study the contents, call for additional information if required, and be prepared for productive deliberations. The agenda and all Board Papers are circulated electronically to Board members via the BoardPAC, ensuring absolute confidentiality of the information, providing instantaneous delivery, and of equal importance, cost saving on printing of papers, which is one of the many green initiatives. This system has helped the Bank conduct Board and Board Committee meetings uninterrupted even during the pandemic. The Directors regularly attend the meetings, physically and/or virtually, and actively participate in deliberations. Urgent Board papers are submitted at short notice or tabled at the meetings on an exceptional basis. Board members typically spend, at a minimum, seven days a month on Board-related matters. In the best interest of the Bank, onethird of the Directors can call for a resolution to be presented to the Board, if required. Figure 28 on page 122 provides details of attendance at Board meetings including membership status, mode of attendance, Figure – 27: Governance structure positions held by the Board members in sub committees, and the tenure on the Board. Minutes of deliberations and decisions made at the meetings are maintained in sufficient detail. On occasion if the need arises, members of the Corporate Management are invited to make presentations to the Board on the performance of areas coming under their purview. Members of the Board are also allowed to seek independent professional advice, if necessary, at the Bank’s expense. The Bank has also obtained a Directors’ and Officers’ Liability Insurance Policy, affording them protection against any allegations in the conduct of their duties. Governance bodies with stewardship role Board of Directors Management Others (Setting strategy and risk appetite with oversight responsibility) (Strategy execution and driving performance) (Conducting operations and assuming risk) Main Board Board Committees Executive Management Chairman Audit Committee (BAC) Managing Director / Group Chief Executive Officer Independent Non-Executive Directors Integrated Risk Management Committee (BIRMC) Chief Operating Officer (COO) Shareholders Nomination Committee (BNC) HR and Remuneration Committee (BHRRC) Executive Directors Other Members of the Corporate Management Related Party Transactions Review Committee (BRPTRC) Group Chief Risk Officer Credit Committee (BCC) Group Chief Compliance Officer Investment Committee (BIC) Group Chief Internal Auditor Technology Committee (BTC) Executive Management Committees Business and Supporting Functions Executive Integrated Risk Management Committee (EIRMC) Personal Banking Corporate Banking Assets and Liabilities Committee (ALCO) Credit Policy Committee (CPC) Executive Committee on Monitoring NPAs (ECMN) Business Continuity Management Steering Committee (BCMSC) International Operations Investment Banking Dealing and Treasury Support Functions Information Security Council (ISC) Executive Investment Committee (EIC) Executive Human Resources Steering Committee (EHRSC) Strategy Development Committee (BSDC) Executive Strategy Development Committee (ESDC) Consultant to BAC Consultant to BTC Mandatory Committees 120 Voluntary Committees Commercial Bank of Ceylon PLC Annual Report 2021 Appointment Flow Responsibility Flow – Direct > Annual Corporate Governance Report Responsibility Flow – Indirect
  123. Conflicts of interest (Principle A.10) The Bank has a meticulous system in place to avoid conflict of interest. At an individual level, members of the Board declare conflicts of interest situations and withdraw from taking part in deliberations on/exercising influence over matters where conflict or the appearance of conflict of interest arises. The actions are appropriately minuted for future reference. In addition, the affiliations and transactions of Directors are regularly reviewed to ensure that there are no conflicts or relationships that might impair Directors’ independence. The Board approved Related Party Transactions Policy of the Bank sets out the procedure to be adopted in granting accommodations to the Directors, their close family members, and entities in which the Directors hold directorships, as permitted by the rules and regulations of the CBSL and within the terms and conditions such facilities are provided to other customers of the Bank. Such facilities, if any, are reviewed and recommended by the BCC and are submitted to the Board for approval. Once approved, details of such facilities are tabled at the next scheduled meetings of the BRPTRC for information purposes. The section on “Directors’ Interest in Contracts with the Bank” on page 158 discloses the details of transactions carried out in the ordinary course of business on an arm’s length basis with entities where the Bank’s Chairman or Directors serve as the Chairman or as a Director in another entity, while Note 63 to the Financial Statements on pages 302 to 306 carries information on Related Party Disclosures. At the point of joining and annually thereafter, the Directors declare their interests, and necessary procedures are in place to ensure that there are no conflicts of interest which will compromise the independence of members. A register of such declared interests is maintained by the Company Secretary of the Bank and is available for inspection by shareholders or their authorised representatives as required by the Section 119 (1) (d) of the Companies Act No. 07 of 2007 and amendments thereto. Board meetings (Principle A.1.1) In the year 2021, the Board held fifteen (15) scheduled meetings (seventeen in 2020) of which one (01) meeting (one meeting in 2020) was devoted exclusively to deliberations on strategy, with all members of Corporate Management being present. Thirteen (13) meetings (fifteen meetings in 2020) were devoted to matters including large and material transactions, review of performance, review and approval of a revised budget for 2021, review of policy frameworks, capital planning, strategy, and risk. Subsequent to the election/re-election of Directors at the Annual General Meeting > Annual Corporate Governance Report (AGM) in place of those who retired by rotation, a further meeting was held to review and revise the composition of the Board Committees. Such meetings are seen to provide an effective forum for discharging the oversight responsibility of the Board, and although the outbreak of COVID-19 resulted in the physical format of these meetings needing to change, creating a new challenge to holding such meetings, the Bank successfully handled the transition to virtual platforms. All meetings of the Board and Board Committees were conducted in accordance with guidelines issued by the health authorities, with limited physical attendance taking place while some of the Directors connected via virtual platforms. As such, the Bank showcased its ability to adapt to the new normal during the pandemic, thereby continuing its successful pattern of corporate governance, and Measurement of Credit Facilities and Direction No. 14 of 2021 on Classification, Recognition, and Measurement of Financial Assets other than Credit Facilities in Licensed Banks - which became effective from January 1, 2022 in particular, the Board also reviewed the changes these Directions would require to existing policies, processes and newly introduced policies of the Bank. The Board continued to play an active role in strategy formulation, providing directions to the Corporate Management for the preparation of the Bank’s five-year strategic plan spanning 2022-2026. This plan was then reviewed and approved at a meeting specifically convened for this purpose, in December 2021. This meeting saw members of the Corporate Management present plans on areas coming under their purview, and extensive deliberations were made on said presentations, with the Board exploring and evaluating alternative strategies prior to the approval and allocation of resources for execution of the same. The Board continued to give prominence to the capital management strategy in the wake of the increasing tax burden and the potential for higher credit losses following moratoriums and difficulties faced by the borrowers, all in a bid to support growth and ensure sustainable value creation. One of the regular agenda items at the monthly Board meetings is to review performance against the strategic plans, devoting sufficient attention and time to review progress made and to identify areas of concern requiring further attention by the Board. In addition, the Board paid heightened attention to credit quality, closely monitored exposures to risk elevated industries, reviewed the reasonableness of the impairment methodology, monitored movements in staging of exposures, and looked at resolving distressed credit facilities. Further, through periodic presentations made by the respective Chief Executive Officers and/or Managing Directors, the Board also reviewed the performance and future plans of the subsidiaries of the Bank. Due to the new directions issued by the Central Bank of Sri Lanka - Directions No. 13 of 2021 on Classification, Recognition, Commercial Bank of Ceylon PLC Annual Report 2021 121
  124. Figure – 28: Composition of the Board and attendance (Principle A.4 and A.5) DOA Age (Years) Membership Status Meeting Attendance Eligible to attend/ Attended Board Sub Committee Membership Mode of Participation BAC Justice K Sripavan 26.04.2017 69 NED ID 15/15 13 2 Prof A K W Jayawardane 21.04.2015 61 NED ID 15/15 11 4 Mr S Renganathan 17.07.2014 59 ED NID 15/15 14 1 Mr K Dharmasiri 21.07.2015 68 NED ID 15/15 9 6 Mr L D Niyangoda 26.08.2016 65 NED ID 15/15 11 4 Ms N T M S Cooray 19.09.2016 63 NED ID 15/15 9 6 Mr T L B Hurulle 05.04.2017 69 NED ID 15/15 6 9 Mr S C U Manatunge 27.07.2018 51 ED NID 15/15 15 0 Ms J Lee 13.08.2020 54 NED ID 15/15 0 15 16.09.2020 60 NED ID 15/15 9 6 Mr S Muhseen 15.02.2021 46 NED ID 14/14 9 5 Mrs D L T S Wijewardena 31.03.2021 48 NED ID 10/10 5 5 Chairman Deputy Chairman MD/GCEO Director Director Director Director Executive Director/COO Director Mr R Senanayake Director Director Director BIRMC BNC BHRRC BRPTRC BCC C C C M M BI M BI BI M M M C BTC C C BI M BI BI BI M M C M M 4+ M 6+ M M M 7+ M M M M 6+ M 5+ M 5+ M M C M M M M M M M M 4+ M C M M M BIC Tenure on the Board BSDC (Years) M M M 3+ M 1+ M 1+ M >1 >1 DOA – Date of Appointment, ED – Executive Director, NED – Non-Executive Director, ID – Independent Director, NID – Non-Independent Director In Person participation C - Chairman Virtual participation M - Member BI - By Invitation Figure – 29: Composition of the Board (As at December 31, 2021) Non-Executive and Executive Directors Independent Non-Executive Directors - 10 Executive Directors (MD/GCEO, COO) - 2 Board’s gender composition Female - 3 Male - 9 Tenure on the Board (Years) 0 1 2 3 4 5 6 7 8 Year Board of Directors’ industry/background experience 122 Banking and Management Agriculture Chemical Finance and Accounting Law 6 1 4 1 Commercial Bank of Ceylon PLC Annual Report 2021 > Annual Corporate Governance Report Science, Engineering and IT 3 Risk Management and International Capital Markets 4
  125. Diversity and Inclusion go hand in hand at the Bank , with a wide array of diverse people and voices all being inclusively heard in the working environment, all towards the overall progress of the Bank. Board Committees (Principles A.7.1, D.3 and D.4) Board Committees are appointed both in terms of compulsory requirements and voluntarily. Out of the Nine Board Committees that have been appointed with delegated authority to strengthen governance and to deal with/decide on certain subject-specific and specialised matters, five are mandatory whilst four are voluntary. Four out of five mandatory Committees have been formed as required by the Direction, while the Board Related Party Transactions Review Committee has been formed as required by the provisions of the Securities and Exchange Commission of Sri Lanka (SEC). The other four voluntary Board Committees have been established considering the business, operational, information technology, and strategy development needs of the Bank as permitted by the Bank’s Articles of Association. Constituted with Board-approved Terms of Reference, these Committees hold regular meetings- once a quarter as the minimumand report proceedings to the Board for information/approval. The Board Committees have sought guidance and advice of external consultants on several occasions. Further, each of the Directors served in a minimum of three Committees during the year. The Board, however, retains responsibility for all Committee decisions, thereby ensuring the continuance of good corporate governance. Proceedings of the Board Committees were regularly reported to the Board and any concerns identified in relation to specialised areas were also referred to them for oversight. The minutes for these meetings carefully ascertain and record the views and deliberations of the Directors on issues under consideration. The composition, areas of oversight responsibility under respective mandates, key activities in 2021, and attendance of members at the Board Committee meetings are given in the respective Board Committee reports given on pages 129 to 145. Executive Management Committee The Executive Management Committee (EMC) comprises of all Corporate Management members including the Managing Director/Group Chief Executive Officer and the Chief Operating Officer, who are also the two Executive Directors (EDs) of the Bank. The primary responsibility of the EMC is to implement strategy- as approved by the Board under the leadership of the Managing Director/Group Chief Executive Officer- and deliver on the performance objectives, while ensuring that the risks undertaken by the Bank are within the risk profile approved by the Board. The EMC > Annual Corporate Governance Report has a number of responsibilities such as laying down policies, making operational decisions, monitoring financial performance against budgets, reviewing achievement of strategic goals set for business divisions, allocating capital, monitoring the progress of implementing the Digital Road Map, managing risk, deliberating on human resource development including health and safety, fortifying the compliance function, and solving operational and customer issues. Beyond the above functions, the EMC also reviews and deliberates information prior to Board review, thereby ensuring that the Board is provided with all material information in a timely and detailed manner, thus aiding the Board to effectively fulfil their oversight responsibilities as Directors. In addition, the EMC meetings provide all members with the opportunity to gain a 360o view of the Group’s operations. This year, seven members of the Corporate Management, including the CEO, were re-designated to reflect the role they play in the subsidiaries and the associate of the Group, thereby maintaining relevance within the EMC. The names, designations, qualifications, and experience of EMC members are given in the section on Corporate Management and Profiles on pages 110 and 112, while the names of Senior Management related to the Bank’s operations in Sri Lanka, Bangladesh, the Maldives, Myanmar, and the subsidiaries in Sri Lanka are given on pages 113 to 116. Management Committees In addition to the Board Committees and the EMC, corporate governance consists of several other Management Committees created along subject specific lines to facilitate decision-making and executing Board- approved strategies. These Management Committees are set under delegated authority from the Managing Director/Group Chief Executive Officer. Based on approved Terms of Reference, the Management Committees operate under a structure and process similar to that of the Board Committees. Detailed minutes are recorded by each of the Committee Secretaries, which are then submitted to the relevant Board Committees after approval by the Managing Director/Group Chief Executive Officer. These Committees undertake extensive deliberations, cooperate across departments, and debate on matters considered critical for the Bank’s operations as described in the Figure 30 given on page 124. Commercial Bank of Ceylon PLC Annual Report 2021 123
  126. Figure – 30: Executive Management committees Executive Integrated Risk Management Committee (EIRMC) Assets and Liabilities Committee (ALCO) Purpose and tasks Purpose and tasks Purpose and tasks Monitors and reviews all risk exposures and risk-related policies and procedures affecting credit, market and operational areas in line with the directives from the BIRMC. Optimises the Bank’s economic goals whilst maintaining liquidity and market risk within the Bank’s predetermined risk appetite. Reviews and approves credit policies and procedures pertaining to the effective management of all credit portfolios within the lending strategy of the Bank. Composition Managing Director/Group Chief Executive Officer, Chief Operating Officer and key members of Integrated Risk Management, Personal Banking, Corporate Banking, Treasury, Internal Audit, Compliance, Finance and Information Security Divisions. Composition Managing Director/Group Chief Executive Officer, Chief Operating Officer and key members of Treasury, Corporate Banking, Personal Banking, Integrated Risk Management, Marketing and Finance Divisions. Meeting Frequency: Fortnightly Meeting Frequency: Monthly Executive Committee on Monitoring NPAs (ECMN) Business Continuity Management Steering Committee (BCMSC) Composition Managing Director/Group Chief Executive Officer, Chief Operating Officer and key members of Corporate Banking, Personal Banking, Integrated Risk Management, Internal Audit, Marketing and Credit Supervision & Recoveries Divisions. Meeting Frequency: Quarterly Information Security Council (ISC) Purpose and tasks Purpose and tasks Purpose and tasks Reviews and monitors the Bank’s Non-Performing Advances (NPAs) above a predetermined threshold to initiate timely corrective actions to prevent/reduce credit losses to the Bank. Directs, guides, and oversees the activities of the Business Continuity Plan of the Bank in accordance with the Bank’s strategy. Focuses continuously on meeting the information security objectives and requirements of the Bank in line with emerging technology and Bank's Strategy. Composition Managing Director/Group Chief Executive Officer, Chief Operating Officer and key members of the Corporate Banking, Personal Banking, Credit Supervision & Recoveries, and Integrated Risk Management Divisions. Composition Chief Operating Officer and key members of Human Resources Management, Personal Banking, Corporate Banking, IT, Services, Operations, Integrated Risk Management and Internal Audit. Meeting Frequency: Quarterly Meeting Frequency: Monthly Executive Investment Committee (EIC) Executive Human Resources Steering Committee (EHRSC) Composition Managing Director/Group Chief Executive Officer, Chief Operating Officer and key members of Human Resources Management, Services, Operations, IT and Information Security Divisions. Meeting Frequency: Monthly Executive Strategy Development Committee (ESDC) Purpose and tasks Purpose and tasks Purpose and tasks Oversees investment activities by providing guidance to the management on significant investment decisions and reviews performance. Setting guidelines and policies on any matter that may affect the Human Resource Management of the Bank and make recommendations on policy matters to the BHRRC and/or address any issues that may need to be reviewed at Board level. Based on overall insights provided by the BSDC, formulates strategies geared for the sustainable development of the Bank. Monitors the implementation of the approved strategic plan and the progress made against strategic milestones and goals. Composition Composition Managing Director/Group Chief Executive Officer, Chief Operating Officer, and key members of Human Resource Management, Personal Banking, Corporate Banking, Marketing, Finance and Treasury Divisions. Managing Director/Group Chief Executive Officer, Chief Operating Officer and key members of Human Resource Management, Marketing, Personal Banking, Corporate Banking, Treasury, Finance and Planning Divisions. Meeting Frequency: Quarterly Meeting Frequency: Quarterly Composition Managing Director/Group Chief Executive Officer, Chief Operating Officer and key members of Corporate and Personal Banking, Investment Banking, Treasury, Finance and Planning Divisions. Meeting Frequency: Quarterly 124 Credit Policy Committee (CPC) Commercial Bank of Ceylon PLC Annual Report 2021 > Annual Corporate Governance Report
  127. Roles , responsibilities, and powers of the Board (Principles A.1.2 and A.1.3) z Seeking professional advice in appropriate The role of the Board of Directors and their responsibilities are set out in the Board Charter, which includes a schedule of powers reserved for the Board as detailed below: z Reviewing, amending, and approving Role of the Board z To represent and serve interests of shareholders by overseeing and appraising the Bank’s strategies, policies, and performance z To provide leadership and guidance to Management for the execution of strategies z To optimise performance and build sustainable value for shareholders in accordance with the regulatory framework and internal policies z To establish an appropriate governance framework z To ensure regulators are apprised of the Bank’s performance and any major developments z To review the performance of the business against the goals and objectives at regular intervals Key responsibilities z Selecting, appointing, and evaluating the performance of the Managing Director/ Group Chief Executive Officer z Setting strategic direction and monitoring its effective implementation z Establishing systems of risk management, internal control, and compliance z Ensuring the integrity of the financial reporting process z Developing a suitable corporate governance structure, policies, and framework z Strengthening the safety and soundness of the Bank z Reviewing the performance of the Bank and the Group companies z Appointing members to the Board of Directors to fill casual vacancies z Appointing members of the Corporate Management of the Bank z Appointing and overseeing the External Auditors’ Responsibilities z Approving Interim and Annual Financial Statements for publication Powers reserved for the Board z Approving major capital expenditure, acquisitions, and divestitures, and monitoring capital management z Appointing the Board Secretary in accordance with Section 43 of the Banking Act No. 30 of 1988 > Annual Corporate Governance Report circumstances at the Bank’s expense governance structures and policies Board’s role in risk management (Principle D.2) Risk management is key to the long-term stability of the Bank, and this responsibility of implementing an effective risk management function in the Group falls on the shoulders of the Board, given their position as the highest decision-making authority in the Bank. With the support of the BIRMC, the Board has devised an effective risk management framework which sets the risk appetite and tolerance limits, and enables monitoring of the risk profile on a regular basis through risk reports submitted to the Board. Risk management has continued to be one of the key and regular agenda items of all Board and Committee deliberations. Clarifications were sought from Management for any deviations from the agreed risk profile and necessary guidance was given for taking mitigatory action, while risks related to the business strategies were carefully reviewed at a special Board meeting held to review the Budget for the year 2021 and deliberate on the strategic plan 2022-2026 Refer Risk Governance and Management ( on pages 159 to 178 for further details). Figure – 31 Board Highlights 2021 Approval/recommendation of a First and Final dividend for the year ended 31st December 2020 of Rs. 6.50 per share, constituting a total sum of Rs. 7,587,767,558/-, distributed by way of cash of Rs. 4.50 per share and by the allotment and issue of new shares of Rs. 2.00 per share. Approval/recommendation to issue and allot up to 100,000,000 fully paid, Basel III Compliant - Tier 2, Listed, Rated, Unsecured, Subordinated, Redeemable Debentures (“Debentures”) with a Non-Viability Conversion feature at such interest rates as may be determined by the Board at the time of issue, at a par value of Rs.100/- each with a minimum maturity period of 5 years and a maximum maturity period of 7 years. Conducted the Annual General Meeting virtually by using a digital platform in line with the guidelines issued by the regulators. Conducted an Extraordinary General Meeting to obtain approval for the debenture issue 2021 virtually by using a digital platform in line with the guidelines issued by the regulators. Appointed two independent nonexecutive Directors to strengthen the Board. Conducted a training programme on Information Security Awareness for Board of Directors. Reviewed all major policy documents. Annual strategy meeting with the Corporate Management Team. Based on recommendations made by the Board Nomination Committee, the Board approved appointments of two Assistant General Managers and two Deputy General Managers to Corporate Management and a Chief Officer was appointed on contract basis during the year. Based on the recommendation made by the Board Nomination Committee, the Board approved the re-designation of seven members of the Corporate Management of the Bank, who carry out groupwide supervisory responsibilities in relation to subsidiaries/overseas operations of the Bank. The Board approved the obtaining of a USD 50 Mn. loan from CDC Group PLC, UK. Based on recommendations made by the Board Human Resources and Remunerations committee, the Board approved the Directors’ Perquisites and Remuneration Policy. Reviewed the Composition of all Board Committees, respective Committee Charters and Terms of Reference. Commercial Bank of Ceylon PLC Annual Report 2021 125
  128. Segregation of roles of Chairman and Chief Executive Officer (Principle A.2 and A.3) With a view to facilitate balance of power and authority and adhering to the best practice in Corporate Governance, the position of Chairman and Group Chief Executive Officer are separated. The Chairman is a Non-Executive Independent Director while the Group Chief Executive Officer is an Executive Director appointed by the Board. Their respective roles are clearly set out in an approved Board paper and in the Board Charter of the Bank. Accordingly, as set out in the said Board paper and the Board Charter, clear and effective separation of accountability and responsibility has made the role of Chairman distinctive. Through providing leadership to the Board, preserving order, and facilitating the effective discharge of its duties, the Chairman promotes good corporate governance and the highest standards of integrity and probity throughout the Group. He ensures that the Board receives all information necessary for making informed decisions and discharging its responsibilities. He also ensures the effective participation of all Directors in Board deliberations and maintains open lines of communication with members of Corporate Management, acting as a sounding board on strategic and operational matters. On the other hand, the role of the Group Chief Executive Officer - as set out in the Board Charter - is to conduct the management functions as directed by the Board. The corporate objectives and the boundaries of his authority as Group Chief Executive Officer are set by the Board, while his duties and responsibilities are jointly developed. The Group Chief Executive Officer leads the Management team in the day-to-day operations and ensures implementation of strategies, plans, and budgets approved by the Board. The Group Chief Executive Officer conducts the affairs of the Group, upholding good corporate governance and the highest standards of integrity and probity as established by the Board. While they have separate functions, the Chairman and the Group Chief Executive Officer meet regularly to set the Board agenda, deliberate on current and future developments, and discuss any material issues impacting the Bank, thereby working together towards the Bank’s overall progress. The Company Secretary plays a vital role in facilitating good Corporate Governance. His responsibilities encompass activities relating to Board meetings, general meetings, Articles of Association, reports, accounts and documentation, Corporate Governance, and Stock Exchange requirements. Primary responsibilities include: z Assisting the Chairman in conducting the Board Meetings, AGMs, and EGMs in accordance with the Articles of Association, the Board Charter, and relevant legislation z Maintaining minutes of meetings and statutory registers, and filing statutory returns in time z Monitoring all Board Committees to ensure they are properly constituted and have clearly defined Terms of Reference z Facilitating best practice of Corporate Governance including assisting the Directors with their duties and responsibilities Appointments/retirements and resignations of Directors (Principle A.7) At the point of retirement or resignation of Directors, the nomination of candidates for appointment as Directors takes place under a formal and transparent procedure formulated by the BNC. The resumés of potential candidates are carefully evaluated by the BNC prior to these being recommended to the Board for their consideration as Non-Executive Directors. Such nominations may also include an interview with the candidate. The appointment of new Directors is based on an annual assessment of the combined knowledge, experience, and diversity of the Board, with new Directors chosen on their ability to bring added perspective and ensure the continued effectiveness of the Bank’s strategic plans. A similar process is followed when appointing Executive Directors, with the exception that candidates are selected from the Corporate Management of the Bank. As required by the Listing Rules, appointments of new Directors to the Board are promptly communicated to the CSE through announcements, subsequent to obtaining approval from the CBSL for their Fitness and Propriety. The announcements typically include a brief resumé of new Directors, relevant expertise, key appointments, shareholdings, and status of independence. This year, there were two new additions to the composition of the Board of Directors, the details of which are given in Figure 28 titled Composition of the Board and attendance on page 122. z Facilitating access to legal and independent professional advice in consultation with the Board, where necessary z Ensuring that the Bank complies with its Articles of Association with required amendments being incorporated in it following proper procedure z Coordinating the publication and distribution of the Bank’s Annual Reports and Accounts and interim financial statements, and preparing the Directors’ Report z Monitoring and ensuring compliance with Listing Rules including required disclosure on related parties and related party transactions, and maintaining cordial relationships with the Colombo Stock Exchange, share and debenture holders regulators The Bank has a strong element of independence on the Board, with ten of the twelve Directors as at December 31, 2021 being independent NEDs. The only Commercial Bank of Ceylon PLC Role of the Company Secretary (Principle A.1.4) z Communicating promptly with the Role of Independent Non-Executive Directors 126 connection of the independent Directors with the Bank and with other Companies in the Group is their Directorships, thereby ensuring that their judgement is unlikely to be influenced by external considerations. The presence of independent NEDs is expected to complement the skills and experience of the other Board members through the independent NED’s conveying an objective and independent view on matters, using their expertise to challenge the Board and the Management constructively, and by assisting in providing guidance on strategy. The appointment and removal of the Company Secretary is a matter for the Board as a whole. Annual Report 2021 > Annual Corporate Governance Report Re-election/election of Directors (Principle A.8) The Articles of Association of the Bank states that the two longest serving NEDs must offer themselves for re-election at each AGM in rotation, with the period of service being considered from the last date of re-election or appointment. If two or more Directors qualify for re-election in a particular year, the Directors may decide amongst themselves, either by considering the affidavits and declarations submitted by them and all other relevant issues, or by drawing lots to determine which Directors will offer themselves for re-election. Accordingly, Prof A K W Jayawardane and Mr L D Niyangoda, the two longest serving Directors since last re-election will be seeking re-election at the forthcoming AGM to be held on March 30, 2022. In addition to the above clauses, if a Director has been appointed as a result of a casual vacancy that has arisen since the previous AGM, that Director will also offer himself/herself for election at the immediately succeeding
  129. AGM . Accordingly, Mrs D L T S Wijewardena who was appointed to the Board during the year 2021 to fill a casual vacancy - will offer herself for re-election at the forthcoming AGM. It is pertinent to mention that Mr S Muhseen who was appointed to the Board on February 15, 2021 to fill a casual vacancy, offered himself for re-election at the AGM held on March 30, 2021 and his appointment was duly approved by the shareholders at the aforesaid AGM. Induction and training of Directors (Principle A.1.8) On appointment, Directors are provided with an induction pack which outlines the main areas that require familiarisation. As such, the pack includes the Articles of Association, the Banking Act Directions, the Corporate Directors’ Handbook published by the Sri Lanka Institute of Directors, the Code of Best Practice on Corporate Governance issued by CA Sri Lanka, the Bank’s organisational structure, the Board Charter, a copy of the Board Related Party Transactions Policy and the most recent Annual Report of the Bank. They are also given access to the electronic support system which has archived minutes of meetings held over the past nine years. All Directors are encouraged to obtain membership of the Sri Lanka Institute of Directors which conducts useful programmes to support Directors. Further, it is mandatory for Directors to attend Director Forums organised by the CBSL. As an additional support, members of Corporate Management and external experts make regular presentations on the business environment in relation to the operations of the Bank, which enables newly appointed directors to familiarise themselves with the banking operations. Remuneration and Benefits Policy The Remuneration and Benefits Policy seeks to provide a distinctive value proposition to current and prospective employees with the aim of attracting and retaining employees with the skills and values that are in line with the business needs of the Bank. The policy also provides a framework for the Bank to design, administer, and evaluate effective reward programmes, thereby inspiring and motivating desired behaviours, and enabling proper alignment of remuneration with the long-term success of the Bank. Directors’ and Executive remuneration (Principles A.10, B.1 and B.3) The Bank has a number of processes in place to ensure that no individual Director is involved in determining his or her own remuneration but is instead part of a larger > Annual Corporate Governance Report deciding process that makes final decisions. Primarily, the BHRRC- which consists entirely of NEDs who also meet the criteria for independence as set out in the relevant regulations on corporate governance- is responsible for making recommendations to the Board regarding the remuneration of the Directors and executives. The BHRRC in consultation with the Group Chief Executive Officer and after obtaining professional advice, where necessary, makes such recommendations. Remuneration for Directors and executives is further set out with reference to the Remuneration and Benefit Policy. The remuneration for NEDs is set by the Board as a whole. In order to provide fair judgements when discharging their duties on remuneration, the Board and the BHRRC engage the services of HR professionals on a regular basis as well. Details of the Remuneration paid to Directors is given in Note 21 to the Financial Statements on page 231. The level and make up of remuneration (Principle B.2) It is the responsibility of the BHRRC to ensure that the remuneration of both EDs and NEDs is sufficient to attract eminent professionals to the Board and retain them for driving the performance of the Bank. As such, the Bank has remuneration policies that are attractive, motivating, and capable of retaining high performing, qualified, and experienced employees. With the assistance of professionals, the BHRRC structures the remuneration packages and benchmarks it with the market on a regular basis to ensure that total remuneration levels remain competitive to attract and retain key talent whilst balancing the interests of the shareholders. The total remuneration of EDs and other members of the Corporate Management includes three components – guaranteed remuneration (the fixed component), annual performance bonus (a variable component), and the ESOP (a variable component). Special emphasis is paid to make the basis of granting ESOPs and their features transparent, prior to seeking approval from the shareholders. Guaranteed remuneration comprises the monthly salary and allowances determined with due reference to the qualifications, experience, levels of competencies, skills, roles, and responsibilities of each employee. These are reviewed annually and adjusted for factors such as promotions, performance, and inflation. The annual performance bonus is based on the degree of achievement on a multi-layered performance criteria matrix which is clearly communicated to the relevant category of employees at the beginning of each year. The Bank’s two employee associations – the Association of Commercial Bank Executives and the Ceylon Bank Employees’ Union (CBEU) with whom a regular dialogue is maintained – are also consulted when necessary. After extensive deliberation, the Bank signed the Collective Agreement with the CBEU which covers a three-year period from 2021 -2023 in early January 2021. With a view to motivate employees to commit to long term value creation, improve overall performance, and increase staff retention while raising equity funding, the Bank has structured many Employee Share Option Plans (ESOPs) since 1997. This entitles the eligible employees to buy a fixed number of shares at a price to be determined based on pre-agreed formula over the vesting period. The Bank has duly obtained the approval of shareholders for all these ESOPs at the Extraordinary General Meetings (EGMs). The EDs, being employees of the Bank, are also eligible for these ESOPs. Approval for the ESOP vested during the year was obtained from the Board after obtaining recommendation for same from the BAC. Details of the ESOPs and the eligibility criteria are given in Note 53 to the Financial Statements on “Share-based Payment” on pages 288 to 291. While employment contracts do not contain any commitments for compensation or early terminations, there were no instances of early termination during the year that required compensation. Board and Board Committee evaluations (Principle A.9) As set out in the Direction, Code, and the other applicable regulations, the Board and the Board Committees annually appraise their own performance to ensure that they are discharging their responsibilities satisfactorily in accordance with the Board Charter. This process requires each Director to fill a Board Performance Evaluation Form which incorporates all criteria specified in the Board Performance Evaluation Checklist of the Governance Code. The responses are then collated by the Company Secretary and submitted to the BNC for consideration. These are subsequently discussed at a Board meeting. Board evaluations for 2020 and 2021 were taken up at the Board Meetings held in February 2021 and February 2022 respectively. Appraisal of the Chief Executive Officer (Principle A.11) With the assistance of the BHRRC, the Board assesses the performance of the Group Chief Executive Officer annually. This assessment is based on criteria agreed at the beginning of Commercial Bank of Ceylon PLC Annual Report 2021 127
  130. each year and consists of short , medium, and long-term objectives with financial and nonfinancial targets whilst also considering the changes in the operating environment. The Chairman discusses the evaluation with the Group Chief Executive Officer and provides him with formal feedback. The Group Chief Executive Officer’s responses to the appraisal are given due consideration prior to it being approved. This exercise is finalised within three months from the financial year end. Shareholder engagement and voting (Principles C.1, C.2, E and F) The Bank actively engages with shareholders and potential investors as part and partial of good corporate governance and has put in place a structured process to facilitate the same. The Board approved Shareholder Communication Policy is in place to ensure that there is effective and timely communication of material matters to shareholders. The Bank maintains several communication channels with the shareholders which includes the Annual Report, AGMs and EGMs, Interim Financial Statements, Announcements to the CSE, press releases, the Bank’s website, shareholder surveys on need basis, and the Investor Feedback form in the Annual Report. Refer Table 03 on pages 21 and 22 on ( “How we connect with our stakeholders” for more details in this regard). During the year, shareholders were notified- either through announcements made to the CSE or via media- of quarterly results, dividend declaration for 2020, annual financial statements for 2020, interim financial statements for 2021, disclosure on Fitch Ratings Preview, appointments of two new Directors, listing of shares issued as a part of the final dividend for 2020 as well as new shares listed consequent to the exercising of options under employee share option schemes, date of the annual general meeting 2022, dealings in shares of the Bank by Directors and related entities, Basel III compliant convertible debenture issue, and the extra-ordinary general meeting for the Basel III compliant convertible debenture issue. The Bank’s website was revamped during the year, is trilingual, and has a dedicated area – Investor Relations - for investors which includes Interim Financial Statements and Annual Reports. The most recent Report was offered in both PDF and interactive format, providing readers with a choice for viewing. The Interactive Report also features a tab for investor feedback. The Board is fully committed to treating all shareholders equitably while recognising, protecting, and facilitating their rights through open communication. The Bank 128 Commercial Bank of Ceylon PLC Whistleblowing The Bank has adopted a Whistleblowers’ Charter in order to deter, detect, and address any genuine concerns of malpractices and unethical behaviour, with the Group’s Chief Compliance Officer being appointed to manage the Bank’s Whistleblowing processes. In addition, measures have been put in place to protect whistleblowers who act in good faith in the interest of the Bank. The Bank undertakes to maintain the utmost confidentiality of staff who raise concerns or make serious specific allegations of malpractices or unethical behaviour. In this way, the Bank aims to promote a healthy workplace that practices good governance from the lowest to the highest tiers. arranged to publish Interim and Annual Financial Statements in Newspapers in all three mediums within statutory deadlines as per the Directions issued by the CBSL, and also submitted Interim and Annual Financial Statements to the CSE within the stipulated timeframes in terms of the Listing Rule 7.4 of the CSE, all amidst the challenges faced during the pandemic. The Bank always encourages shareholders to participate at the AGMs and the EGMs and exercise their votes. To this end, the Bank circulates clear instructions on procedures governing voting along with every notice of AGMs/ EGMs. Shareholders play a key role in the re-election of Directors and the External Auditor, and vote on all matters for which Notice is given including the adoption of the Annual Report and Accounts. Although the Bank could not conduct the AGM with the physical presence of its shareholders due to the outbreak of COVID-19 (as per the Notice of Meeting published in the Annual Report 2020), after giving due Notice and publicity, it successfully conducted the Fifty Second AGM as a virtual meeting. The meeting fully adhered to the guidelines issued by the Government health authorities and regulators while ensuring maximum shareholder participation, providing every opportunity for shareholders to clarify matters of interest to them. A total of 69 Voting and 11 Non-Voting shareholders participated in the Fifty Second AGM held virtually on March 30, 2021, while a further 137 Voting shareholders and 08 Non-Voting shareholders exercised their right to vote through proxy. The 08 Non-Voting shareholders exercised their right to vote through proxy strictly in relation to matters designated for their vote. Anti-Bribery and Anti-Corruption The Bank adopted a Board approved Anti-Bribery and Anti-Corruption Policy during the year, clearly setting out principles for countering bribery and corruption in the Bank. The principles also set out the management of bribery and corruption risk by requiring the Bank, Bank personnel, and defined third parties to commit to countering bribery and corruption in all forms in relation to transactions routed through or involving the Bank. The Bank has zero tolerance for any form of bribery and corruption and will treat potential instances of bribery or corrupt behaviour as a threat to its integrity and reputation as a business. The Bank developed the Policy in accordance with these commitments as well as in adherence to the applicable laws and regulations, with a view to promote a culture of compliance. As set out in this Policy, all employees are responsible for the prevention and mitigation of bribery and corruption within their own roles and responsibilities. In addition, every single employee of the Bank has been issued with a Code of Ethics containing guidelines that encompass a wide range of aspects, which, inter-alia, include the prevention of insider dealing in securities, outlines the internal rules on the purchase/sale of the Bank’s shares, notes down the Gift Policy, highlights how to manage conflicts of interest, provides information on combating financial crimes, and discusses the importance of respecting communities and the environment etc. A detailed discussion is given in the section on “Prudent Growth” on page 40. Shareholder approval was received at a virtual EGM held on August 9, 2021 for issuing Basel III compliant convertible debentures for augmenting Tier II capital and to support future lending growth of the Bank, raising Rs. 8.595 Bn. in Tier II capital consequently. A summary of the details of shareholder attendance at AGMs during the past five years is given in the Table below: Table – 44: Attendance at AGMs – 2017 to 2021 Annual Report 2021 Voting shareholders (including proxies) AGM of the year Number of attendees Shareholding Non-voting shareholders (including proxies) % of total shareholding Number of Attendees Shareholding % of total shareholding 2021 169 795,052,531 72.32 19 4,326,942 6.36 2020 119 672,118,061 69.92 19 3,132,256 4.72 2019 346 703,703,954 73.21 145 12,048,304 18.18 2018 317 713,801,082 75.52 119 14,344,030 22.06 2017 387 688,571,770 81.41 126 5,694,130 9.80 > Annual Corporate Governance Report
  131. Board Committee Reports Report of the Board Audit Committee Composition of the Committee Charter of the Committee During the year under review , the Board Audit Committee (the BAC) comprised of the following members. Profiles of the members as at December 31, 2021 are given on pages 106 to 109. The Board approved Charter of the BAC (the Committee) clearly defines the Terms of Reference of the Committee. It is annually reviewed to ensure that new developments relating to the Committee’s functions are addressed. The Charter of the Committee was last reviewed and approved by the Board on October 27, 2021. Board members and attendance During the year, special emphasis was given to enhance the scope of internal audit work to cover testing of controls over granting debt moratoriums, relief measures and recoveries. R Senanayake Chairman – Board Audit Committee Mr R Senanayake* (Chairman) 08/08 Mr K Dharmasiri* (Member) 08/08 Ms N T M S Cooray* (Member) 08/08 Ms J Lee* (Member) 08/08 Mrs D L T S Wijewardena* (Member) (Appointed to BAC w.e.f March 31, 2021) 08/08 Regular attendees by invitation 07/08 Mr S Renganathan (Managing Director/Group Chief Executive Officer) 08/08 Mr S C U Manatunge (Director/Chief Operating Officer) Mr K D N Buddhipala (Group Chief Financial Officer) Mr S K Hettihamu (Group Chief Risk Officer) Mr J Premanath (Group Chief Internal Auditor) Ms A V P K T Amarasinghe (Group Chief Compliance Officer) Mr R Mihular (Senior practicing Chartered Accountant, appointed as an Independent Consultant to the Committee to provide necessary assistance in discharging its functions) Secretary to the Committee Mr J Premanath (Group Chief Internal Auditor) *Independent Non-Executive Director The Committee assists the Board in discharging its responsibilities and exercises oversight over financial reporting, internal controls and internal/external audits. The Committee has full access to information, cooperation from Management and discretion to invite any Director or Executive Officer to attend its meetings. The Banking Act Direction No. 11 of 2007 on “Corporate Governance for Licensed Commercial Banks in Sri Lanka” and its subsequent amendments (hereinafter referred to as the Direction), “Rules on Corporate Governance under Listing Rules of the Colombo Stock Exchange”, and the “Code of Best Practice on Corporate Governance”, issued by The Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka) further regulate the composition, role and functions of the Committee. The Committee is empowered by the Board to: z Ensure that financial reporting systems in place are effective and well managed in order to provide accurate, appropriate and timely information to the Board, Regulatory Authorities, the Management and other stakeholders. z Review the appropriateness of accounting policies and ensure adherence to statutory and regulatory compliance requirements and applicable accounting standards. z Ensure that the Bank adopts and adheres to high standards of corporate governance practices, conforming to the highest ethical standards and good industry practices in the best interest of all stakeholders. z Evaluate the adequacy, efficiency, and effectiveness of risk management measures, internal controls and governance processes in place to avoid, mitigate, or transfer current and evolving risks. z Monitor all aspects of internal/external audit and inspection programme of the Bank and review Internal and External Audit Reports for follow up with the Management on responses to their findings and recommendations. Commercial Bank of Ceylon PLC Annual Report 2021 129
  132. z Review the Interim and Annual Financial Statements of the Bank in order to monitor the integrity of such Statements prepared for disclosure , prior to submission to the Board. Activities in 2021 The Committee held eight (08) meetings during the financial year ended December 31, 2021. Proceedings of these meetings with adequate details of matters discussed were regularly reported to the Board. Representatives of the Bank’s External Auditors, Messrs Ernst & Young too participated in all eight (08) meetings during the year by invitation. The Committee also invited members of the Senior Management of the Bank to participate in the meetings from time to time on an as needed basis. Reporting of financial position and performance: The Committee assisted the Board in its oversight on the preparation of Financial Statements to evidence a true and fair view on financial position and performance. This process is based on the Bank’s accounting records and in accordance with the stipulated requirements of the Sri Lanka Accounting Standards. In fulfilling its oversight responsibilities, the Committee reviewed and discussed the Interim and Annual Financial Statements for the Bank and the Group, including the acceptability of the accounting principles and the reasonableness of significant estimates and judgements. The Committee reviewed the Tax Assessments outstanding and action initiated for follow up for resolution through regular reports submitted by the Group Chief Financial Officer. The prevailing internal controls, systems and procedures were assessed by the Committee and it expressed the view that adequate controls and procedures were in place to provide reasonable assurance to the effect that the Bank’s assets are safeguarded and the financial position of the Bank is well monitored and accurately reported. Annual review of the policy on adoption of Sri Lanka Accounting Standards SLFRS 9 The Committee reviewed the revised policy document on Adoption of the Sri Lanka Accounting Standard SLFRS 9 on Financial Instruments during the year 2021 and made recommendations for implementation. 130 Commercial Bank of Ceylon PLC The Committee also followed up and monitored the progress of the implementation of IT Systems and automation of the processes for the preparation of Financial Statements as per the Sri Lanka Accounting Standards and Regulatory Requirements. Internal Capital Adequacy Assessment Process (ICAAP): The Committee reviewed the effectiveness of internal control mechanism in place to meet the regulatory requirements on ICAAP and the mechanism in place to ensure integrity, accuracy, and reasonableness in capital assessment process of the Bank for the year 2020, as per the Section 10 (in Pillar II – Supervisory Review Process) of the Banking Act Direction No. 01 of 2016 on “Regulatory Framework on Supervisory Review Process”. Oversight on regulatory compliance: The Committee also ensured that the Bank complies with all regulatory and legal requirements and closely scrutinized compliance with mandatory banking and other statutory requirements and the systems and procedures that are in place. The quarterly reports submitted by the Group Compliance Officer were used by the Committee to monitor compliance with all such legal and statutory requirements. The Bank’s Inspection Department has been mandated to conduct independent test checks covering all regulatory compliance requirements, as a further monitoring measure. The Committee monitored the progress on implementation of the recommendations made in the Statutory Examination Reports of the Central Bank of Sri Lanka (CBSL) through regular follow-up reports tabled during the year 2021. Identification of risks and control measures: The Bank has adopted a risk-based audit approach towards assessing the effectiveness of the internal control procedures in place to identify and manage all significant risks and that these are being reviewed by the Committee. During the year, special emphasis was given to enhance the scope of internal audit work to cover testing of controls over granting debt moratoriums, relief measures and recoveries. Annual Report 2021 > Board Committee Reports The Committee sought and obtained the required assurances from Business Units on the remedial action in respect of the identified risks to maintain the effectiveness of internal control procedures. Internal audit and inspection: The Committee ensured that the internal audit function is independent of the activities it audited and that it was performed with impartiality, proficiency, and due professional care. The Committee approved the Programme of Inspection/IS Audit for the year 2021 formulated by the Inspection Department and the Information Systems Audit Unit (ISAU). The progress and scope of Inspections/IS Audits were continuously reviewed to ensure that appropriate corrective actions have been taken to manage risks identified during lockdowns, and curtailed business operations during the COVID-19 pandemic. The scope of work was enhanced/realigned to include credit audits and remote, work from home business operations through online and off-site audit procedures. The Bank’s Inspection Department carried out, onsite, offsite and online inspection of Business Units including four (4) subsidiaries in Sri Lanka and operations in Bangladesh. Overseas subsidiaries namely Commercial Bank of Maldives Private Limited, CBC Myanmar Microfinance Co. Ltd. and Commex Sri Lanka S. R. L., a subsidiary incorporated in Italy were monitored through an off-site surveillance. With the concurrence of the Board, the Bank continued to engage the services of four (4) firms of Chartered Accountants approved by the CBSL in order to supplement the Bank’s Inspection Department in carrying out inspection assignments. Five hundred and thirty-seven (537) inspection reports on Business Units including subsidiaries and overseas operations received the attention of the Committee which highlighted the operational deficiencies, risks, and the recommendations. The Committee evaluated the Bank’s system of internal controls and duly reported its findings to the Board. Major findings of internal investigations with recommendations of the Management were considered and appropriate instructions issued. The Committee also invited representatives from the audit firms assisting in inspections to make presentations on their observations and findings.
  133. ISAU conducted on-site /off-site audits (Bank and Group) covering local and overseas operations. Audits conducted through system-based audit tools, reviews of systems change management activities under the agile approach and verification of compliance with industry standards such as ISO 27001:2013/ PCI-DSS/ Baseline Security Standards (BSS) to ensure safeguarding of IT assets of the Bank. z Discussing all relevant matters arising The Committee paid attention to significant findings and recommendations related to IT Governance, Cyber Security, Network Security, Physical and Logical Access Management, Endpoint Security, Privileged and Vendor Access Management, Robotic Process Automation, Vulnerability Assessment and Penetration Testing Process made in the reports submitted by the ISAU. The Committee also reviewed the reports on findings relating to business continuity planning and disaster recovery arrangements during the year 2021. The Auditors were provided with the opportunity of meeting Non-Executive Directors separately, without any Executive Directors being present, to ensure that the Auditors had the opportunity to discuss and express their opinions openly on any matter. It provided the assurance to the Committee that the Management has provided all information and explanations requested by the Auditors and also that the Management has not imposed any restrictions on their scope of work. Reviewed the Internal Audit report on the independent assessment of the degree of compliance with the Banking Act Direction No. 11 of 2007 issued by the CBSL on Corporate Governance and Code of Best Practice on Corporate Governance issued by the CA Sri Lanka. Reviewed the adequacy and integrity of the Bank’s Management Information System (MIS) through internal audit reports to ascertain whether information presented to the Board is “fit for purpose”. External audit: The Committee played the following role with regard to the external audit function of the Bank: z Assisting the Board in engaging External Auditors for audit services, in compliance with the provisions of the Direction and agreeing on their remuneration with the approval of the shareholders. z Monitoring and evaluating the independence, objectivity, and effectiveness of the External Auditor. z Reviewing non-audit services provided by the Auditors, with a view to ensuring that such functions do not fall within the restricted services and provision of such services will not impair the External Auditor’s independence and objectivity. z Discussing the audit plan, scope and the methodology proposed to be adopted in conducting the audit with the Auditors, prior to commencement of the annual audit. > Board Committee Reports from the interim and final audits, and any matters the Auditor may wish to discuss, including matters that may need to be discussed in the absence of Key Management Personnel. z Reviewing the External Auditor’s Management Letter and the Management responses thereto. At the conclusion of the audit, the Committee also met the Auditors to review the Auditor’s Management Letter before it was submitted to the Board and the CBSL. The members of the Committee evaluated the Bank’s External Auditor, Messrs Ernst & Young covering key areas such as scope and delivery of audit, resources and quality assurance initiatives, during the year 2021. Mechanism of internal controls: Sections 3 (8) (ii) (b) and (c) of the Banking Act Direction No. 11 of 2007 stipulate the requirements to be complied with by the Bank to ensure reliability of the financial reporting system in place at the Bank. Conduct, ethics and good governance: The Committee continuously emphasized on upholding ethical values of the staff members. In this regard, the Bank has a Code of Ethics, a Whistleblower’s Charter and an Anti-Bribery and Anti-Corruption Policy in place which ensure and encourage all staff members to be ethical, transparent and accountable and resort to whistleblowing if they suspect any wrongdoings or other improprieties. Highest standards of corporate governance and adherence to the Bank’s Code of Ethics were ensured. All appropriate procedures were in place to conduct independent investigations into incidents reported through whistleblowing or identified through other means. The Whistleblower’s Charter guarantees the maintenance of strict confidentiality of the identity of the whistleblowers. Evaluation of the Committee: An independent evaluation of the effectiveness of the Committee was carried out by the other members of the Board during the year. Considering the overall conduct of the Committee and its contribution on the overall performance of the Bank, the Committee has been rated as highly effective. R Senanayake Chairman – Board Audit Committee The Committee is assisted by the External Auditor and the Inspection Department to closely monitor the procedures designed to maintain an effective internal control mechanism to provide reasonable assurance that this requirement is being complied with. February 25, 2022 In addition, the Committee regularly monitored all exceptional items charged to the Income Statement, long outstanding items in the Bank’s chart of accounts, credit quality, risk management procedures and adherence to classification of nonperforming loans and provisioning requirements specified by the CBSL. The Committee also reviewed the credit monitoring and follow-up procedures and the internal control procedures in place to ensure that necessary controls and mitigating measures are available in respect of newly identified risks. Commercial Bank of Ceylon PLC Annual Report 2021 131
  134. Report of the Board Integrated Risk Management Committee Composition of the Committee During the year under review , the Board Integrated Risk Management Committee (the BIRMC) comprised of the following Board members. Profiles of the members as at December 31, 2021, are indicated on pages 106 to 109. Board members and attendance Prof A K W Jayawardane* (Chairman) Embracing Data Analytics to facilitate predictive capabilities, the Bank initiated implementation of an Early Warning Signals (EWS) system aimed at maintaining the overall credit quality of the lending portfolio. 05/05 05/05 Mr S Renganathan (Managing Director/Group Chief Executive Officer) Mr K Dharmasiri* (Director) 05/05 Mr L D Niyangoda * (Director) 05/05 Mr T L B Hurulle* (Director) 05/05 Ms J Lee* (Director) 05/05 Mr R Senanayake* (Director) 05/05 Mrs D L T S Wijewardena* (Director) (Appointed to BIRMC w.e.f. March 31, 2021) 03/04 Non Board member Mr S K K Hettihamu (Group Chief Risk Officer Regular attendees by invitation 05/05 Mr S C U Manatunge (Director/Chief Operating Officer) Ms A V P K T Amarasinghe (Group Chief Compliance Officer) *Independent Non-Executive Director z As was in the year 2020, the main focus Charter of the Committee The BIRMC has been established by the Board of Directors, in compliance with the Section 3(6) of the Direction No. 11 of 2007, on “Corporate Governance for Licensed Commercial Banks in Sri Lanka”, issued by the Monetary Board of the CBSL under powers vested in the Monetary Board, in terms of the Banking Act No. 30 of 1988. The composition and the scope of work of the Committee are in line with the same, as set out in the BIRMC Charter which was reviewed during December 2021, and clearly sets Commercial Bank of Ceylon PLC Annual Report 2021 All key risks such as Credit, Operational, Market, Liquidity, Information Technology, Strategic, etc. are assessed by the BIRMC regularly through a set of defined risk indicators. The Committee works very closely with the Key Management Personnel and the Board in fulfilling its statutory, fiduciary and regulatory responsibilities for risk management. The risk profile of the Bank is communicated to the Board of Directors periodically through the Risk Assessment report submitted to the Board following each BIRMC meeting. Mr K D N Buddhipala (Group Chief Financial Officer) Secretary to the Committee 132 The BIRMC assists the Board of Directors in fulfilling its responsibilities for overseeing the Bank’s risk management framework and activities, including the review of major risk exposures and the steps taken to monitor and control those exposures pertaining to the myriad of risks faced by the Bank in its business operations. Duties of the BIRMC include determining the adequacy and effectiveness of such measures, and to ensure that the actual overall risk profile of the Bank conforms to the desirable risk profile of the Bank, as defined by the Board. Material risk types within specific risks that the Bank may face due to existing risks or forward looking emerging risks that require action to minimize their impacts in future are given special attention. Activities in 2021 In discharging the above duties and responsibilities vested on the BIRMC, the Committee reviewed significant risks comprising of Strategic, Operational, Credit, Market, Cyber and other Emerging risk categories during the year. The activities carried out by the Committee are given below: Mr K S A Gamage (Assistant General Manager – Information Technology: Operations) Prof A K W Jayawardane Chairman – Board Integrated Risk Management Committee out the membership, authority, duties and responsibilities of the BIRMC as described in the “Risk Governance and Management” Section of this Annual Report on pages 159 to 178. > Board Committee Reports area for the year 2021 too was on the deteriorated credit quality level of the industry amidst socio-economic challenges that the country is facing due to the COVID-19 global pandemic situation. Deliberations on sectors affected and the factors that are within the control of the Bank to mitigate the risks were given due cognisance with a view to arresting deterioration of credit quality. z Latter part of the year, the focus heavily shifted towards analyzing and reviewing the strategies adopted by the Management to cater to the increasing Foreign Currency (FCY) demand amidst the dearth in
  135. FCY liquidity in the market as a result of depleting FCY reserves , shift in risk appetite of foreign counterparts when lending to Sri Lankan institutes due to sovereign rating downgrade by rating agencies during the year. z The business strategy of the Bank was reviewed by the Committee in line with the changes taken place in external economic factors of the country. Amidst the rising interest rates and FCY liquidity shortage in the interbank market, the Committee focused on identification of the priorities of the business strategy to optimize the growth, profitability and asset quality. z Technological assistance in our journey in the digital space through embracing Data Analytics to facilitate predictive capabilities was identified as a stepping stone. With such backdrop, Early Warning Signals (EWS) system aimed at maintaining the overall credit quality of the lending portfolio was initiated. z Approval of parameters and limits set by the Management against various categories of risk upon ascertaining that they are in accordance with the relevant laws and regulations as well as the desired policy levels stipulated by the Board of Directors, were given attention in a very dynamic and challenging environment. z An important decision was taken in the year 2021 to extend the Social and Environmental Management System (SEMS) to cover the entire CBC Group and accordingly, the Social and Environmental (S&E) Policy was structured to cover the entire Group operations. Development and implementation of systematic and tailor made S&E risk assessment and management procedures of Maldives Operations, Myanmar Operations and CBC Finance have taken placed parallel to the Group S&E policy development. z As a framework for performance measurement, pricing strategy aligned to underlying risk and optimization of capital allocation, Risk Adjusted Return on Capital (RAROC) framework which enables the assessment of economic feasibility of a credit exposure by incorporating the risk and return of a lending transaction was implemented at the Bank. z Reviewed periodic reports from the Management on the metrics used to measure, monitor and manage risks, including acceptable and appropriate levels of risk exposures. The reviews covered movements from inherent to residual risk levels which indicate the progress in implementing controls and assessing the effectiveness of measures for addressing the sources of risk. > Board Committee Reports z Improvements were recommended to the Bank’s Risk Management Framework and related policies and procedures as deemed suitable, in consideration of anticipated changes in the economic and business environment, including consideration for emerging risks, legislative or regulatory changes and other factors considered relevant to the Group’s risk profile. z The Key Risk Indicators (KRIs) designed to monitor the level of specific risks were reviewed regularly, with a view to determining the adequacy of such indicators to serve the intended risk management objectives and took proactive measures to control risk exposures. The actual results computed monthly were reviewed against each risk indicator and prompt corrective actions were recommended to mitigate the effects of specific risks, in case such risks exceeded the prudent thresholds defined by the Board of Directors. z Reviewed and revised the Terms of Reference of all Management Committees dealing with specific risks or some aspects of risk, such as the Executive Integrated Risk Management Committee, Executive Committee on Monitoring NPLs, Credit Policy Committee, Information Security Council, Asset and Liability Committee, etc. Actions initiated by the Senior Management were monitored periodically to verify the effectiveness of the measures taken by these respective Committees. z Operational efficiency, disruptions to services that lead to customer inconvenience, extended outage of Bank’s payment platforms, controls available when there is increased uptake in digital solutions were deliberated under new normal business environment that the Bank is facing subsequent to COVID–19 pandemic. z The annual work plans, related strategies, policies and frameworks of the above Committees were reviewed to ensure that these Committees have a good understanding of their mandates and adequate mechanisms to identify, measure, avoid, mitigate, transfer or manage the risks within the qualitative and quantitative parameters set by the BIRMC. z Reviewed and approved the Internal Capital Adequacy Assessment Process (ICAAP) results related to Commercial Bank Group entities to ensure that the Group maintains an appropriate level and quality of capital in line with the risks inherent in its activities and projected business performance. z Unusual and unprecedented changes experienced by the Bank arising out of socioeconomic and geo-political factors that had given rise to extreme market movements and their impact on the capital and the Bank’s performance reviewed closely by the BIRMC and mitigatory measures were deliberated to reduce the impact. z Monitored the effectiveness and the independence of the risk management function within the Bank and ensured the adequacy of resources deployed for this purpose. z Reviewed the effectiveness of the compliance function to assess the Bank’s compliance with laws, regulations, regulatory guidelines, internal controls and approved policies in all areas of business operations. Increasing regulatory expectations, challenging working conditions and heightened levels of misbehavior of certain customer segments posed challenges during the period under review in this front. z Initiated appropriate action through the Management against failures of the Risk Owners in order to improve the overall effectiveness of the Risk Management of the Bank. z The risk profiles of the Subsidiaries of the Bank were monitored through periodic review of KRIs and comprehensive annual risk reviews. z Reviewed the adequacy of the Business Continuity and Disaster Recovery plans of the Bank, in line with the statutory requirements. z Findings from the bi-annual Risk Control SelfAssessment (RCSA) exercise were reviewed. During the year under review, the BIRMC held four (04) meetings on quarterly basis and one (01) additional meeting specifically to discuss the Internal Capital Adequacy Assessment process of the Bank. The proceedings of the Committee meetings were regularly reported to the Board of Directors. During the year 2021, the BIRMC supported execution of the overall business strategy of the Bank within a set of prudent risk parameters that are reinforced by an effective risk management framework. Proceedings of the Committee meetings which also included activities under its Charter were regularly reported to the Board of Directors. Prof A K W Jayawardane Chairman – Board Integrated Risk Management Committee February 25, 2022 Commercial Bank of Ceylon PLC Annual Report 2021 133
  136. Report of the Board Nomination Committee Composition of the Committee z implement a procedure for the During the year under review , the Board Nomination Committee (the BNC) comprised of the following members. Profiles of the members as at December 31, 2021, are given on pages 106 to 109. appointment and re-appointment of Directors to the Board taking into account factors such as fitness, propriety including qualifications, competencies, independence and relevant statutory provisions and regulations. z implement a procedure for the selection/ Board members and attendance The Terms of Reference for BNC was reviewed and recommended for approval by the Board of Directors. The Succession Plan developed to ensure orderly succession of Board appointments was approved by the BNC. Justice K Sripavan Chairman – Board Nomination Committee Justice K Sripavan* (Chairman) 09/09 Prof A K W Jayawardane * (Director) 09/09 Ms J Lee* (Director) 09/09 Regular attendees by invitation Mr S Renganathan (Managing Director/ Group Chief Executive Officer) 08/09 Secretary to the Committee Mr R A P Rajapaksha (Company Secretary) *Independent Non-Executive Director Terms of Reference of the Committee The Board Nomination Committee was established by the Board of Directors in compliance with the Clause 3 (6) (iv) of Banking Act Direction No. 11 of 2007 on “Corporate Governance for Licensed Commercial Banks in Sri Lanka” issued by the Monetary Board of the Central Bank of Sri Lanka (CBSL) under powers vested in the Monetary Board in terms of Section 46 (1) of the Banking Act No. 30 of 1988, as amended. The Committee was established to ensure Board’s oversight and control over selection of Directors, Chief Executive Officer and Key Management Personnel. The Composition and the scope of work of the Committee are in line with the same as set out in the Terms of Reference. Charter of the Committee The Committee shall; z review the structure, size and composition of the Board and make recommendations to the Board with regard to any change. z review the leadership needs of the organization, both executive and nonexecutive with a view to ensure long term sustainability of the organization to compete effectively in the market place. 134 Commercial Bank of Ceylon PLC Annual Report 2021 > Board Committee Reports appointment of Managing Director/Group Chief Executive Officer, Chief Operating Officer and other Key Management Personnel. z set the criteria such as qualifications, competencies, experience, independence, conflict of interest and other key attributes required for the eligibility to be considered for the appointment or promotion to the position of Managing Director/Group Chief Executive Officer, Chief Operating Officer and Key Management Personnel. z prior to any appointment is made by the Board, evaluate the balance of skills, knowledge, experience and diversity on the Board and in the light of this evaluation, prepare a description of the role and capabilities required for a particular appointment. z consider in respect of the Executive Directors and Key Management Personnel proposal for their appointment or promotion and any proposal for their dismissal or any substantial change in their duties or responsibilities or the terms of their appointment. z prior to the appointment of a Director ensure that the proposed appointee would disclose any other business interests that may result in a conflict of interest and report any future business interests that could result in a conflict of interest. z consider and recommend from time to time, the requirements of additional/ new expertise for Directors and other Key Management Personnel. z propose the maximum number of listed Company Board representations which any Director may hold in accordance with relevant statutory provisions and regulations. z peruse duly completed Affidavits and Declarations of all Directors and Key Management Personnel and recommend same for approval of the Board. z formulate plans for succession for Key Management Personnel, Executive and Non-Executive Directors in the Board and in particular for the key roles of Chairman and Group Chief Executive Officer and Chief Operating Officer taking into account challenges and opportunities facing the Company and skills needed in the future.
  137. z make recommendations to the Board concerning , suitable candidates for the role of Senior Independent Director in instances where Chairman is not an Independent Director, membership of other Board Committees as appropriate in consultation with the Chairpersons of those Committees and the re-election of Directors at the Annual General Meeting by the Shareholders or the retirement by rotation according to the provisions of the Articles of Association of the Bank. z monitor the progress of any relevant Corporate Governance or Regulatory Developments, that may impact the Committee and recommend any actions or changes it considers necessary for Board approval and ensure compliance with existing Laws and regulations. z be authorized to discuss issues under its purview and report back to the Board with recommendations, enabling the Board to take a final decision on the matter. z be authorized to express their independent views when making decisions. z be authorized by the Board to obtain, at the Bank’s expense, outside legal or other professional advice on any matters within its Terms of Reference. z make recommendations to the Board concerning an indemnity and insurance cover to be taken in respect of all Directors and Key Management Personnel in accordance with the Articles of Association, relevant statutory provisions and regulations. z invite any member of the Corporate Management, any member of the Bank staff or any external advisers to attend meetings as and when appropriate and necessary. The Committee obtained declarations from all the Directors through a prescribed format confirming their status of independence. Affidavits signed by each of the Directors through a prescribed format was obtained with the assistance of the Company Secretary to satisfy an annual requirement imposed under a Direction issued by the Central Bank of Sri Lanka (CBSL) and the original of same was furnished to the Director of Bank Supervision of CBSL to enable the CBSL to re-assess their fitness and propriety. The Terms of Reference for BNC was reviewed and recommended for approval by the Board of Directors. The Succession Plan developed to ensure orderly succession of Board appointments was approved by the BNC. As provided for in the Articles of Association of the Bank, the BNC recommended for approval of the Board retirement by rotation of two Directors. Based on recommendations made by the BNC, the Board approved appointments of two Assistant General Managers, two Deputy General Managers and a Chief Treasury Officer on contract basis to the Corporate Management. As per the recommendation made by the BNC, the Board also approved the re-designation of seven members of the Corporate Management of the Bank, who carry out Group-wide supervisory responsibilities with officers engaged in subsidiaries/overseas operations of the Bank reporting directly to them. The Committee continued to work closely with the Board of Directors on matters assigned to the Committee and reported back to the Board of Directors with its recommendations. Activities in 2021 Nine (9) Committee meetings were held during the year under review. The proceedings of the Committee meetings are regularly reported to Board of Directors. The Committee recommended the election/ re-election of Directors, taking into account the performance and contribution made by them towards the overall discharge of the Board’s responsibilities. The Committee identified suitable persons to fill the vacancies arising in the Board and after carefully evaluating several candidates, recommended the appointment of one (01) new Non Executive/ Independent Director to the Board during the year. > Board Committee Reports Justice K Sripavan Chairman – Board Nomination Committee February 25, 2022 Commercial Bank of Ceylon PLC Annual Report 2021 135
  138. Report of the Board Human Resources and Remuneration Committee Composition of the Committee z Evaluate the performance of Managing During the year under review , the Board Human Resources and Remuneration Committee (the BHRRC) comprised of the following members. Profiles of the members as at December 31, 2021, are indicated on pages 106 to 109. Board members and attendance Performance of the members of the Corporate Management including that of the Managing Director/Group Chief Executive Officer and the Chief Operating Officer during the financial year 2020 was reviewed. Justice K Sripavan Chairman – Board Human Resources and Remuneration Committee Justice K Sripavan* (Chairman) 04/04 Ms J Lee* (Director) 04/04 Prof A K W Jayawardena* (Director 04/04 Regular attendees by invitation Mr S Renganathan (Managing Director/ Group Chief Executive Officer) 04/04 additional/new expertise required by the Bank. z Assess and recommend to the Board, promotions of KMP, address succession planning and issues relating to organizational structure. z Evaluate, assess and make recommendations and provide directions pertaining to the Board of Trustees and the management of the Private Provident Fund of the Bank. z Recommend/decide/give directions on disciplinary matters resulting in a significant financial loss to the Bank, caused by KMP of the Bank. z Formulating formal and transparent Secretary to the Committee z Approving annual increments, bonuses, Mr U I S Thilakawardena (Group Chief Human Resource Officer) *Independent Non-Executive Director Charter of the Committee Evaluate, assess, decide and recommend to the Board, matters that may affect the Human Resource Management of the Bank specifically including: z Determine compensation of the Chairman, Deputy Chairman, Managing Director/ Group Chief Executive Officer and other members of the Board of Directors of the Bank, while ensuring that no Director is involved in setting his or her own remuneration. z Formulate guidelines, policies and parameters for the compensation structures for all executive staff of the Bank and oversee its implementation. z Review information related to executive pay from time to time to ensure same is in par with the market/industry rates or as per the strategy of the Bank. Annual Report 2021 commitments relating to employees are fulfilled in a timely manner. Participated in all deliberations except those matters impacting his own terms and conditions of employment. of the KMP and establish performance parameters in setting their individual goals and targets. Commercial Bank of Ceylon PLC z Make recommendations to Board of z Ensure that all regulatory and contractual z Determine compensation and benefits 136 Director and KMP against the pre-agreed targets and goals. > Board Committee Reports procedures for developing policy on remuneration for Executives and Directors. changes in perquisites and incentives. The Chairman of the Committee can convene a special meeting in the event a requirement arises provided all members are given sufficient notice of such special meeting. The quorum for a meeting is two (2) members. Members of the Corporate Management may be invited to participate at the sittings of the Committee meetings as and when required by the Chairman, considering the topics for deliberation at such meeting. The proceedings of the Committee meetings are regularly reported to the Board of Directors. Guiding Principles The overall focus of the Committee: z Setting guidelines and policies to formulate compensation packages, which are attractive, motivating and capable of retaining qualified and experienced employees in the Bank. In this regard, the Committee sets the criteria such as qualifications, experience and the skills and competencies required, to be considered for appointment or promotion to the post of Managing Director/Group Chief Executive Officer and to Key Management Positions.
  139. z Setting guidelines and policies to ensure that the Bank upholds and adheres to the provisions of the Laws of the Lands particularly those provisions of the Banking Act No . 30 of 1988, including the Directions issued by the Monetary Board/Director of Bank Supervision in accordance with the provisions of such Act. z Providing guidance and policy direction for relevant matters connected to general areas of Human Resources Management of the Bank. z Ensuring that the performance related element of remuneration is designed and tailored to align employee interests with those of the Bank and its main stakeholders and support sustainable growth. z Structuring remuneration packages to ensure that a significant portion of the remuneration is linked to performance, to promote a pay for performance culture. z Promoting a culture of regular performance reviews to enable staff to obtain feedback from their superiors in furtherance of achieving their objectives and development goals. z Developing a robust pipeline of raising talent capable and available to fill key positions in the Bank. Methodology adopted by the Committee The Committee recognizes rewards as one of the key drivers influencing employee behaviour, thereby impacting business results. Therefore, the reward programmes are designed to attract, retain and to motivate employees to perform by linking performance to demonstrable performancebased criteria. In this regard, the Committee evaluates the performance of the Managing Director/Group Chief Executive Officer and KMP against the pre-agreed targets and goals that balance short-term and long-term financial and strategic objectives of the Bank. The Bank’s variable (bonus) pay plan is determined according to the overall achievements of the Bank and pre-agreed individual targets, which are based on various performance parameters. The level of variable pay is set to ensure that individual rewards reflect the performance of the Bank overall, the particular business unit and individual performance. The Committee makes appropriate adjustments to the bonus pool in the event of over or under > Board Committee Reports achievement against predetermined targets. In this regard, the Committee can seek external independent professional advice on matters falling within its purview. Further, the Committee may seek external agencies to carry out salary surveys to determine the salaries paid to staff vis-à-vis the market position, enabling the Committee to make informed decisions regarding the salaries in the Bank. Activities in 2021 The Committee held four (04) meetings during the year under review and the proceedings of the Committee meetings which also included activities under its Terms of Reference were regularly reported to the Board of Directors with its comments and observations. The Committee determined the bonus payable for 2020 performance according to the Variable Pay Plan (VPP) for Executive staff and the grant of annual increments to the Executive staff who are not covered by the Collective Agreement. Performance of the members of the Corporate Management including that of the Managing Director/ Group Chief Executive Officer and the Chief Operating Officer during the financial year 2020 was reviewed. At the conclusion of the review process for 2020, the Key Performance Areas and the respective KPIs of the Corporate Management members set for 2021 were carefully perused by the Committee and agreed on, subject to changes. Requests by the Pensioners for a revision of pension was considered and granted during the year. The Terms of Reference for the BHRRC was reviewed and recommended for approval by the Board of Directors. New Policy on Director Perquisites & Remuneration was reviewed and recommended to the Board for approval. Justice K Sripavan Chairman – Board Human Resources and Remuneration Committee February 25, 2022 Commercial Bank of Ceylon PLC Annual Report 2021 137
  140. Report of the Board Related Party Transactions Review Committee Composition of the Committee Charter of the Committee During the year under review , the Board Related Party Transactions Review Committee (the BRPTRC) comprised of the following Independent Non-Executive Directors (in conformity with the requirements of the Code of Best Practice on Corporate Governance issued by CA Sri Lanka). Profiles of the members as at December 31, 2021, are indicated on pages 106 to 109. Demonstrating the Bank’s commitment to good governance, the Board formed the BRPTRC in 2014 by early adoption of the Code of Best Practice on Related Party Transactions (RPT) as issued by the Securities and Exchange Commission (SEC) of Sri Lanka which became mandatory for all listed entities from January 01, 2016. Being one of the few listed entities to do so, the Committee assists the Board in reviewing all related party transactions carried out by the Bank, all its subsidiaries and the Associate in the Group to ensure that there are no conflicts of interest. The Committee also assists the Board in maintaining transparency in relation to RPT with the required disclosures. The Committee took further steps to improve the accuracy of the process involved in submitting the information on related party transactions. Board members and attendance Justice K Sripavan* (Chairman) 04/04 Mr L D Niyangoda* (Member) 04/04 Mr T L B Hurulle* (Member) 04/04 Mr R Senanayake* (Member) 04/04 Regular attendees by invitation Mr S Renganathan (Managing Director/ Group Chief Executive Officer) Mr S C U Manatunge 04/04 (Director/Chief Operating Officer Secretary to the Committee Mr L W P Indrajith (Assistant General Manager – Finance) Justice K Sripavan Chairman – Board Related Party Transactions Review Committee 04/04 *Independent Non-Executive Director The mandate of the Committee includes inter-alia, the following: z Developing, updating and recommending for adoption by the Board of Directors of the Bank and its listed subsidiaries, a RPT Policy consistent with that proposed by the SEC. z Updating the Board of Directors on the RPT of each of the companies of the Group on a quarterly basis. z Advising the Board of Directors in making immediate market disclosures on applicable RPT as required by Section 9.3.1 of the Listing Rules of the CSE. z Advising the Board of Directors in making appropriate disclosures on RPT in the Annual Report as required by Section 9.3.2 of the Listing Rules of the CSE. Methodology Adopted by the Committee z Reviewing the mechanisms in place to obtain declarations from all Directors (at the time of joining the Board and annually thereafter) informing the Company Secretary, the primary contact point for Directors, of any existing or potential RPT carried out by them or their Close Family Members (CFM) and obtaining further declarations on a quarterly basis in the event of any change during the year to the positions previously disclosed. 138 Commercial Bank of Ceylon PLC Annual Report 2021 > Board Committee Reports
  141. z Reviewing the mechanisms in place to obtain confirmations on any new appointments accepted by Directors of the Bank in other entities as KMP , informing the Company Secretary to identify and capture such transactions carried out by the Bank with such entities which need to be disclosed under ‘Directors’ Interest in Contracts with the Bank’ as disclosed on page 158 of this Annual Report. z Reviewing the mechanisms in place to capture and feed relevant information on RPT which also includes information on KMP, CFM and the Bank’s subsidiaries and associate into the data collection system and the accuracy of such information. z Obtaining an annual declaration from each Director as required by the CBSL designed to elicit information about any existing or potential RPT. z Obtaining independent validation from the Bank’s Internal Audit division for information submitted to the Committee for its review. Further, following types of RPTs are brought to the attention of the BRPTRC. z Any credit facility or any other form of accommodation for Directors or their CFMs as approved by the Board. In the case of facilities granted to the children of Directors, such transactions require approval of the Board only if the children are financially dependent in terms of the Definition given on “Close relation” in the Section 86 of the Banking Act No. 30 of 1988. z Any credit facility or any other form of accommodation for entities in which a Director of the Bank holding more than 10% of its paid-up capital as approved by the Board. > Board Committee Reports Activities in 2021 During the year, as a part of Bank’s annual review of policies, the RPT Policy was further reviewed and updated. The amended RPT Policy was approved by the Board of Directors in November 2021 and implemented. Arrangements were also made to disseminate the amended RPT Policy among all relevant stakeholders and obtain their acknowledgements to ensure that they have read and understood the applicable regulatory requirements relating to identifying, capturing and reporting of RPT. In addition, the Terms of Reference of the Committee was reviewed and revised to capture new developments and was approved by the Board of Directors in November 2021. Further, the Committee took further steps to improve the accuracy of the process involved in submitting the information on RPT. The Committee held four (4) meetings during the year under review as required by Section 9.2.4 of the Listing Rules of the CSE. The Committee reviewed all RPT carried out during the year at its quarterly meetings and the proceedings of the Committee meetings which also included activities under its Terms of Reference, were regularly reported to the Board of Directors with its comments and observations. Justice K Sripavan Chairman – Board Related Party Transactions Review Committee February 25, 2022 Commercial Bank of Ceylon PLC Annual Report 2021 139
  142. Report of the Board Credit Committee Composition of the Committee z Review and recommend credit proposals During the year under review , the Board Credit Committee (the BCC) comprised of the following members. Profiles of the members as at December 31, 2021, are indicated on pages 106 to 109. which fall within the purview of the Board z Evaluate and recommend sector exposures and cross border exposures to the Board as per the frequencies identified in the Risk Management Policy of the Bank. z Monitor and evaluate special reports called for by the Board. Board members and attendance The Committee set the lending directions of the Bank for prudent management of credit growth, while aiming at maintaining and improving credit quality. Justice K Sripavan Chairman – Board Credit Committee z Set lending directions based on the current economic climate and risk appetite of the Bank. Justice K Sripavan* (Chairman) 12/12 Mr K Dharmasiri* (Director) 12/12 Ms N T M S Cooray * (Director) 09/09 Activities in 2021 Mr S Renganathan (Managing Director/ Group Chief Executive Officer) 10/12 The Committee held Twelve (12) meetings during the year under review. The proceedings of the committee meetings were regularly reported to the Board of Directors. 12/12 Mr S C U Manatunge (Director/Chief Operating Officer) Secretary to the Committee Mr R A P Rajapaksha (Company Secretary) *Independent Non-Executive Director Charter of the Committee The Committee shall assist the Board in effectively fulfilling its responsibilities relating to Credit Direction, Credit Policy and Lending Guidelines of the Bank in order to inculcate healthy lending culture, standards and practices and ensure relevant rules, regulations and directions issued by the appropriate authorities are complied with. The Committee is empowered to: z Review and consider changes proposed by the Management from time to time to the Credit Policy and the Lending Guidelines of the Bank. In a challenging environment due to the COVID-19 pandemic affecting the global and local business environment, the Committee set the lending directions of the Bank for prudent management of credit growth, while aiming at maintaining and improving credit quality. The Committee approved credit proposals above a predetermined limit, recommended credit proposals and other credit reports intended for approval/perusal by the Board of Directors after careful scrutiny. These tasks were carried out by the Committee in line with the Bank’s lending policies and credit risk appetite to ensure that the lending portfolios were managed in line with the stipulated credit risk parameters set by the Board of Directors while achieving the Bank’s lending targets.   z Review the credit risk controls in lending, ensure alignment with the market context and the internal policy of the Bank and the prevailing regulatory framework in order to ensure continuous maintenance and enhancement of the overall quality of the Bank's loan book. z Evaluate, assess and approve credit proposals which fall within the delegated authority level of the Committee as prescribed by the Board from time to time. z Evaluate, assess and approve the provisioning of bad and doubtful debts, concession on interest and writing off of bad debts within the delegated authority level of the Committee as prescribed by the Board from time to time. 140 Commercial Bank of Ceylon PLC Annual Report 2021 > Board Committee Reports Justice K Sripavan Chairman – Board Credit Committee February 25, 2022
  143. Report of the Board Investment Committee Composition of the Committee Charter of the Committee During the year under review , the Board Investment Committee (the BIC) comprised of the following members. Profiles of the members as at December 31, 2021, are indicated on pages 106 to 109. The Board Investment Committee is responsible for the treasury and investment activities of the Bank. The Committee reviews and approves the policies and operating parameters for treasury and investment activities. It evaluates proposed treasury and investment strategies, reviews significant investment decisions, and oversees the performance of the treasury and investment portfolios. The Committee also initiates discussions and reviews the capital management of the Bank. Board members and attendance Ms J Lee* (Chairperson) The Committee discussed in detail the management process of the Bank’s FCY assets and liabilities with the ALM team and proposed recommendations on strategies and approvals. Mr S Renganathan 11/11 (Managing Director/Group Chief Executive Officer) Mr S C U Manatunge 11/11 (Director/Chief Operating Officer) Mr K Dharmasiri* (Director) 11/11 Ms N T M S Cooray* (Director) 11/11 Mr S Muhseen* (Director) 09/10 (Appointed to BIC w.e.f. February 15, 2021) Regular attendees by invitation Mr K D N Buddhipala (Group Chief Financial Officer) Mr K A P Perera (Chief Treasury Officer) Mr B A H S Preena (Assistant General Manager – Corporate Banking) Mr S K K Hettihamu (Group Chief Risk Officer) Secretary to the Committee Ms Judy Lee Chairperson – Board Investment Committee 11/11 Mr A Wijesiriwardane (Deputy General Manager-Treasury) *Independent Non-Executive Director Given its oversight on treasury activities, the Committee evaluates the Bank’s overall liquidity management operations, treasury investments and borrowing activities, and capital adequacy. The Bank’s borrowing proposals are evaluated together with the liquidity requirement and suitable recommendations are provided. To meet the core objectives of the Committee, the investment portfolio performance is closely monitored via regular updates from Treasury and Investment Banking Divisions. Suitable treasury and investment proposals are approved or recommended to the Board of Directors. The Committee also evaluates the impact of possible macroeconomic developments and trends to the profitability, liquidity, balance sheet, and capital through sensitivity and scenario analysis. The Committee also provides expert views and assistance to the Management with regard to the treasury and investment portfolio risks and performance. Methodology Adopted by the Committee The Committee meets monthly and reviews progress of strategic and significant investments, the liquidity situation of the bank, the currency exposures of the portfolio, and impact on performance and capital. Evaluation of current market developments and the economic outlook of the markets the bank operates in, are reviewed to evaluate the current portfolio and new investment strategies. The Committee actively reviews the monthly performance of the Treasury and Investment Banking Division, where the interest rate risk, re-pricing risk, liquidity risk, currency risk and other market risks are discussed. The Committee from time to time would issue instructions to executive officers of the Bank on investment related activities. > Board Committee Reports Commercial Bank of Ceylon PLC Annual Report 2021 141
  144. Activities in 2021 Following key decisions can be highlighted . The Committee assumed a significant role in 2021, as the Bank’s operating economic climate created many new and unique challenges. Strengthening the operational framework in relation to investments, continuous evaluation of the investment portfolios, and assessment of the impact on the Bank’s capital was closely monitored and discussed by the Committee. This resulted in major inputs to direct and manage the Bank’s strategy and operations. Due to the deteriorating economic climate of Sri Lanka, the Committee regularly provided inputs and recommendations to the Board of Directors and the Management of the Bank on capital management, possible market shocks and adverse developments. With the Bangladesh operations of the Bank becoming an increasingly important part of the Bank’s overall balance sheet and FCY funding, the Committee discussed the developments in Bangladesh markets and its impact to the Bank. 1. Recommendation of the Tier 2 debt issuance of the Bank to strengthen the capital base. 2. Continuous and active monitoring of the FCY position and exposures of the Bank and the introduction of a FCY exposure reduction plan. 3. Regular and detailed discussion of the Bank’s FCY assets and liabilities management process and exposures with the ALM team and proposed recommendations on strategies and approvals. 4. Recommendation for the medium-term FCY borrowing facility from CDC Group, UK. 5. Recommendation for the medium term borrowing proposal for FCY loan from overseas Development Finance Institution (DFI). 6. Evaluation and approval for the investment limits for Sri Lanka Rupee investment portfolios of the Bank. 7. Recommendation for the new Investment Policy of the Bank and the revised operating guidelines for equity market activities of the Bank. 8. Evaluation, finalization, and approval for the Bank’s proposed overseas expansion activities. Ms J Lee Chairperson – Board Investment Committee February 25, 2022 142 Commercial Bank of Ceylon PLC Annual Report 2021 > Board Committee Reports
  145. Report of the Board Technology Committee Composition of the Committee Charter of the Committee During the year under review , the Board Technology Committee (the BTC) comprised of the following members. Profiles of the members as at December 31, 2021, are indicated on pages 106 to 109. The primary responsibility of the BTC is to assist the Board in performing its oversight function on all Digital and Technological strategies of the Bank and to evaluate all IT-related procurement proposals and submit its recommendations to the Board. The Committee has been empowered to: Board members and attendance Prof A K W Jayawardane* (Chairman) Having identified digital reach and convenience as critical factors in taking the banking business to the next level, the Bank implemented a Digital Road Map. Mr S Renganathan 04/05 (Managing Director/Group Chief Executive Officer) Mr S C U Manatunge 05/05 (Director/Chief Operating Officer) Mr T L B Hurulle* (Director) 05/05 Mr K Dharmasiri* (Director) 05/05 Mr S Muhseen* (Director) (Appointed to BTC w.e.f. March 30, 2021) 03/04 Mrs D L T S Wijewardena* (Director) (Appointed to BTC w.e.f. March 31, 2021) 04/04 Mr D B Saparamadu (Consultant) Mr T P Suraweera (Assistant General Manager – Operations) Mr V Thotagammana (Assistant General ManagerInformation Technology: R&D) Mr U K P Banduwansa (Head of Retail Products & Digital Channels) Mr K Mediwake (Chief Executive Officer – CBC Tech Solutions Limited) Secretary to the Committee Mr K S A Gamage (Assistant General Manager – Information Technology: Operations) *Independent Non-Executive Director > Board Committee Reports z Guide the Bank on building Technology and Digital Strategy, reviewing the Digital Road Map, Data Science & Machine learning strategies, Technology, and Information Security Roadmaps z Ensure that the key technology initiatives and emerging technologies support the Bank’s business objectives z Oversee risks related to the quality and effectiveness of the Bank’s information security strategies z Review ROI of key IT initiatives. Activities in 2021 Regular attendees by invitation Mr L H Munasinghe (Group Chief Marketing Officer) Prof A K W Jayawardane Chairman – Board Technology Committee 04/05 The Committee held five (5) meetings during 2021, and the proceedings of the Committee meetings were regularly reported to the Board of Directors with its comments and observations. The Committee focused on improving the following areas, which are the key drivers of the Bank towards a digital era while ensuring the robustness of the IT infrastructure of the Bank. Digital reach and convenience have been identified as critical factors in taking the banking business to the next level by enhancing customer convenience on dayto-day banking services. To cater to this requirement, the Bank has implemented a comprehensive Digital Road Map, and in the year 2021, the Bank was able to implement the following key initiatives to excel in the banking operation. Completed Projects z Combank Digital – Introducing new responsive web application and two native mobile applications for Maldives operation enabling access across all devices with enhanced user experience with new features. z Banking on Social Media (Viber banking) – Seamless banking services through social media 24/7 with the assistance of an AI Chatbot. Commercial Bank of Ceylon PLC Annual Report 2021 143
  146. z ePassbook Revamping – Bangladesh/ Maldives – The hassle-free way to download and view customers’ account transactions online or offline on Android and Apple smartphones. The application provides an online-real time view of the account transactions with Self-Enrolment and Biometric Authentication.  z Automation of Lower counter operations of branches – Automate and enhance key processes of lower counter operations. This initiative increases customer experience by minimizing waiting time and streamlining the internal processes. z Government Payment Platform Integration – Facilitating online payments to Government organizations, including SL Customs, BOI, Sri Lanka Ports Authority, Inland Revenue Department, EPF Board, SLS Institute, Import and Export Control Department connected to LankaPay Online Payment Platform (LPOPP) by transferring money directly from customers’ current or savings accounts. z Pay with Flash – Enabling e-commerce sites to allow users to checkout and pay using their Flash Digital Bank Account. z Remittance App Phase II with Remittance Tracker integration – Making a hasslefree way to track remittance status for customers employed overseas in real-time through the online tracking system. z Customer relationship management system – Providing a customer 3600 view dashboard to the branches about a customer to improve customer relationships and identify opportunities for cross-selling and up-selling by providing customized service by analyzing the customer behaviour. Furthermore, the Agile way of working at IT R&D has supported to cater to the business units with the correct priorities. The productivity and quality of deliveries have been greatly improved compared to the previous year. Digital Infrastructure plays a vital role in providing an uninterrupted service and serves the ever-increasing customer expectations. Cognisant of the importance of the infrastructure, the Information Technology Department has identified and taken the following key initiatives to enhance the internal system capabilities and streamline the hardware usage; 144 Commercial Bank of Ceylon PLC z 900 Touchpoints (ATM/CRM) – The Bank has further expanded ATM/CRM facility while reaching 900 touchpoints landmark at the end of the Year 2021 while being the Sri Lanka’s largest single ATM/CRM network owned by a private sector bank with 24 x 7 customer convenience and enhanced features. z High availability Framework – The availability of IT systems for customers is of paramount importance in today’s competitive banking industry, especially in digital platforms. When maintaining availability, “High Availability” is important for IT systems to continue the business even with unpredictable failures of IT systems. The Bank has enhanced the ‘High Availability’ of its mission-critical systems. z Server Virtualization and Private Cloud – Centralized Virtual Server Infrastructure at Datacenters facilitates the Bank’s systems and applications and covers 93% of the servers and provides many technical advantages while saving OPEX. The strategic decision has been taken to further enhance the server virtualization platform while enabling a private cloudready platform. Enterprise Architecture focus has been set to align all the banking systems and infrastructure to the industry standards. The Business, Data, Application, and Infrastructure architectures have been considered as the key focus verticals incorporating IT standards with security compliance. z Compliance and Certifications of PCI- DSS/ISO 20000/ISO 27001 – The Bank was recertified for PCI-DSS and ISO 27001 standard in 2021. These are the de facto standards on the Information security and card industry and demonstrate that IT systems and processes are maintained with these world-renowned certifications. All these compliances build customer confidence in information security practices. z AI and Data Science practice – A dedicated team has been formed to create the data culture within the Bank to promote data-driven decision-making to grow business with predictions with trend analysis by segmenting the customers for a better-customized banking experience. Annual Report 2021 > Board Committee Reports Projects In Progress  The Bank has initiated several key IT projects during the year, including Core Banking upgrade, Enhancing Online Banking platform for Bangladesh, Early Warning Signals for lending portfolio, AI and Data Science use cases, Robotic process automation for internal operations, Recoveries system implementation, Fraud monitoring system implementation and Employee self-service mobile app. Prof A K W Jayawardane Chairman – Board Technology Committee February 25, 2022
  147. Report of the Board Strategy Development Committee Composition of the Committee z To engage in detailed discussion and During the year under review , the Board Strategy Development Committee (the BSDC) comprised of the following members. Profiles of the members as at December 31, 2021, are indicated on pages 106 to 109. The Committee provided guidance to ensure that adequate impairment cover is maintained while sustaining reasonable financial performance. 06/06 Prof A K W Jayawardane* (Director) 06/06 – The impact of changes in the competitive environment. 06/06 Mr S Renganathan (Managing Director/Group Chief Executive Officer) Mr K Dharmasiri* (Director) 06/06 Mr L D Niyangoda* (Director) 06/06 Ms N T M S Cooray* (Director) 05/06 Ms J Lee* (Director) 06/06 Mr R Senanayake* (Director) 06/06 Mr S Muhseen* (Director) 05/05 Activities in 2021 The BSDC assisted the Board by evaluating the business strategies and strengthening core competencies of the Bank. The BSDC met more frequently than the minimum of four (04) meetings as per the Terms of Reference [Six (06) meetings were held in 2021] and was able to offer greater responsiveness in the strategic decisionmaking process of the Bank. Secretary to the Committee Mr R A P Rajapaksha (Company Secretary) *Independent Non-Executive Director Charter of the Committee Justice K Sripavan Chairman – Board Strategy Development Committee – Governance, risk appetite, financial and capital planning, liquidity and fund management, control environment and resources required to support the Bank’s strategic objectives. – Divestitures, mergers and acquisition strategies including post transaction performance tracking. Board members and attendance Justice K Sripavan* (Chairman) provide guidance to the Management on: The Committee was established to have an overall Bank-wide strategic management oversight. The Committee is empowered: z To assist the Board in performing its oversight responsibilities relating to the Bank’s strategy. z To advise the Management and monitor progress on: – Defining of business strategies geared for the sustainable development of the Bank; and – Establishment of processes for planning, implementing, assessing, and adjusting of the business strategy. z To oversee the Management’s engagement on the strategic perspective, direction, and development of the strategy for the Bank and its business units. The BSDC reviewed matters related to capital planning, acquisition, investment opportunities and strategies to provide relief measures to borrowers affected by COVID-19 pandemic in addition to actively engaging in the Government relief scheme. Further, the Committee provided guidance to ensure that adequate impairment cover is maintained while sustaining reasonable financial performance. The BSDC reviewed the Digital Road Map based on a presentation made by the Corporate Management and the strategies for enhancing contribution from the Subsidiaries and overseas operations of the Bank. It also evaluated the feasibility of establishing new overseas operations. Corporate Plan and strategies planned by the Management were reviewed against the achievement and necessary directions were provided to the Management to achieve the desired results. Important decisions taken at the Committee meetings which also included activities under its Terms of Reference were regularly reported to the Board of Directors for information/approval. z To oversee the Management’s implementation of the approved strategic plan and the progress against strategic milestones and goals. z To oversee the Management’s implementation of major business transformation projects and their execution. > Board Committee Reports Justice K Sripavan Chairman – Board Strategy Development Committee February 25, 2022 Commercial Bank of Ceylon PLC Annual Report 2021 145
  148. Statement of Compliance Further to the Annual Report of the Board of Directors on the Affairs of the Company appearing on page 3 , given below is a summary of the extent of compliance with the requirements of Section 168 of the Companies Act No. 07 of 2007 and amendments thereto and other relevant statutes. Table – 45: Statement of Compliance Disclosure requirement Reference to the relevant statute/rule Page reference for compliance and other necessary disclosures Page/s Mandatory disclosures as required by the Companies Act No. 07 of 2007 and amendments thereto (CA) 1. The nature of the business of the Group Section 168 and the Bank together with any changes (1) (a) thereof during the accounting period 2. Signed Financial Statements of the Group and the Bank for the accounting period completed in accordance with Section 152 3. Auditors’ Report on the Financial Statements of the Group and the Bank 4. Accounting Policies of the Group and the Section 168 Bank and any changes therein (1) (d) 5. Particulars of the entries made in the Interests Registers of the Bank and its subsidiaries during the accounting period Notes to the Financial Statements: Item 1.3: Principal business activities, nature of operations of the Group and ownership by the Bank in its subsidiaries and associate 199 and 200 Section 168 (1) (b) Financial Statements of the Group and the Bank for the year ended December 31, 2021 187 to 336 Section 168 (1) (c) Independent Auditors’ Report 182 to 184 Notes 6 to 11 to the Financial Statements: Significant Accounting Policies adopted in the preparation of the Financial Statements of the Group and the Bank 209 to 221 Section 168 (1) (e) The Bank and all its subsidiaries maintain Interests Registers All Directors have made declarations as required by the Section 192 (1) and (2) and all related entries were made in the Interests Registers during the year under review The Interests Registers are available for inspection by shareholders or their authorised representatives as required by the Section 119 (1) (d) Refer "Directors' Interest in Contracts with the Bank" disclosed in the Annual Report 158 6. Remuneration and other benefits paid to Section 168 Directors of the Bank and its subsidiaries (1) (f ) during the accounting period Note 21 to the Financial Statements: Other operating expenses 231 Report of the Board Human Resources and Remuneration Committee 136 and 137 7. Total amount of donations made by the Bank and its subsidiaries during the accounting period Section 168 (1) (g) Note 21 to the Financial Statements: Other operating expenses 231 8. Information on directorate of the Bank and its subsidiaries during and at the end of the accounting period Section 168 (1) (h) Governance and Risk Management 104 to 178 Refer “Board of Directors and Profiles” for details of members of the Board of Directors of the Bank 106 to 109 Refer “Group Structure” for details of members of the Board of Directors of the Group 84 and 85 Recommendations for re-election (i) In terms of Article 85 of the Articles of Association, two Directors are required to retire by rotation at each Annual General Meeting (AGM). Article 86 provides that the Directors to retire by rotation at an AGM shall be those who (being subject to retirement by rotation) have been longest in office, since their last re-election or appointment. (ii) The Board recommended the re-election/election of the following Directors, after considering the contents of the Affidavits & Declarations submitted by them and all other related issues: (a) Re-election of Directors who retire by rotation z Prof A K W Jayawardane z Mr L D Niyangoda (b) Election of Directors who were appointed to fill casual vacancies z Mrs D L T S Wijewardena 146 Commercial Bank of Ceylon PLC Annual Report 2021
  149. Disclosure requirement Reference to the relevant statute /rule Page reference for compliance and other necessary disclosures Page/s (iii) Directors who served on the Board for nine years – None as at end of 2021. 9. Separate disclosure on amounts payable Section 168 to the Auditors as audit fees and fees (1) (i) for other services rendered during the accounting period by the Bank and its subsidiaries 10. Auditors’ relationship or any interest with the Bank and its subsidiaries (Lead Auditor’s independence) Section 168 (1) (j) [In terms of the Banking Act Direction No. 11 of 2007 on “Corporate Governance for Licensed Commercial Banks in Sri Lanka”, the total period of service of a Director (other than a Director who holds the Position of Chief Executive Officer) is limited to nine years. Further, under the criteria to assess the fitness and propriety of Directors, the age of a person who serves as director of a bank has been restricted to a maximum of 70 years]. Note 21 to the Financial Statements: Other operating expenses 231 Independence Confirmation has been provided by Messrs. Ernst & Young as required by Section 163 (3) in connection with the audit for the year ended December 31, 2021, confirming that Ernst & Young is not aware of any relationship with or interest in the Bank or any of its subsidiaries that in their judgement, may reasonably be thought to have a bearing on their independence within the meaning of the Code of Professional Conduct and Ethics issued by CA Sri Lanka, applicable as at the reporting date. No prohibited non audit services have been provided by Messrs. Ernst & Young as per the Direction issued by the CBSL on 'Guidelines for External Auditors relating to their Statutory Duties'. The Directors are satisfied as the BAC has assessed each service, having regard to auditors' independence requirements of applicable laws, rules and regulations, and concluded in respect of each non-audit service or type of non-audit service that the provision of that service or type of service would not impair the independence of Messrs. Ernst & Young. 11. Acknowledgement of the contents of this report/signatures on behalf of the Board of Directors Section 168 (1) (k) The Board of Directors have acknowledged the contents of this Annual Report as disclosed 3 Other Disclosures as required by Recommended Best Practices (RBP), Listing Rules (LR) of the Colombo Stock Exchange, Companies Act No. 07 of 2007 and amendments thereto (CA) and Banking Act Direction No. 11 of 2007 (CBSL) 12. Vision, Mission and Corporate Conduct RBP The business activities of the Group and the Bank are conducted maintaining the highest level of ethical standards in achieving our “Vision and Mission”, which reflect our commitment to high standards of business conduct and ethics Inner Front Cover The Bank issues a copy of its Code of Ethics to each and every staff member and all employees are required to abide by the provisions contained therein 13. Review of business operations of the Group and the Bank and future developments RBP “Joint Message from the Chairman and his Successor “Managing Director/ Group Chief Executive Officer's Review” 14 to 19 Management Discussion and Analysis 38 to 103 Note 62 to the Financial Statements: Operating segments 300 and 301 14. Gross income RBP Notes 12 and 62 to the Financial Statements: Gross income and operating segments 222, and 300 to 301 15. Dividends on ordinary shares RBP Notes 25 and 69 to the Financial Statements: Dividends and Events after the reporting period 234 and 235, and 336 92 and 93 Refer – “Investor Relations” – Item 3 16. 17. Reserves and appropriations Corporate Social Responsibility (CSR) > Statement of Compliance RBP RBP Statement of Changes in Equity 190 to 197 Notes 54, 55 and 56 to the Financial Statements: Statutory reserves, Retained earnings and other reserves 291 to 294 Community sustainability 65 Commercial Bank of Ceylon PLC Annual Report 2021 147
  150. 18 . 19. 20. Disclosure requirement Reference to the relevant statute/rule Page reference for compliance and other necessary disclosures Page/s Extents, locations, valuations and the number of buildings of the Bank’s land holdings and investment properties LR 7.6 (VIII) Note 39 to the Financial Statements: Property, plant and equipment and right-of-use assets 257 to 268 Note 40 to the Financial Statements: Investment property 269 and 270 Note 58.2 to the Financial Statements: Capital commitments 296 Notes 39.5 (b) to the Financial Statements: Information on freehold land and buildings of the Bank – valuations 263 to 267 Note 40.1 (b) to the Financial Statements: Information on Investment properties of the Group – valuations 269 and 270 Significant changes in the Bank's or its subsidiaries fixed assets and the market value of land, if the value differs substantially from the book value LR 7.6 (XII) Issue of shares and debentures 20.1 Issue of shares by the Bank LR 7.6 (XIII) Notes 52 and 52.1 to the Financial Statements: Stated capital and movements in number of shares 287 and 288 20.2 Issue of debentures by the Bank LR 7.6 (XIII) Note 51 to the Financial Statements: Subordinated liabilities 286 and 287 98 Refer – "Investor Relations" – Item 10 20.3 Issue of shares and debentures by the subsidiaries and the associate 21. During the year, subsidiaries and the associate of the Bank did not make any share or debenture issues. Share information and substantial shareholdings 21.1 Distribution Schedule of Shareholdings, names and the number of shares held by the 20 largest holders of voting & non-voting shares and the percentage of such shares held, float adjusted market capitalisation, public holding percentage, number of public shareholders, and the option under which the Bank complies with the minimum public holding requirement. LR 7.6 (III) LR 7.6 (IV) LR 7.6 (X) LR 7.13.1 21.2 Financial ratios and market price information LR 7.6 (XI) Refer – "Investor Relations" – Items 4.2, 4.3 and 4.5 93 to 95 Financial Highlights 10 Information on earnings, dividend, net assets, and market value per share Decade at a Glance 80 to 83 Information on listed debt securities 90 and 98 Refer – "Investor Relations" – Item 10 Annex 2 – Basel III – Disclosures under Pillar III as per Banking Act No. 01 of 364 and 365 2016 - Disclosure 6 – Main features of regulatory capital instruments 21.3 Information on shares traded and the number of shares represented by the stated capital LR 7.6 (IX) 21.4 Own share purchases CA S.64 The Bank does not purchase its own shares 21.5 Equitable treatment to shareholders RBP Statement of Directors’ Responsibility for Financial Reporting – Item (k) 153 22.1 Directors’ meetings RBP Details of the meetings of the Board of Directors 122 22.2 Board committees RBP Board Committee Reports 129 to 145 22. 23. Refer – "Investor Relations" – Item 2 and 7 90 to 92 and 96 to 97 Information on Directors’ meetings and Board Committees Disclosure of Directors’ dealings in shares and debentures 23.1 Directors’ interests in ordinary voting and non-voting shares of the Bank 148 CA S.168 (1) (e) Commercial Bank of Ceylon PLC LR 7.6 (V) Annual Report 2021 Refer – "Investor Relations" - Item 4.4 Directors’ shareholdings in Ordinary Voting Shares and Ordinary NonVoting Shares have not changed subsequent to the date of the Statement of Financial Position up to February 07, 2022, the date being one month prior to the date of Notice of the AGM. > Statement of Compliance 94
  151. Reference to the relevant statute /rule Page reference for compliance and other necessary disclosures 23.2 Directors’ interests in debentures LR 7.6 (V) Mr S Renganathan, Managing Director/Group Chief Executive Officer, held 170,000 debentures of the Bank as at December 31, 2021. Except the above there were no debentures registered in the name of any other Director as at the beginning and at the end of the year. 24. LR 7.6 (XIV) Note 53 to the Financial Statements: Share-based Payment Disclosure requirement Employee share option plans and profit sharing plans Page/s 288 to 291 The Group and the Bank have not, directly or indirectly, provided funds for 288 to 291 the ESOPs. The Group and the Bank do not have any employee profit sharing plans, except the variable bonus scheme Tabulated below are the details of options available/exercised by the Executive Directors under the ESOPs 2021 Description 2020 Mr S Renganathan Mr S C U Manatunge Mr S Renganathan Mr S C U Manatunge 25. Directors’ interests in contracts or proposed contracts and remuneration and other benefits of Directors during the year under review CA S.192 As at January 1 201,000 125,829 123,580 76,452 Vested during the year 126,796 80,070 115,353 72,844 Exercised during the year (60,687) Expired during the year (85,647) (52,985) (37,933) (23,467) As at December 31 181,462 152,914 201,000 125,829 – – – Directors’ interest in contracts with the Bank 158 Note 21 to the Financial Statements: Other operating expenses 231 Note 63 to the Financial Statements: Related party disclosures 302 to 306 RBP As a practice, Directors have refrained from voting on matters in which they were materially interested. Directors have no direct or indirect interest in any other contract or proposed contract with the Bank CA S.168 (1) (e) LR 7.6 (XIV) There are no arrangements that enable the Non-Executive Directors of the Group and the Bank to acquire shares or debentures of the Bank or its subsidiaries, other than via the market CA S.217 (2) There are no restrictions on the approval of loans to Directors in the Bank’s ordinary course of business, subject to compliance with all applicable (d) regulations 26. Directors’ and officers’ insurance CA S.218 The Bank has, during the financial year, paid an insurance premium in respect of an insurance policy for the benefit of the Bank and the Directors, secretaries, officers and certain employees of the Bank and related body corporates as defined in the insurance policy. In accordance with commercial practice, the insurance policy prohibits disclosure of the terms of the policy, including the nature of the liability insured against and the amount of the premium 27. Environmental protection RBP The Group and the Bank have not, to the best of their knowledge, engaged in any activity, which was detrimental to the environment Specific measures taken to protect the environment are disclosed in the section on “Operational Excellence” 59 to 65 28. Declaration on statutory payments RBP Statement of Directors' Responsibility for Financial Reporting - item (h) 152 29. Events after the reporting period RBP Note 69 to the Financial Statements: Events after the reporting period 336 30. Going concern RBP Statement of Directors' Responsibility for Financial Reporting - item (m) 153 31. Directors’ responsibility for financial reporting CBSL Direction 3(8)(ii)(a) Statement of Directors' Responsibility for Financial Reporting – Compliance Report 152 and 153 > Statement of Compliance Commercial Bank of Ceylon PLC Annual Report 2021 149
  152. 32 . Disclosure requirement Reference to the relevant statute/rule Page reference for compliance and other necessary disclosures Appointment of Auditors and their remuneration CBSL Direction 3(1)(i)(m) The Board of Directors of the Bank resolved to adopt a Policy of rotation of Auditors, once in every five years, in keeping with the principles of good Corporate Governance, although the mandatory requirement is only partner rotation once in every five years. Accordingly, the present Auditors, Messrs Ernst & Young, were reappointed as Auditors of the Bank, at the last AGM held on March 30, 2021, to carry out the audit for the year ended December 31, 2021, and will hold the office until the conclusion of the next AGM of the Bank which is to be held on March 30, 2022. Accordingly, Messrs Ernst & Young will serve for a maximum period of 5 years consecutively, subject to them being re-elected by shareholders, upon a recommendation of the Board of Directors, annually. Page/s The retiring Auditors, Messrs Ernst & Young have signified their willingness to continue to function as the Auditor to the Bank CA S.168 (1) (I) A resolution to appoint Messrs Ernst & Young as Auditors and granting authority to the Directors to fix their remuneration will be proposed at the forthcoming AGM to be held on March 30, 2022 for shareholder approval Expenses incurred in respect of audit fees and fees for other services rendered by Messrs Ernst & Young during the year are given in Note 21 to the Financial Statements: Other operating expenses 33. Material issues pertaining to employees and industrial relations LR 7.6 (VII) Refer – "Investor Relations" – Item 6 95 34. Risk management and system of internal LR 7.6 (VI) controls Risk Governance and Management 159 to 178 35. Corporate governance RBP Report of the Board Integrated Risk Management Committee 132 and 133 Note 67 to the Financial Statements: Financial risk review 308 to 336 The Directors’ Statement on Internal Control over Financial Reporting 154 and 155 The Independent Auditors’ Report 182 to 184 Independent Assurance Report on the Directors’ Statement on Internal Control over Financial Reporting 156 The Directors declare that – (a) the Bank has complied with all applicable laws and regulations in conducting its business and have not engaged in any activity contravening the relevant laws and regulations, except for certain operational lapses as pointed out by the Financial Intelligence Unit Refer of the CBSL for which a penalty was imposed on the Bank ( page 175 on "Review of Operational Risk") Officers responsible for ensuring compliance with the provisions in various laws and regulations, confirm compliance in each quarter to the Board Integrated Risk Management Committee; (b) they have declared all material interests in contracts involving the Bank and refrained from voting on matters in which they were materially interested; (c) they have complied with the Code of Best Practices on Corporate Governance; (d) they have conducted a review of internal controls covering financial, operational and compliance controls, risk management and have obtained a reasonable assurance of their effectiveness and proper adherence; (e) the Bank has complied with the Code of Best Practices on related party transactions and has made the required disclosures in the Financial Statements and to the market when applicable; (f) the business is a Going Concern with supporting assumptions or qualifications as necessary, and that the Board of Directors has reviewed the Bank’s Corporate/Business plans and is satisfied that the Bank has adequate resources to continue its operations in the foreseeable future. Accordingly, the Financial Statements of the Bank, its Subsidiaries and Associate are prepared based on the Going Concern assumption; 150 231 Commercial Bank of Ceylon PLC Annual Report 2021 > Statement of Compliance
  153. 36 . Disclosure requirement Reference to the relevant statute/rule Page reference for compliance and other necessary disclosures Focus on new regulations RBP Accounting Standards Page/s The effective date of Interbank Offered Rate (IBOR) reform Phase 1 and Phase 2 amendments is for annual reporting periods beginning on or after January 1, 2021 in the Sri Lankan context. However, the regulatory authorities and public and private sector working groups in several jurisdictions have been discussing the alternatives to IBORs but there is still uncertainty over when these alternative rates will be available and how the reforms will impact specific financial products and services. Regulations issued by the Central Bank of Sri Lanka The Bank is well poised to comply with directives issued by the Central Bank of Sri Lanka during year 2021 on Classification, Recognition and Measurement of Credit facilities and other assets, Regulatory frame work on Technology Risk Management and resilience etc Tax legislature Further, the Bank will be complying with the proposals of the Government Budget 2022, subject to enactment, in relation to introduction of a Surcharge Tax of 25% on the Taxable Income for the Year of Assessment 20/21 exceeding Rs. 2 Bn., Social Security Contribution Levy of 2.5% on the turnover exceeding Rs. 120 Mn. per annum and an increase in the rate of Value Added Tax on Financial Services from 15% to 18%. 37. Sustainability RBP The Bank is an early champion of adopting sustainability practices and sustainability reporting. The Bank has considered the sustainability aspects when formulating its business strategies Annex 3: GRI Content Index 38. Human resources RBP 375 and 376 The Bank continues to invest in human capital development and implement effective human resource practices and policies to improve workforce efficiency, effectiveness and productivity and also to foster collaborative partnerships that enrich the work and learning environment for our staff Specific measures taken in this regard are detailed in the Report of the Board Human Resources and Remuneration Committee 38 to 103 Refer Management Discussion and Analysis 39. Technology RBP As encapsulated in the Vision and the Mission, our business processes are underpinned by technology. All of our processes involve information technology, and we use technology to deliver superior products and services to our customers. Correspondingly, the business is more heavily intertwined with technology than ever before Key achievements in this regard during the year are detailed in the Report of the Board Technology Committee 40. Operational excellence RBP To increase efficiency and reduce operating cost, the Bank has ongoing initiatives to drive policy and process standardisation and to optimise the use of existing technology platforms 41. Outstanding litigation RBP In the opinion of the Directors and in consultation with the Bank’s lawyers, litigation currently pending against the Bank will not have a material impact on the reported financial results or future operations. 42. 43. Disclosure on related party transactions Annual General Meeting and the Notice of Meeting 136 and 137 143 and 144 Note 60 to the Financial Statements: Litigation Against the Bank 297 LR 9.3.2 (a) and (b) Note 63 to the Financial Statements: Related Party Disclosures 302 to 306 LR 9.3.2 (c) Report of the Board Related Party Transactions Review Committee 138 and 139 LR 9.3.2 (d) Statement of Annual Report of the Board of Directors 3 The 53rd AGM of the Bank will be held on Wednesday, March 30, 2022 at CA S.133 2.30 p.m. at Galadari Hotel, No. 64, Lotus Road, Colombo 01, as a virtual and CA S.135 (a) meeting using a digital platform. Notice relating to the 53rd AGM of the Bank is enclosed at the end of the Annual Report. > Statement of Compliance Commercial Bank of Ceylon PLC Annual Report 2021 151
  154. Statement of Directors ’ Responsibility for Financial Reporting The Statement sets out the responsibility of the Board of Directors, in relation to the Financial Statements of the Commercial Bank of Ceylon PLC (the Bank) and the Consolidated Financial Statements of the Bank and its Subsidiaries and the Associate (the Group). The responsibilities of the External Auditors in relation to the Financial Statements are set out in the “Independent Auditors’ Report” given on pages 182 to 184. In terms of Sections 150 (1), 151, 152 and 153 (1) & (2) of the Companies Act No. 07 of 2007 and amendments thereto, the Board of Directors of the Bank is responsible for ensuring that the Group and the Bank keep proper books of account of all the transactions and prepare Financial Statements that give a true and fair view of the financial position of the Group and the Bank as at the end of each financial year and of the financial performance of the Group and the Bank for each financial year and place them before a general meeting. The Financial Statements comprise of the Statement of Financial Position as at December 31, 2021, the Income Statement and Statement of Profit or Loss and Other Comprehensive Income, Statement of Changes in Equity, Statement of Cash Flows for the year then ended and Notes thereto of the Group and the Bank. Accordingly, the Board of Directors confirms that the Financial Statements of the Group and the Bank give a true and fair view of the – financial position of the Group and the Bank as at December 31, 2021 ; and – financial performance of the Group and the Bank for the financial year then ended. Compliance Report The Board of Directors also wishes to confirm that: (a) appropriate Accounting Policies have been selected and applied in preparing the Financial Statements exhibited on pages 187 to 336. based on the latest financial reporting framework on a consistent basis, while reasonable and prudent judgements have been made so that the form and substance of transactions are properly reflected and material departures, if any, have been disclosed and explained; (b) the Financial Statements for the year ended December 31, 2021, prepared and presented in this Annual Report are in agreement with the underlying books of account and are in conformity with the requirements of the following: z Sri Lanka Accounting Standards; z Companies Act No. 07 of 2007 and amendments thereto (Companies Act); z Sri Lanka Accounting and Auditing Standards Act No. 15 of 1995; z Banking Act No. 30 of 1988 and amendments thereto; z Listing Rules of the Colombo Stock Exchange (CSE); and z Code of Best Practice on Corporate Governance issued by The Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka); (c) these Financial Statements comply with the prescribed format issued by the CBSL for the preparation of annual financial statements of licensed commercial banks; (d) proper accounting records which correctly record and explain the Group’s and the Bank’s transactions have been maintained as required by the Section 148 (1) of the Companies Act to determine at any point of time the Group’s and the Bank’s financial position, with reasonable accuracy, enabling preparation of the Financial Statements, in accordance with the Companies Act to facilitate proper audit of the Financial Statements; (e) they have taken appropriate steps to ensure that the Group and the Bank maintain proper books of account and review the financial reporting system directly by them at their regular meetings and also through the BAC, the Report of which is given on pages 129 to 131. The Board of Directors also approves the Interim Financial Statements prior to their release, following a review and recommendation by the BAC; (f ) they accept responsibility for the integrity and objectivity of the Financial Statements presented in this Annual Report; 152 Commercial Bank of Ceylon PLC Annual Report 2021 (g) they have taken reasonable measures to safeguard the assets of the Group and the Bank and to prevent and detect frauds and other irregularities. In this regard, the Board of Directors has instituted an effective and comprehensive system of internal controls comprising of internal checks, internal audit and financial and other controls required to carry on the business of banking in an orderly manner and safeguard its assets and secure as far as practicable, the accuracy and reliability of the records. The “Directors’ Statement on Internal Control over Financial Reporting” is given on pages 154 and 155; (h) to the best of their knowledge, all taxes, duties and levies payable by the Bank and its Subsidiaries, all contributions, levies and taxes payable on behalf of and in respect of the employees of the Bank and its Subsidiaries, and all other known statutory dues as were due and payable by the Bank and its Subsidiaries as at the Reporting date have been paid or, where relevant, provided for, except as specified in Note 60 to the Financial Statements on “Litigation against the Bank” on page 297. (i) as required by the Section 56 (2) of the Companies Act, they have authorised distribution of the dividends paid and proposed upon being satisfied that the Bank and all its Subsidiaries, subject to complying with all the conditions imposed by the Central Bank of Sri Lanka, would satisfy the solvency test after such distributions are made in accordance with the Section 57 of the Companies Act and have obtained in respect of dividends paid and proposed, and also for which approval is now sought, necessary certificates of solvency from the External Auditors; (j) as required by the Sections 166 (1) and 167 (1) of the Companies Act, they have prepared this Annual Report in time and ensured that a copy thereof is sent to every shareholder of the Bank, who have expressed desire to receive a hard copy. Considering the prevailing situation in the Country, we have hosted a soft copy of this Annual Report in the Investor Relations section of the Bank’s website (https://www.combank.lk/financials), in addition to the soft copy thereof available in the CSE website, for the benefit of other shareholders within the
  155. stipulated period of time as required by the Rule No . 7.5 (a) and (b) of Continuing Listing Requirements of the Listing Rules of the CSE, instead of sending a soft copy in a CD. (k) that all shareholders in each category have been treated equitably in accordance with the original terms of issue; (l) that the Bank and its quoted subsidiary have met all the requirements under the Section 07 of Continuing Listing Requirements of the Listing Rules of the CSE, where applicable; (m)that after considering the financial position, operating conditions, regulatory and other factors and such matters required to be addressed in the ‘Code of Best Practice on Corporate Governance’ issued by the CA Sri Lanka, the Board of Directors has a reasonable expectation that the Bank and its Subsidiaries possess adequate resources to continue in operation for the foreseeable future. For this reason, we continue to adopt the Going Concern basis in preparing the Financial Statements; the Financial Statements made available to them by the Board of Directors of the Bank together with all the financial records, related data and Minutes of shareholders’ and Directors’ Meetings and expressed their opinion in the “Independent Auditors’ Report” which appears as reported by them on pages 182 to 184. Accordingly, the Board of Directors is of the view that they have discharged their responsibilities as set out in this Statement. By Order of the Board, R A P Rajapaksha Company Secretary Colombo, February 25, 2022 (n) the Financial Statements of the Group and the Bank have been certified by the Group Chief Financial Officer, the officer responsible for their preparation, as required by the Sections 150 (1) (b) and 152 (1) (b) of the Companies Act and also have been signed by three Directors and the Company Secretary of the Bank on February 25, 2022 as required by the Sections 150 (1) (c) and 152 (1) (c) of the Companies Act and other regulatory requirements; and (o) the Bank’s External Auditors, Messrs Ernst & Young who were appointed in terms of the Section 158 of the Companies Act and in accordance with a resolution passed at the last Annual General Meeting held on March 30, 2021, were provided with every opportunity to undertake the inspections they considered appropriate. They carried out reviews and sample checks on the system of internal controls as they considered appropriate and necessary for expressing their opinion on the Financial Statements and maintaining accounting records. They have examined > Statement of Directors’ Responsibility for Financial Reporting Commercial Bank of Ceylon PLC Annual Report 2021 153
  156. Directors ’ Statement on Internal Control over Financial Reporting Responsibility The Board of Directors (the Board) of Commercial Bank of Ceylon PLC (the Bank) wish to present this Report on Internal Control over Financial Reporting, in line with the Section 3 (8) (ii) (b) of the Banking Act Direction No. 11 of 2007, and principle D.1.5 of the Code of Best Practice on Corporate Governance 2017 (Code) issued by CA Sri Lanka. The Board is responsible for the adequacy and effectiveness of the system of internal controls in place at the Bank. However, such a system is designed to manage the Bank’s key areas of risk within an acceptable risk profile, rather than to eliminate the risk of failure to achieve business objectives of the Bank. Accordingly, the system of internal controls can only provide reasonable but not absolute assurance against material misstatements of management and financial information and records or against financial losses or fraud. The Board has established an ongoing process for identifying, evaluating and managing the significant risks faced by the Bank and this process has been in well in place for many years which includes enhancing the system of internal controls as and when there are changes to business environment or regulatory guidelines. The process is regularly reviewed by the Board and accords with the “Guidance for Directors of Banks on the Directors’ Statement on Internal Control” issued by CA Sri Lanka. The Board has assessed the internal controls taking into account all main principles for the assessment of internal control system as given in that guidance. The Board is of the view that the system of internal controls in place over financial reporting is sound and adequate to provide reasonable assurance regarding the reliability of financial reporting, and that the preparation of Financial Statements for external purposes is in accordance with relevant accounting principles and regulatory requirements. The management assists the Board in the implementation of the Board’s policies and procedures on risks and controls by identifying and assessing the risks faced, and in the design, operation and monitoring of suitable internal controls to mitigate and control these risks. 154 Commercial Bank of Ceylon PLC Key features of the process adopted in applying and reviewing the design and effectiveness of the internal control system on financial reporting The key processes that have been established in reviewing the adequacy and integrity of the system of internal controls with respect to financial reporting include the following: z Various appointed committees are established by the Board, including those mandatary committees as required by the Banking Act Direction No 11 of 2007, to assist the Board in ensuring the effectiveness of the Bank’s daily operations and that the Bank’s operations are conducted in line with the corporate objectives, strategies and the annual budget as well as the policies and business directions that have been approved. z Policies/Charters are developed covering all functional areas of the Bank and these are recommended by Board appointed Committees and are approved by the Board. Such policies and Charters are reviewed and approved at least annually. z The Inspection/Internal Audit Department /IS Audit Unit of the Bank check for compliance with policies and procedures and the effectiveness of the internal control systems/ Information System controls on an ongoing basis using samples and rotational procedures and highlight significant findings in respect of any non-compliance. On-site, Online and Off-site audits are carried out covering all departments, branches, subsidiaries and overseas operations in accordance with the annual audit plan reviewed and approved by the BAC. The type/ frequency of audits of Business units are determined by the level of risk assessed, to provide an independent and objective report. Findings of the internal audits are submitted to the BAC for review at their periodic meetings. Initiatives taken by Inspection/Internal Audit Department to audit certain selected areas of the business "online" during the year 2016 on a limited scope, were gradually expanded year after year and covered all Branches in Sri Lanka and Bangladesh, Corporate Banking Unit, Digital Banking Unit, Card Centre, Treasury, Finance, and Subsidiaries – CBC Finance Limited, Commercial Bank of Maldives Private Limited and CBC Myanmar Microfinance Company Limited Annual Report 2021 during 2021. Scope of Online, near time and real time audits was further enhanced to cover high risk transactions of the Bank amidst COVID-19 pandemic. In addition, monitoring over cyber security controls, modifications to core banking systems/ databases was further strengthened utilizing appropriate tools/techniques and resources. Through this initiative, the controls are being tested on a near or real time basis. A significant improvement in methodology was made by testing the entire population of the data rather than on a sample selected on a random basis. Also Off-site/Online audit introduced during 2020 were continued in 2021 to test and verify internal controls relating to Credit area of Branches. The findings were tabled at the meetings of the BAC for review. The “Online Auditing” initiative has further strengthened the review of the design and effectiveness of the internal control system of the Bank. z The BAC reviews internal control issues identified by the Internal Audit Department, co-sourced internal auditors, regulatory authorities, external auditors and the management, and evaluates the adequacy and effectiveness of the risk management and internal control systems. The BAC also carries out an annual evaluation to review the effectiveness of internal audit function with particular emphasis on the scope, quality, independence of internal audit and the resources. The Minutes of the BAC meetings are tabled at the meetings of the Board of Directors of the Bank on a periodic basis. Details of the activities undertaken by the BAC are set out in the ‘Report of the Board Audit Committee’ which appears on pages 129 to 131. z In assessing the internal control system over financial reporting, identified officers of the Bank continued to review and update all procedures and controls that are connected with significant accounts and disclosures of the Financial Statements of the Bank. The Internal Audit Department continued to verify the suitability of design and effectiveness of these procedures and controls on an ongoing basis. The assessment included both local and overseas subsidiaries and the Bangladesh operations of the Bank as well. > Directors’ Statement on Internal Control over Financial Reporting
  157. Effective from January 01 , 2018, the Bank adopted the Sri Lanka Accounting Standard – SLFRS 9 on ‘Financial Instruments’, which introduced the forward looking “expected credit loss” model to calculate impairment provisions. The processes that are required to comply with the requirements of recognition, measurement, presentation and disclosures were introduced and implemented and were continuously strengthened based on the feedback received from the External Auditor, Internal Audit Department, regulators and the BAC. Continuous monitoring is in progress and steps are being taken to make improvements to the processes where required, to enhance effectiveness and efficiency. The Bank has documented procedures relating to these requirements and updates the procedure manuals as and when necessary and also obtained approval of the BAC and the Board for changes made to the documented procedures. The Bank’s Internal Audit department commenced testing these processes since first quarter 2013 and continued to do so in 2021 as well. The outcome of such exercise was tabled regularly for review by the BAC during the year 2021. Having recognised the need to introduce an automated platform for various computations required under SLFRSs and LKASs including loan impairments, the Bank signed up with a renowned software solutions provider to automate impairment calculations and this project was completed during the final quarter of 2021 with the live deployment of the software solution, which assisted the Bank to eliminate manual intervention in calculating impairment provisions to a greater extent. In addition, the Bank took steps to document the entire Financial Statement Closure Process with the support of an external consultant, and the same was validated by an another independent consultant. The Assurance Report of the External Auditors in connection with internal control over financial reporting appears on page 156. By Order of the Board, Confirmation Based on the above processes, the Board of Directors confirms that the financial reporting system of the Bank has been designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of Financial Statements for external purposes has been done in accordance with the Sri Lanka Accounting Standards and regulatory requirements of the Central Bank of Sri Lanka. Justice K Sripavan Chairman Prof A K W Jayawardane Deputy Chairman Review of the statement by external auditors The External Auditor, Messrs Ernst & Young, has reviewed the above Directors’ Statement on Internal Control included in this Annual Report of the Bank for the year ended December 31, 2021 and reported to the Board that nothing has come to their attention that causes them to believe that the statement is inconsistent with their understanding of the process adopted by the Board in the review of the design and effectiveness of the internal control system over financial reporting of the Bank. Their independent assurance report on the 'Directors' Statement on Internal Control over Financial Reporting ' is given on page 156 of this Annual Report. R Senanayake Chairman – Board Audit Committee S Renganathan Managing Director/ Group Chief Executive Officer Colombo, February 25, 2022 The comments made by the External Auditor in connection with the internal control system over financial reporting in previous years were reviewed during the year and necessary steps were taken to address them where appropriate. The recommendations made by the External Auditor in 2021 in connection with the internal control system over financial system will be dealt with in the future. > Directors’ Statement on Internal Control over Financial Reporting Commercial Bank of Ceylon PLC Annual Report 2021 155
  158. Independent Assurance Report To the Board of Directors of Commercial Bank of Ceylon PLC Ernst & Young Chartered Accountants 201, De Saram Place P.O. Box 101 Colombo 10, Sri Lanka Tel Fax (Gen) Fax (Tax) Email ey.com : +94 11 246 3500 : +94 11 269 7369 : +94 11 557 8180 : eysl@lk.ey.com HMAJ/WDPL Report on the Director’s Statement on Internal Control Our responsibilities and compliance with SLSAE 3050 (Revised) We were engaged by the Board of Directors of Commercial Bank of Ceylon PLC (“the Bank”) to provide assurance on the Directors’ Statement on Internal Control over Financial Reporting (“Statement”) included in the annual report for the year ended December 31, 2021. Our responsibility is to assess whether the Statement is both supported by the documentation prepared by or for directors and appropriately reflects the process the directors have adopted in reviewing the design and effectiveness of the internal control of the Bank. Management’s responsibility Management is responsible for the preparation and presentation of the Statement in accordance with the “Guidance for Directors of Banks on the Directors’ Statement on Internal Control” issued in compliance with Section 3(8)(ii)(b) of the Banking Act Direction No. 11 of 2007, by The Institute of Chartered Accountants of Sri Lanka. Our Independence and Quality Control We have complied with the independence and other ethical requirement of the Code of Ethics for Professional Accountants issued by The Institute of Chartered Accountants of Sri Lanka, which is founded on fundamental principles of integrity, objectivity, professional competence and due care, confidentiality and professional behaviour. The firm applies Sri Lanka Standard on Quality Control 1 and accordingly maintains a comprehensive system of quality control including documented policies and procedures regarding compliance with ethical requirements, professional standards and applicable legal and regulatory requirements. Partners: We conducted our engagement in accordance with Sri Lanka Standard on Assurance Engagements (SLSAE) 3050 (Revised), Assurance Report for Banks on Directors’ Statement on Internal Control, issued by The institute of Chartered Accountants of Sri Lanka. This Standard required that we plan and perform procedures to obtain limited assurance about whether Management has prepared, in all material respects, the Statement on Internal Control. For purpose of this engagement, we are not responsible for updating or reissuing any reports, nor have we, in the course of this engagement, performed an audit or review of the financial information. Summary of work performed We conducted our engagement to assess whether the Statement is supported by the documentation prepared by or for directors; and appropriately reflected the process the directors have adopted in reviewing the system of internal control over financial reporting of the Bank. The procedures selected depend on our judgement, having regard to our understanding of the nature of the Bank, the event or transaction in respect of which the Statement has been prepared. We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our conclusion. Our conclusion Based on the procedures performed, nothing has come to our attention that causes us to believe that the Statement included in the annual report is inconsistent with our understanding of the process the Board of Directors has adopted in the review of the design and effectiveness of internal control over financial reporting of the Bank. Chartered Accountants Colombo, February 25, 2022 The procedures performed were limited primarily to inquiries of bank personnel and the existence of documentation on a sample basis that supported the process adopted by the Board of Directors. H M A Jayesinghe FCA FCMA, R N de Saram ACA FCMA, Ms. N A De Silva FCA, W R H De Silva FCA ACMA, Ms. Y A De Silva FCA, Ms. K R M Fernando FCA ACMA, N Y R L Fernando ACA, W K B S P Fernando FCA FCMA, Ms. L K H L Fonseka FCA, D N Gamage ACA ACMA, A P A Gunasekera FCA FCMA, A Herath FCA, D K Hulangamuwa FCA FCMA LLB (London), Ms. A A Ludowyke FCA FCMA, Ms. G G S Manatunga FCA, A A J R Perera ACA ACMA, Ms. P V K N Sajeewani FCA N M Sulaiman ACA ACMA, B E Wijesuriya FCA FCMA, C A Yalagala ACA ACMA Principals: G B Goudian ACMA, Ms. P S Paranavitane ACMA LLB (Colombo), T P M Ruberu FCMA FCCA A member firm of Ernst & Young Global Limited 156 SLSAE 3050 (Revised) does not require us to consider whether the Statement covers all risks and controls or to form an opinion on the effectiveness of the Bank’s risk and control procedures. SLSAE 3050 (Revised) also does not require us to consider whether the processes described to deal with material internal control aspects of any significant problems disclosed in the annual report will, in fact, remedy the problems. Commercial Bank of Ceylon PLC Annual Report 2021
  159. Managing Director /Group Chief Executive Officer’s and Group Chief Financial Officer’s Statement of Responsibility The Financial Statements of the Commercial Bank of Ceylon PLC (the Bank) and the Consolidated Financial Statements of the Bank and its Subsidiaries and the Associate (the Group) as at December 31, 2021 are prepared and presented in conformity with the requirements of the following: z Sri Lanka Accounting Standards issued by The Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka); z Companies Act No. 07 of 2007 and amendments thereto; z Sri Lanka Accounting and Auditing Standards Act No. 15 of 1995; z Banking Act No. 30 of 1988 and amendments thereto and the Directions, Determinations and Guidelines issued by the Central Bank of Sri Lanka (CBSL); z Listing Rules of the Colombo Stock Exchange (CSE); and z Code of Best Practice on Corporate Governance issued by the CA Sri Lanka The formats used in the preparation of the Financial Statements and disclosures made in this Annual Report comply with the specified formats prescribed by the CBSL. The Group presents the financial results to its shareholders on a quarterly basis. The Significant Accounting Policies have been consistently applied by the Group. Application of Significant Accounting Policies and estimates that involve a high degree of judgement and complexity were discussed with the members of the BAC and Bank’s External Auditors. Comparative information has been amended to comply with the current presentation, where applicable. There were no changes to the Accounting Policies and methods of computation since the publication of the Annual Report for the year ended December 31, 2020. Accordingly, there was no necessity to amend the comparative information to comply with the current presentation. We confirm that to the best of our knowledge, the Financial Statements, Significant Accounting Policies and other financial information included in this Annual Report, fairly present in all material respects the financial position, results of the operations and the Cash Flows of the Group during the year under review. We also confirm that the Group has adequate resources to continue in operation and have applied the Going Concern basis in preparing these Financial Statements. We are responsible for establishing, implementing and maintaining Internal Controls and Procedures within the Bank and all of its Subsidiaries and the Associate. We ensure that effective Internal Controls and Procedures are in place, ensuring material information relating to the Group are made known to us for safeguarding assets, preventing and detecting fraud and/or error as well as other irregularities, which is reviewed, evaluated and updated on an ongoing basis. We have evaluated the Internal Controls and Procedures of the Group for the financial period under review and are satisfied that there were no significant deficiencies and weaknesses in the design or operation of the Internal Controls and Procedures, to the best of our knowledge. We confirm, based on our evaluations that there were no significant deficiencies and material weaknesses in the design or operation of internal controls and detection of fraud that involves management or other employees. The Bank’s Internal Audit Department also conducts periodic reviews to ensure that the Internal Controls and Procedures are consistently followed. The Financial Statements of the Group were audited by Messrs Ernst & Young, Chartered Accountants and their Report is given on pages 182 to 184. The BAC preapproves the audit and non-audit services provided by Messrs Ernst & Young, in order to ensure that the provision of such services does not contravene with the guidelines issued by the CBSL on permitted nonaudit services or impair Ernst & Young’s independence and objectivity. The BAC, inter alia, reviewed all the Internal and External Audit and Inspection Programmes, the efficiency of Internal Control Systems and procedures and also reviewed the quality of Significant Accounting Policies and their adherence to Statutory and Regulatory requirements, the details of which are given in the ‘Report of the Board Audit Committee’ appearing on pages 129 to 131. The Bank engaged the services of four firms of Chartered Accountants approved by the CBSL to strengthen the audit and inspection functions. The continuous inspection and audit functions, engagement of firms of Chartered Accountants and effective functioning of the BAC, ensure that the Internal Controls and Procedures are followed consistently. To ensure complete independence, the External Auditors and the Internal Auditors have full and free access to the members of the BAC to discuss any matter of substance. However, there are inherent limitations that should be recognised in weighing the assurances provided by any system of internal control and accounting. It is also declared and confirmed that the Group and the Bank have complied with and ensured compliance with the guidelines for the audit of listed companies where mandatory compliance is required. We confirm that to the best of our knowledge: z The Group and the Bank have complied with all applicable laws and regulations and guidelines and there is no material litigation against the Group and the Bank other than those disclosed in Note 60 on page 297 of the Financial Statements. z All taxes, duties, levies and all statutory payments payable by the Group and the Bank and all contributions, levies and taxes payable on behalf of and in respect of the employees of the Group and the Bank as at December 31, 2021 have been paid, or where relevant provided for. S Renganathan Managing Director/ Group Chief Executive Officer K D N Buddhipala Group Chief Financial Officer Colombo, February 25, 2022 Commercial Bank of Ceylon PLC Annual Report 2021 157
  160. Directors ’ Interest in Contracts with the Bank Related party disclosures as per the Sri Lanka Accounting Standard – LKAS 24 on “Related Party Disclosures” is disclosed in Note 63 to the Financial Statements on pages 302 to 306 of this Annual Report. In addition, the Bank carries out transactions in the ordinary course of business on an arm’s length basis with entities where the Chairman or a Director of the Bank is the Chairman or a Director of such entities. Table - 46: Director/Company Accommodation granted/Deposits Current limit Balance/outstanding as at 31.12.2021 as at 31.12.2021 as at 31.12.2020 Rs ‘000 Rs ‘000 Rs ‘000 1,540,000 440,883 799,812 820,000 706,947 1,596,587 360,802 83,581 985 1,620 Deposits 1,360 2,855 Arthur C Clarke Institute for Modern Technologies Deposits 27 27 Deposits 9,757 24,526 Ceylon Tea Brokers PLC Deposits 2,491 861 Jetwing Hotels Ltd. Deposits 1,898 542 Negombo Hotels Ltd. Deposits 2,211 1,579 The Lighthouse Hotel PLC Deposits 20,362 13,840 Jetwing Travels (Pvt) Ltd. Loans and advances 41,094 8,433 26,370 Off-balance sheet accommodations 50,000 51,282 19,321 (a) Prof A K W Jayawardane Sierra Cables PLC Loans and advances Combined Off-balance sheet accommodations Limits available Deposits Mother Lanka Foundation Loans and advances 985 (b) Mr S Renganathan International Chamber of Commerce ‑ Sri Lanka (c) Ms N T M S Cooray Deposits 1,789,610 1,074,914 Loans and advances 32,500 12,500 25,000 Off-balance sheet accommodations 65,000 35,499 36,906 Deposits 77,622 33,767 Jetwing Hotel Management Services (Pvt) Ltd. Deposits 26 26 Allianz Insurance Lanka Ltd. Deposits 57,540 98,986 Go Vacation Lanka Co. (Pvt) Ltd. Deposits 1,683 1,243 Allianz Life Insurance Lanka Ltd. Deposits 2,524 8,287 Yarl Hotels (Pvt) Ltd. Deposits 3 21 Jetwing Symphony Ltd. Deposits 928 181 Capital Alliance Holdings Ltd. Deposits 1,880 1,880 Jetwing Air (Pvt) Ltd. (d) Mr L D Niyangoda A Baur & Company (Pvt) Ltd. Loans and advances Combined 3,500,000 3,881,216 281,250 Off-balance sheet accommodations Limits available 7,135,500 3,532,551 4,589,147 3,313,677 2,963,406 Deposits (e) Mr T L B Hurulle Kanrich Finance Ltd. Loans and advances 5,000 Deposits 209 4,220 4,383 11,017 2,062,463 2,454,006 (f ) Mr R Senanayake Senkadagala Finance PLC Loans & Advances Off-balance sheet accommodations Virtual Capital Technologies (Pvt)Ltd. 4,608,435 – 23,093 – Deposits 1,265,478 329,573 Deposits 22 66 Deposits 125,925 (f ) Mr S Muhseen Amana Takaful Life PLC 158 Commercial Bank of Ceylon PLC Annual Report 2021 > Directors’ Interest in Contracts with the Bank –
  161. Risk Governance and Management Another year of disruption and challenge Relatively speaking , Sri Lanka witnessed increased economic activity and favourable economic outlook in the year under review as evident from higher imports and exports as well as the increased demand for banking products and services. Yet, the economy continued to suffer from the long-lasting effects of the Easter Sunday attack in April 2019 and the COVID-19 pandemic in March 2020 that continued to spread in several waves. As widely speculated, the full social, economic and financial impact of these developments is yet to be seen. The downgrading of the sovereign rating by several rating agencies during the year based on their concerns about sovereign debt sustainability and financial vulnerability in the medium term, shortage of foreign currency liquidity, drop in worker remittances and pandemic-related policies and regulations impacted the operations and business performance of financial institutions. The Central Bank promulgated a series of new rules and regulations to help manage the foreign currency liquidity shortage in the market, with limited success. From a risk management perspective, the challenge during the year was to build resilience across existing and new dimensions of risks, including risks associated with the increasing demand for digital products & services; risks associated with remote working arrangements; liquidity risks due to the shortfall of foreign currency; the continuing potential for rising defaults, especially as Government support and forbearance measures are phased out; and the need for a strong data infrastructure to anticipate and analyse compound and contagion risks. Additionally, as environment, sustainability, and governance (ESG) issues are brought to the centre of the corporate landscape, there is a need to identify and account for new risks in areas such as diversity, equity and climate change. The Bank devoted more resources and effort to carefully monitor such risks and others, such as credit risk with respect to segments of the lending portfolio under moratorium and exposures to risk-elevated industries, market risks due to rising interest rates, and operational risks due to heightened concerns on anti-money laundering and terrorist financing. The Bank also successfully tested its business continuity and disaster recovery plans during the year along with monitoring the ongoing health and safety risks to staff and customers in the context of operating in the midst of the COVID-19 pandemic. The success of these > Risk Governance and Management efforts is evident from the conservative risk profile the Bank has been able to maintain ( Refer page 161) and the results of operations and the financial position as given in the financial statements published in this Annual Report. Business model and risk As a commercial bank, the Bank’s business model is centred around the two primary activities of financial intermediation and Refer Business maturity transformation ( Model for Sustainable Value Creation on pages 33 to 35). This has enabled the Bank to gear its capital of Rs. 164.89 Bn. 11 times to operate with an on-balance sheet asset base of Rs. 1,949.21 Bn. as at December 31, 2021. The higher level of gearing exposes the Bank to a multitude of risks, which conventionally include credit risk (76%), operational risk (5%) and market risk (2%) in particular, based on the amount of capital allocated as per Basel capital adequacy requirements. In addition, a host of ancillary risks also have arisen due to various emerging developments, which are threatening to disrupt the business model Refer page 28 for a list of of the Bank ( such emerging developments). These risks together with the developments referred to in the paragraphs above materially impacted almost all the main risk categories of the Bank. Nevertheless, the robust risk governance framework and the rigorous risk management function helped the Bank to manage the associated risks, enabling it to optimise the trade-off between risk and return, and continue sustainable value creation into the future. Objectives The primary objectives of the Bank’s risk governance framework and the risk management function are: z to establish the necessary organisational structure for the management and oversight of risk; z to define the desired risk profile in terms of risk appetite and risk tolerance levels; z to institutionalise a positive risk culture within the Bank embodying values, beliefs, attitudes and practices that drive highly effective risk decisions; z to establish functional responsibility for decisions relating to accepting, transferring, mitigating and minimising risks and recommending the best ways of doing so; z to evaluate the risk profile against the approved risk appetite on an ongoing basis; z to estimate potential losses that could arise from plausible risk exposures; z to periodically conduct stress testing to ensure that the Bank holds sufficient buffers of liquidity and capital to honour contractual obligations and meet unexpected losses; z to integrate risk management with strategy formulation and execution; z to ensure efficient allocation of available capital to generate optimum risk return trade-off and z to promote better communication of risk across all the levels of the Bank. Key developments in 2021 Major initiatives relating to risk governance and risk management during the year included: z Implementation of the Early Warning Signals (EWS) framework Embarked on implementation of EWS framework, which is capable of early detection of credit risk by anticipating the incipient stress in borrowers that are likely to default by constantly monitoring behavioural components of internal and publicly available information on borrower and industry specific performance using advanced analytical tools with predictive capabilities, to help the Bank enhance its asset quality. z Implementation of the Risk Adjusted Return on Capital (RAROC) Framework Completed implementation of the RAROC framework across the Bank for Corporate and SME borrowers, enabling it to support business decisions with a view to optimise the trade-off between risk and return at varying levels of granularity such as account, borrower, customer segment, product, business unit etc. z Carrying out analysis to proactively identify Risk Elevated Industries (REIs) Developed capabilities to isolate and manage industry risk by understanding its exposures most at risk, which will help the Bank devise strategies to manage such exposures and to make an informed assessment of potential for expected credit losses and their impact on the Bank’s capital levels. Carried out an analysis to identify REIs – i.e. those facing heightened stress as a result of the pandemic – based on patterns of the availing of moratoria by borrowers in the Bank’s loan book and those who have been affected by economic stress and policy changes. This enabled the Bank to identify and classify the facilities for which moratoria Commercial Bank of Ceylon PLC Annual Report 2021 159
  162. were granted based on the lending sectors to which the loan proceeds were utilized and make appropriate provisions to withstand the forecasted impact . Accordingly, the Bank has taken Rs. 13 Bn. overlays on cumulative basis to reflect potential for any further credit deterioration. z Issue of debentures to strengthen the capital As identified in the Internal Capital Adequacy Assessment Plan for 2021, the Bank raised Rs. 8.595 Bn. by issuing Basel III compliant – Tier 2, Listed, Rated, Unsecured, Subordinated, Redeemable debentures with a Non-viability Conversion in order to further improve the capital adequacy ratio by increasing the Tier 2 capital base. Funds so collected also helped the Bank to grow the lending portfolio as well as reduce maturity gaps in the Bank’s Balance Sheet by matching medium to long term liabilities with medium to long term assets. z Continuous review of the USD liquidity position With substantial exposures to the Government of Sri Lanka in terms of assets, borrowings from overseas lenders and huge imbalances in demand for and supply of foreign exchange relating to foreign trade, the Bank devoted a lot of effort during the year to managing the USD liquidity position while accommodating customer requirements in the most equitable manner possible. The Bank continued negotiations with a number of parties throughout the year to secure USD funding and successfully mobilised USD 50 Mn. from multilateral funding agencies. As a policy, the Bank never resorted to maintaining open positions beyond the regulatory specified limits to manage foreign currency liquidity. z Managing excess Rupee liquidity Although the Bank experienced satisfactory credit growth during the year under review relative to 2020, the Bank continued to have excess Rupee liquidity throughout the year due to deposits continuing to grow at an unprecedented rate. Having analyzed the potential movements of interest rate forecasts in coming years, the Bank continued to rebalance the maturity profile of its Government securities portfolio in order to enhance returns. z Conducted additional stress testing Fair Value through Other Comprehensive Income (FVOCI) portfolios of both FCY and Rupee bond portfolios indicated high level of stress arising out of sharp interest rate movements experienced in the market due to varying factors. Much focus was placed on such portfolios and their impact arising from marking to market exercise leading to possible depletion of Capital Adequacy Ratio with a view to formulate strategies to minimize adverse impact. 160 Commercial Bank of Ceylon PLC Further, frequent downgrading of country rating experienced during the year prompted the Bank to review resilience levels of FCY Bond exposures. FCY liquidity remained a focus area, which is common to banking sector at large and as the stress levels are unprecedented, the Bank resorted to various scenario analysis to manage this constraint at a reasonable level. z Continuous process improvements to further strengthen information and cyber security The Bank continued to implement further technical solutions and make process improvements to address the ever-evolving cyber security threat landscape. These included; z Cyber Security Incident Response Plan is in place for managing and responding to cyber security events; z A security log management system is configured to alert on identified cyber security events such as abnormal behaviours in perimeter security devices such as firewalls, intrusion prevention/ detection systems etc, denial of service attacks, password enumeration attacks, privilege access etc. These alerts/ dashboards are monitored and necessary action is taken on any identified events; z Appointed a Chief Information Security Officer (CISO) to provide leadership to the Bank’s overall information security function including cyber security; z Established an Information Security Risk Assessment Policy, and as per the Policy, information/cyber security risk assessments are carried out periodically; z Conducted technical security assessments such as vulnerability assessments, penetration tests, application security assessments, configuration assessments etc. periodically, in order to gauge the cyber risk profile of the Bank; z Performance of the Information Security Management Systems (ISMS) and any deviations, information security road-map/ progress of cyber security projects as well as the information/cyber security risk profile of the Bank are regularly reported to the Information Security Council (ISC) and the BIRMC is kept updated periodically through risk indicators and other reports; z Sufficient time is allocated in the agenda of the Board Technology Committee (BTC) for discussion on cyber risk management. Proceedings of both the BIRMC and the BTC meetings are submitted to the Board for information and necessary directions; z Adoption of the Group Social and Environmental Management System (SEMS) Annual Report 2021 > Risk Governance and Management The Bank has been maintaining a robust SEMS since 2010 and it was extended to the subsidiaries of the Bank as recommended by the stakeholders, by adopting the Board approved Group Social and Environmental Management System during the year. Objective assistance was provided to the subsidiaries in adopting well-crafted Social and Environment Risk Management Procedure enabling the subsidiaries to conform to the SEMS of the Bank. z “Masked” credit risk The overall credit risk and asset quality of the Bank improved during the year as reflected by the gross and net non-performing loan ratios improving to 4.62% and 1.44% respectively as at December 31, 2021 as against 5.11% and 2.18% as at December 31, 2020. The improvement in the ratios was as a result of the gross loans and advances portfolio grown by 13%, while the growth in the non-performing loans and advances being curtailed to 6.3%. However, the Bank is aware that, due to the still evolving nature of the pandemic and the uncertainties surrounding it as well as the Government support measures introduced to cushion the impact of the pandemic to the households and the business entities, the true underlying creditworthiness of some of the borrowers may be masked to some extent and that there is potential for some deterioration in asset quality in the years ahead. Being aware of such conditions, the Bank has taken necessary safeguards in terms of its business model and capital buffers to deal with any general deterioration in asset quality and the operating environment and made additional impairment provisions for the loans under moratoria and to exposures to REIs. z Resilience to operational environment/ changes Despite certain relaxation of systems and procedures, remote working arrangements and heavy reliance on digital channels, there was no increase in the operational risk profile in terms of incidents and losses compared to the previous year. With proper strategic responses aided by the robust risk governance and the rigorous risk management function, the Bank was able to successfully maintain its stability, resilience and profitability although it continued to be a year of ongoing disruptions and challenges. Risk appetite and risk profile A clearly-defined and Board approved Risk Appetite Statement articulates the types of risks, degrees of risks and the maximum amount of aggregate risk exposure that the Bank is prepared to assume at any given point in time. In order to provide for ease of monitoring, risk appetite is expressed in terms of quantitative parameters for all
  163. the important risk indicators under each risk category . It, among others, reveals the desired asset quality, maximum market and operational risk losses and minimum capital and liquidity requirements, taking into account the volatile operating environment, regulatory requirements, strategic focus, ability to withstand losses, and stress with the available capital, funding and liquidity positions and the robustness of the risk management framework. The risk management function periodically reports the overall risk profile of the Bank to the Management, BIRMC, and the Board, in terms of certain Key Risk Indicators and a Risk Profile Dashboard. With the help of this information, the risk profile is rigorously monitored on an ongoing basis with the due consideration it deserves and swift remedial action is taken for any deviations to ensure that the actual risk exposures across all the risk categories are kept within the approved risk appetite. With strong capital adequacy and liquidity positions which define the capacity to assume risk, the Bank’s risk profile is characterised by a portfolio of high-quality assets and stable sources of funding sufficiently diversified in terms of geographies, sectors, products, currencies, size and tenors. Risk profile of the Bank’s Sri Lankan operation as at December 31, 2021 and December 31, 2020 compared to the risk appetite as defined by the regulatory / Board approved policy parameters is given below: Table - 47: Risk profile Risk category Key Risk Indicator Policy parameter Actual position 31.12.2021 31.12.2020 5.11% Credit risk: Quality of lending portfolio Concentration Cross border exposure Gross NPA ratio 3% – 8% 4.62% Net NPA ratio 2% – 6% 1.44% 2.18% Impairment over total NPA (*) 40% – 60% 49.97% 46.95% Weighted average rating score of the overall lending portfolios 35% – 40% 52.60% 52.93% Loans and advances by product – Highest exposure to be maintained as a percentage of the total loan portfolio 30% – 40% 22.40% 21.72% Advances by economic sub sector (using HHI-HerfindahlHirschman-index) 0.015 – 0.025 0.0149 0.0145 Exposures exceeding 5% of the eligible capital (using HHI) 0.05 – 0.10 0.0063 0.0057 Exposures exceeding 15% of the eligible capital (using HHI) 0.10 – 0.20 0.0053 0.0055 Exposure to any sub sector to be maintained at 4% – 5% 4.49% 4.33% Aggregate of exposures exceeding 15% of the eligible capital 20% – 30% 9.98% 12.25% Rating of the highest exposure of the portfolio on S&P Investment Grade – AAA to BBB- AA AAA AAA Rs. 195.23 Mn. Rs. 267.12 Mn. 0.77 Times (1.86 times for 1 month bucket) 1.11 Times (1.78 times for 1 month bucket) Market risk: Interest rate risk Liquidity risk Interest rate shock: Maximum of Rs. 2,250 Mn. Re-pricing gaps (RSA/RSL in each maturity bucket – up to one- year period) <1-1.5 Times (other than for the 1 month bucket which is <2.5 Times) (Impact to NII as a result of 100bps parallel rate shock for LKR and 25bps for FCY) Statutory Liquid Asset Ratio (SLA) for Domestic Banking Unit (DBU) 22% 38.73% 44.99% Liquid Asset Ratio (LCR) for All Currencies 100% 242.52% 422.86% Net Stable Funding Ratio (NSFR) 100% 157.47% 157.49% Foreign Exchange risk Exchange rate shocks on Total FCY exposure Rs. 450 Mn. Rs. 373.47 Mn. Rs. 301.20 Mn. Operational risk Operational loss tolerance limit (as a percentage of last three years average gross income) 3% – 5% 0.78% 0.58% Strategic risk: Capital adequacy ratios: CET 1 Over 7.5% 11.923% 13.217% Total capital Over 13.0% 15.650% 16.819% ROE Over 15% 14.660% 11.28% Creditworthiness – Fitch Rating AA(lka) AA-(lka) AA-(lka) (RSA – Rate Sensitive Assets, RSL – Rate Sensitive Liabilities) (*) Impairment ratios (without undrawn amount) calculated for the years 2020 and 2021, based on the guidelines stipulated in the Banking Act Direction No. 13 of 2021, extracting the data given in note 34 on page 246, are 31.47% and 44.34%, respectively. > Risk Governance and Management Commercial Bank of Ceylon PLC Annual Report 2021 161
  164. Credit ratings In January 2021 , following the recalibration of the agency’s Sri Lankan rating scale, Fitch Ratings Lanka Limited revised the Bank’s National Long-Term Rating to AA-(lka)/Stable. The Bank’s Bangladesh operations continued to be rated AAA by Credit Rating Information and Services Limited (CRISL), the highest credit rating given to any financial institution in Bangladesh by CRISL. These credit ratings coupled with the high capital and liquidity buffers available in the Bank and the steady and consistent performance even during a period of disruptions and challenges depict the stability and the creditworthiness of the Bank and its conservative risk profile. Outlook and plans for 2022 and beyond The Operating Context and Outlook on pages 20 to 22 provides an analysis of the outlook for the Sri Lankan and the Bangladesh economies and the financial services sectors for 2022 and beyond. With full social, economic and financial impact of COVID-19 yet to be seen, deteriorating credit quality and potential for increased impairment losses, lackluster economic activities, sovereign debt sustainability related concerns and forex liquidity related pressures, a high degree of uncertainty is likely to continue to prevail in the short to medium term. With further acceleration of digital channels with potential disruptions and escalating cyber security threats and potential for compound and contagion risks, non-financial risks will become more prominent. Banking regulations will be further widened and deepened amidst pervasive technological advances and macroeconomic shocks. Recovery and resolution will require heightened attention. These developments necessitate further strengthening of the risk governance and risk management function. With compound and contagion risks arising from pandemic related developments and country specific/ global economic, historical correlations underlying risk management models may be found to be inadequate and trigger the need for alternative sources of data. Risk management function will also require professionals who will better understand how to leverage data which in turn requires such skills and knowledge as data science, data modelling, machine learning and AI based model risk management. Accordingly, the Bank will continue to make the necessary changes to the mandate, structure, resourcing, competencies, technologies, data analytics and MIS etc., thereby 162 Commercial Bank of Ceylon PLC aligning business strategies with sound risk management practices and making risk management function more forward looking, value adding and proactive. Specific initiatives planned for 2022 and beyond will include: z Developing systems and processes for data capturing in preparation for Basel IV, proposed to be implemented globally with effect from January 1, 2023; z Monitoring risk of competitor activity, entry of Fintech and telecom giants into the banking industry in particular, and evaluation of feasibility of possible partnerships to leapfrog competition; z Developing a risk database to strengthen cybersecurity to address risks arising from increasing interconnectedness and resulting financial contagion and carrying out scenario-based stress testing; z Implementation of a climate risk assessment tool with a view to address potential climate related risks by reducing carbon footprint of banking operations; z Development of a policy framework to manage the conduct risk; z Development of the CBSL mandated Recovery Plan; z Effective involvement in the asset classification, recognition, and measurement as per the Banking Act Direction Nos. 13 and 14 issued by the Central Bank; z Introduction of an ESG (Environment, Social and Governance) Framework that would enable practical initiatives that address ESG ambitions at Group level, identify growth opportunities and meet stakeholder needs whilst creating value; z Studying the options available to make the capital allocation process more efficient; z Introduction of a congruent and intelligent broad Credit, Operational and Market Risk Management frameworks in subsidiaries; z Converge the EWS with Internal credit evaluation to bring about a more robust mechanism to identify, predict, measure and control quality of credit exposures created by the Bank; z Inculcate a Data Culture throughout the organization by way of a comprehensive Data Roadmap and a well augmented Data Analytics Unit supporting effective business growth; z Implement robust Capital Optimization Initiatives Annual Report 2021 > Risk Governance and Management With success of the vaccination campaigns, the latest variant, Omicron, being classified as a less severe form of COVID-19 and most of the countries easing on their earlier strict zero COVID-19 policies, latest predictions are that the pandemic will be over soon, reviving hopes for a better outlook for 2022 and beyond. Risk management framework The Bank has an all-encompassing Risk Management Framework (RMF) based on the Three Lines of Defence model, which takes into account the different roles played by the different departments of the Bank and their interplay determining effectiveness of the Bank in dealing with risk. It is a structured approach to manage all its risk exposures and is underpinned by rigorous organisational structures, systems, processes, procedures and industry/global best practices taking into account all plausible risks, potential losses and uncertainties the Bank is exposed to. The Three Lines of Defence model, which is the international standard, enables the Bank to have specific skills and framework for managing risk and guides its day-to-day operations with the optimum balance of responsibilities. The RMF is subject to an annual review or more frequently if the circumstances so warrant, taking into account changes in the regulatory and operating environments.
  165. Figure – 32: Three lines of defence 1st Line of Defence 2nd Line of Defence 3rd Line of Defence Business lines/Corporate functions Risk management and control Assurance Owns and manages associated risks Evaluates risk using informed judgment Ensures that risks accepted are within the Bank’s risk appetite and risk management policies Comprises a robust system of internal controls and an organisation culture of risk awareness which is nurtured with regular training Independently monitors effective implementation of risk management framework Comprises internal audit, external audit and regulatory reviews providing independent assurance to the Board over the First and Second Lines of Defence Facilitates high levels of risk awareness throughout the organisation and ensures implementation of the risk management framework Facilitates high standards of governance and control systems Maintains a sound risk management policy framework Carries out timely reporting of findings to the Management and the Board Audit Committee Carries out measurement, monitoring and reporting to the Management and Board Integrated Risk Management Committee Objectively challenges First Line of Defence Line Management/Business Units Risk Governance Risk governance is the necessary organisational structure for maintaining a high standard of governance and comprises of the committees, rules, processes and mechanisms by which decisions relating to risk are taken and implemented for the management and oversight of risk within the risk appetite and the risk tolerance levels and for institutionalizing a strong risk culture. It enables the Management to undertake risk taking activities more prudently. The Board of Directors has established a robust governance structure by leveraging the best practice in corporate governance to risk management. It comprises Board committees, executive functions and executive committees with required delegated authority, facilitating accountability for risk at all levels and across all risk types of the Bank and enabling a disciplined approach to managing risk. The organisation of the Bank’s risk governance is given in Figure 33 on page 164. Since it is highly specialized and also to ensure an integrated and consistent approach, decision-making on risk management is centralized to a greater extent in several risk management committees. Board of Directors The Board of Directors is the apex governance body responsible for strategy and policy formulation, objective setting and for overseeing executive functions. It has the overall responsibility for understanding the > Risk Governance and Management Risk/Compliance Departments Inspection/Audit risks assumed by the Bank and the Group and for ensuring that they are appropriately Refer pages 104 to 109 for managed ( the profiles of the members of the Board of Directors). Accordingly, the Board determines the risk appetite of the Bank with due regard to achieving its strategic goals and delegates oversight responsibility to Board committees, a list of which is given on pages 125 and 128. These Board committees work closely with the executive functions and executive level committees to review and assess the effectiveness of the risk management function and report to the Board on a regular basis. These reports provide a comprehensive perspective of the Bank’s risk profile and risk management efforts and outcomes, enabling the Board to identify the risk exposures, any potential gaps and mitigating actions necessary, on a timely basis. The tone at the top and the corporate culture reinforced by the ethical and effective leadership of the Board plays a key role in managing risk at the Bank. In addition to the Three Lines of Defence model and the tone at the top, the Bank’s commitment to conduct its business in an ethical manner too plays a significant role in managing risk in the Bank. The Bank’s unwavering commitment and expectations of all the employees to undertaking business in a responsible, transparent and disciplined manner are set out in a number of related documents such as the Code of Ethics, Gift Policy, Communication Policy, Credit Policy and the Anti-Bribery and Anti-Corruption Policy which demand the highest level of honesty, integrity and accountability from all employees. In view of the potential for financial losses and reputational risk and also as required by regulatory authorities, the Board of Directors closely monitors the risk profile of all the subsidiaries in the Group apart from Refer page 200 for the that of the Bank ( list of subsidiaries). Board committees The Board has set up the following four Board committees to assist it in discharging its oversight responsibilities for risk management and for ensuring adequacy and effectiveness of internal control systems. z Board Audit Committee (BAC) z Board Integrated Risk Management Committee (BIRMC) z Board Credit Committee (BCC) z Board Strategy Development Committee (BSDC) These committees periodically review and make recommendations to the Board on risk appetite, risk profile, strategy, risk management and internal controls framework, risk policies, limits and delegated authority. Details relating to composition, terms of reference, authority, meetings held and attendance, activities undertaken during the year etc., of each of these Board committees are given in the respective committee reports on pages 129 to 145. Commercial Bank of Ceylon PLC Annual Report 2021 163
  166. Executive committees z Asset and Liability Committee (ALCO) Executive management is responsible for the execution of strategies and plans in accordance with the mandate of the Board of Directors while maintaining the risk profile within the approved risk appetite. Executive Integrated Risk Management Committee (EIRMC) comprises members from units responsible for credit risk, market risk, liquidity risk, operational risk and IT risk. Spearheaded by the EIRMC, the following committees have been set up on specific aspects of risk to facilitate risk management across the First and the Second Lines of Defence. z Credit Policy Committee (CPC) z Executive Committee on Monitoring Non-Performing Advances (ECMN) z Information Security Council (ISC) z Business Continuity Management Steering Committee (BCMSC) EIRMC coordinates communication with the BIRMC to ensure that risk is managed within the risk appetite. In addition, the Group Chief Risk Officer reports directly to the BIRMC. Details relating to composition of the executive committees are given in the section on “Annual Corporate Governance Report” on pages 117 and 128. The Group Chief Risk Officer, head of the Integrated Risk Management Department (IRMD) participates in the executive committees listed above as well as in BIRMC, BCC and BAC meetings. It is the responsibility of the IRMD to independently monitor compliance of the First Line of Defence to the laid down policies, procedures, guidelines and limits and escalate deviations to the relevant executive committees. It also provides the perspective on all types of risk for the above committees to carry out independent risk evaluations and share their findings with the Line Managers and the Senior Management enabling effective communication of material issues and to initiate deliberations and necessary action. Figure – 33: Risk governance structure Governance bodies and reporting Board of Directors BIRMC ISC BAC ALCO EIRMC BCMSC ECMN BCC BSDC CPC ESDC Operational Risk IT Risk ORMU ITRU IRMD headed by GCRO Credit Risk CRMU CRRU Market Risk SERMU TMO MRMU Risk management process Suite of policies and procedures, segregation of functions (Three Lines of Defence), risk assessment, risk measurement, risk mitigation, key risk indicators, Management Action Triggers (MATs), risk monitoring, risk reporting, guidance to business line managers, stress testing Risk ratings, collateral management and valuation, independent verification Limit structure, market behavioural analysis, balance sheet analysis, contingency funding, VaR measurements Tolerance levels Information Security Management System Risk culture Best practices BAC – Board Audit Committee, BIRMC – Board Integrated Risk Management Committee, BCC – Board Credit Committee, BSDC – Board Strategy Development Committee, ISC – Information Security Council, ALCO – Asset and Liability Committee, EIRMC – Executive Integrated Risk Management Committee, BCMSC – Business Continuity Management Steering Committee, ECMN – Executive Committee on Monitoring NPAs, CPC – Credit Policy Committee, ESDC – Executive Strategy Development Committee, IRMD – Integrated Risk Management Department, CRMU – Credit Risk Management Unit, CRRU – Credit Risk Review Unit, SERMU – Social and Environmental Risk Management Unit, TMO – Treasury Middle Office, MRMU – Market Risk Management Unit, ORMU – Operational Risk Management Unit, ITRU – IT Risk Management Unit 164 Commercial Bank of Ceylon PLC Annual Report 2021 > Risk Governance and Management
  167. Risk Management adopt international best practices . Since risk management is a responsibility of each and every employee of the Bank and that they need to have a clear understanding of the risks the Bank is faced with, IRMD provides ongoing training and awareness to the employees, risk owners in particular, disseminating knowledge and enhancing their skills on all aspects related to risk, instilling the desired risk culture. Risk management is the functional responsibility for identifying, assessing and mitigating risks as well as determining risk mitigation strategies, monitoring early warning signals, estimating potential future losses and putting measures in place to contain losses/risk transfer. The risk management framework (Figure 34) facilitates the formulation and implementation of risk management strategies, policies and procedures while taking into account the strategic focus as defined in the Corporate Plan and the risk appetite. The Bank has made significant investments to develop and maintain the infrastructure required in terms of both human and physical resources to strengthen detection and management of risks, including mandates, policies & procedures, limits, software, databases, expertise, communication etc. and to Policies, procedures and limits The Bank has a set of comprehensive risk management policies that cover all the risks it manages in order to provide guidance to the business and support units on risk management and regulatory compliance including the Banking Act Direction No. 07 of 2011 – Integrated Risk Management Framework for Licensed Commercial Banks based on the Basel Framework and subsequent CBSL directives. This helps to reduce prejudice and subjectivity in risk decisions by institutionalizing the risk knowledge base. This key document establishes the Bank’s risk culture by defining its objectives, priorities and processes as well as the Board’s and the Management’s roles in risk management. The Risk Assessment Statement (RAS) sets out the risk limits and forms an integral part of the risk management framework. The BIRMC and the Board of Directors review the RAS at least once a year, if not more frequently, based on regulatory and business needs. The Bank has considered the regulatory needs of the countries in which it operates. The Bank’s overall risk exposure including its international operations is within the CBSL’s regulatory framework. The Bank has issued comprehensive operational guidelines to facilitate implementation of the risk management policy and the limits specified in the RAS. These guidelines detail types of facilities, processes and terms and conditions under which the Bank conducts business, giving staff clarity in their day-to-day tasks. Figure – 34: Risk management framework Board of Directors Board committees Executive committees IRMD (2nd LOD) Risk management processes Risk culture Best practices Sources of risk from activities relating to financial intermediation and maturity transformation Deviations/ Trends Risk owner (1st LOD) Risk treatment plan Evaluation of risk Directions/Risk Policy Reviews Risk Governance Structure Risk evaluation Risk approval Assuming risk Internal Audit and External Audit (3rd LOD) Monitor/Review Assets and liabilities exposed to credit, market and liquidity risks (within the desired risk profile) and sources of operational and IT risks (with risk mitigated to “as low as reasonably practicable”) Credit risk Market risk Operational risk Key Credit Risk Indicators – Thresholds/MATs Credit risk review Post disbursement review Cross border risk review Counterparty bank risk review Social and environmental risk review Key Market Risk Indicators – Thresholds/MATs/ portfolio and income statement/balance sheet analysis Limit monitoring and review Market development/ trends and MIS Funds Transfer Pricing based IRR management by Treasury Key Operational Risk Indicators Thresholds/tolerance levels Check points Internal/external incidents/loss events/ compliance/scenarios Control gaps/policy exceptions Product/process reviews > Risk Governance and Management IT risk Key IT Risk Indicators Thresholds/tolerance levels Check points Information security incidents/loss events Emerging threats/ vulnerabilities Control gaps/policy exceptions Commercial Bank of Ceylon PLC Annual Report 2021 165
  168. Risk management tools To identify , measure, manage and report risks, the Bank uses a combination of qualitative and quantitative tools. Selection of the appropriate tool(s) for managing a particular risk is based on the likelihood of occurrence and the impact of the risk as well as the availability of data. These tools include early warning signals, threat analysis, risk policies, risk registers, risk maps, risk dashboards, RCSA, ICAAP, diversification, covenants, SEMS, workflow-based operational risk management system, insurance and benchmarking to limits, gap analysis, NPV analysis, swaps, caps and floors, hedging, risk rating, risk scoring, risk modelling, duration, scenario analysis, marking to market, stress testing, VaR analysis etc. Figure – 35: Summary of key risks External Our objective Mitigation Economic performance and trade cycles Cyber threats Increased regulations Stability of fiscal and monetary policy Close monitoring of trends for possible ramifications on the economy and business strategy which could impact asset quality and profitability Guiding business strategy and resource allocation communicated to business lines Specialised teams within the risk management function (in addition to the First Line of Defence) and continued investments in enhancing cyber security A dedicated compliance function and an independent internal audit function facilitate compliance Safeguard stable funding sources, asset quality and returns Safeguard information and ensure business continuity Dynamic approach to comply with regulations Other emerging risks Offering unparalleled and unprecedented convenience by adopting the latest banking technology To satisfy the rising expectations of stakeholders and to be future ready BANK Internal Mitigation Our objective Credit risk People and operational risk Market risk Safeguard the asset quality and reduce exposures to high risk segments Creating an environment that enables performance while safeguarding the business Safeguard against adverse movement of market factors arising from price sensitivities of funding sources, investments, lending or trading portfolios Develop predictive capability to support the decision making process Safeguard against funding constraints that prevent growth and meet demands of depositors/investors Robust and rigorous risk assessment and pricing of loans in line with risk appetite and collateral support Succession plans, code of conduct and business ethics, competency, policy frameworks, segregation of duties and internal controls Monitoring, predicting and controlling through stringent limits and Management Action Triggers Assumptions based models and behavioural testing through internal/ external independent validation Retention and growth of a stable deposit base and tapping low cost funding sources locally and overseas, act as a buffer in addition to sound maintenance of the liquid asset portfolio to support contingencies Increasing trend in risk 166 Commercial Bank of Ceylon PLC Decreasing trend in risk Annual Report 2021 No significant change > Risk Governance and Management Model risk Liquidity risk
  169. Types of risks The Bank is exposed to a multitude of financial and non-financial risks , which can be broadly categorised into credit, market, liquidity, operational, reputational, IT, strategic and legal risks. All these risks taken together determine the risk profile of the Bank which is monitored periodically against the risk appetite referred to earlier. Robust risk management framework in place enables the Bank to manage these risks prudently. Nevertheless, banks are not immune to the significant levels of uncertainty arising from various external developments as well as internal factors that will continue to affect their risk profiles on an ongoing basis. External developments may include; z The outbreak of pandemics z Movements in macroeconomic variables z Fragile supply chains z Sovereign risk destabilising financial markets z Political instability z Demographic changes z Changes in Government fiscal and monetary policies z Technological advances z Regulatory developments z Mounting stakeholder pressures z Competitor activities z Unsubstantiated information being circulated in social media z Decline in property market valuations giving rise to higher losses on defaulting loans z Lapses in implementing the risk proposition for future growth. A summary of key risks is given in Figure 35 on page 166. management framework z Improper alignment of remuneration to performance and risk z Incorrect advice offered to customers z Inaccurate predictions of macroeconomic variables z Execution gaps in internal processes z Lack of industrial harmony z Critical accounting judgements and estimates turning to be inaccurate z Lack of robust data infrastructure adversely affecting business and operational decisions and z Subsidiaries and associates not performing up to expectations of the Bank. These factors, if not properly managed, may affect the risk profile of the Bank as well as cause reputational damage, hampering the objective of sustainable value creation for all its stakeholders. Furthermore, the operating environment has been made much more complex and unpredictable by some potentially disruptive emerging threats and uncertainties, resulting in some of the long-standing assumptions about markets, competition and even business fundamentals being less true today. These call for the Bank to better understand its stakeholders and meet their expectations with excellence in execution in internal processes. The Bank deals with these developments through appropriate strategic responses, believing that these provide opportunities to differentiate its value These developments are making the operating environment more complex, dynamic and competitive day by day and risk management very challenging on an ongoing basis. Effective management of these risks with a congruent approach to face uncertainties is nevertheless a sine qua non to the implementation of the Bank’s strategy for value creation for all its stakeholders. Consequently, deliberations on risk management were on top of the agenda in all Board, Board Committee and Executive Committee meetings of the Bank. A description of the different types of risks managed by the risk management function of the Bank and risk mitigation measures adopted are given below. Credit risk Credit risk refers to the potential that a borrower or a counterparty will fail to meet its obligations in accordance with agreed terms. Direct lending activities as well as commitments and contingencies expose the Bank to credit risk. COVID-19 pandemic related developments have triggered certain implications such as masking credit risk and changes in creditworthiness of certain sectors, requiring the Bank to explore new approaches for managing and mitigating credit risk. The Bank’s total credit risk is made up of counterparty risk, concentration risk and settlement risk. Table - 48: Maximum credit risk exposure z Unfounded public perceptions that banks As at December 31, 2021 are exploiting customers z Distressed businesses and individuals z Downgrading of ratings of the banks and z Growing sustainability concerns Besides limiting physical movements of people and global trade, such developments could impact public perceptions, disposable income of people, demand for banking products and services, funding mix, interest margins and tax liabilities of the Bank. Internal factors may include; z Knowledge and skill gaps among staff members z Lapses in internal administration Rs. Bn. % Cash and cash equivalents 68.078 2.7 Placements with central banks and other banks (excluding reserves) 24.690 1.0 Net carrying amount of credit exposure: Financial assets at amortised cost – Loans and advances to banks Financial assets at amortised cost – Loans and advances to other customers 1,014.618 40.7 Financial assets at amortised cost – Debt and other financial instruments 369.418 14.8 Financial assets measured at fair value through other comprehensive income 335.463 13.5 Total (a) 1,812.267 z Deterioration of internal sub-cultures z Deliberate acts of fraud, cheat, misappropriation etc z Arbitrary decision making z Inaccurate/insufficient risk reporting z Inadequacies/misalignments of digitisation z Strategic misalignments > Risk Governance and Management Commercial Bank of Ceylon PLC Annual Report 2021 167
  170. As at December 31 , 2021 Rs. Bn. % Off-balance sheet maximum exposure: Lending commitments 143.400 5.8 Contingencies 536.753 21.5 Total (b) Total of maximum credit exposure (a + b) 680.153 2,492.420 Gross carrying amount of loans and advances to other customers Stage 3 (credit impaired) loans and advances to other customers Impaired loans as a % of gross loans and advances to other customers Allowance for impairment – loans and advances to other customers Allowance for impairment as a % of gross loans and advances to other customers Impairment charge – loans and advances to other customers Amid the COVID-19 pandemic related environmental challenges, the maximum credit exposure of the Bank has grown from Rs. 2,354.9 Bn. (as at end December 2020) to Rs. 2,492.4 Bn. (as at end December 2021). According to the SLFRS 9 classification, the credit impaired (Stage 3) loans to customers stood at Rs. 79.0 Bn. (Rs. 102.5 Bn. in 2020) which is 7.3% (10.8% in 2020) of the gross loans and advances to other customers portfolio of the Bank. Further, the increasing trend experienced in loans and advances to other customers getting classified as impaired which has resulted in a cumulative impairment allowance of Rs. 64.0 Bn. as at December 31, 2021 (Rs. 50.9 Bn. as at December 31, 2020). Managing credit risk The lending portfolio accounts for 52% of total assets and credit risk accounts for over 90% of the total risk-weighted assets. Hence, it is needless to overemphasise the critical importance of prudently managing the credit risk to the Bank’s sustainability. In the circumstances, we endeavour to manage credit risk going beyond mere regulatory compliance in order to enhance value. It is managed through the Board approved credit risk management framework which comprises a robust risk governance structure and a comprehensive suite of 168 Commercial Bank of Ceylon PLC 100.0 1,078.685 79.076 7.3 64.066 5.9 14.553 risk management processes which, among others, include policies and procedures, risk ratings, risk review mechanism, collateral management and valuation, segregation of credit risk management functions, social and environmental risk management, independent verification of risk assessments, credit risk monitoring, post disbursement review, providing direction to business line managers, dissemination of credit risk related knowledge and sharing information with internal audit. Review of credit risk The challenging operating environment following the Easter Sunday attack further deteriorated due to the COVID-19 pandemic related lockdowns, travel restrictions, supply chain disruptions, and import restrictions continued throughout the year under review. Concerns fuelled by foreign currency liquidity shortages exerted pressure on the business entities. However, certain proactive measures taken by the Government such as the effective vaccination drive, efforts to boost FDIs and revive tourism helped the country sustain economic activities at a reasonable level. Demonstrating its resilience, the Bank managed to gradually weather the effects of the pandemic and make progress. NPL ratios improved during Annual Report 2021 > Risk Governance and Management Refer Table 47 on risk profile on the year ( page 161). Continuous follow up of facilities that were subjected to moratoria, recovery initiatives such as offering incentives and elevated levels of attention given to loan approvals and post-sanction monitoring and recovery efforts together with planned implementation of early identification of stressed borrowers through EWS will assist the Bank to gradually bring down these ratios further in 2022 and minimise potential credit risk. In addition to the effective credit risk management framework referred to above that guides the Bank when on-boarding new exposure and monitoring existing exposure which makes an enormous contribution to maintain the quality of the loan book, the Bank is vigilant and exercises caution when choosing customers, products, segments and geographies it serves. Continuous monitoring of age analysis and the underlying movement of overdue loans through arrears buckets enabled the Bank to swiftly take action, thereby moderating default risk during the year. Concentration risk It is through strategically diversifying the business across industry sectors, products, counterparties and geographies that the Bank manages concentration risk. The Bank’s RAS defines the limits for these segments and to ensure compliance, the Board, BIRMC, EIRMC and the CPC monitor these exposures. They also make suggestions and recommendations on modifications to defined limits based on the trends and developments shaping the business environment. Graph 23 depicts that the tenor-wise breakdown of the portfolio of total loans and advances to other customers is within the risk appetite of the Bank. The distribution of Stage 3 credit impaired loans and advances to other customers in terms of identified industry sectors as at year end is given in Table 49 on page 169.
  171. Graph – 23: Loans and advances to other customers by tenor-wise as at December 31, 2021 (based on residual maturity) Upto 3 months 4-12 months 13-36 months 37-60 months Over 60 months A– B – C– D– Overdrafts Trade finance Lease receivables Credit cards E – F – G– H– Pawning Staff loans Housing loans Personal loans I – Long-term loans J – Short-term loans K – Bills of exchange K J I H G F E D C B A 0 80 160 240 320 400 Rs. Bn. Table - 49: Distribution of Stage 3 credit impaired loans and advances to other customers as at December 31, 2021 Industry Category Agriculture, forestry and fishing Arts, entertainment and recreation Allowance for Collective Impairment Rs. ’000 ECL Allowance Amount Written-off Rs. ’000 Allowance for Individual Impairment Rs. ’000 Rs. ’000 Rs. ’000 10,020,367 996,468 3,570,968 4,567,436 51,527 Stage 3 Loans and Advances 28,658 28,658 78 Construction 7,791,382 3,449,065 2,258,071 5,707,136 38,790 Consumption and others 7,601,095 7,420 3,378,997 3,386,417 256,730 117,352 117,352 692 136,675 921,272 629 Education 78,162 305,324 – – Financial services 1,205,504 784,597 Health care, social services and support services 1,590,064 61,884 507,360 569,244 2,212 657,123 4,220 261,577 265,797 1,821 Infrastructure development 2,532,161 620,781 259,999 880,780 154 Lending to overseas entities 2,735,791 67,065 668,510 735,575 – 16,585,196 2,838,447 4,047,918 6,886,365 470,767 634,977 - 236,223 236,223 3,298 Information technology and communication services Manufacturing Professional, scientific and technical activities Tourism 6,143,146 188,100 1,774,473 1,962,573 3,719 Transportation and storage 2,852,214 1,228,902 270,056 1,498,958 42,472 Wholesale and retail trade 18,343,130 2,210,175 5,091,240 7,301,415 67,253 Total 79,075,636 12,457,124 22,608,077 35,065,201 940,142 > Risk Governance and Management Commercial Bank of Ceylon PLC Annual Report 2021 169
  172. Graph – 24: Geographical analysis of loans and advances to other customers by product-wise as at December 31, 2021 Sabaragamuwa province Southern province Uva province Western province Bangladesh Central province Eastern province North central province Northern province North western province A– B – C– D– E – F – Overdrafts Trade finance Lease receivables Credit cards Pawning Staff loans G– H– I – J – K – local banks in Bangladesh consisted of AAA to AA rated counterparty banks (Graph 27). Housing loans Personal loans Long-term loans Short-term loans Bills of exchange Graph – 26: The concentration of counterparty bank exposures in Sri Lanka as at December 31, 2021 (Fitch ratings-wise) K J I H G AAA to A BBB to B F 94% 6% Graph – 27: The concentration of counterparty bank exposures in Bangladesh as at December 31, 2021 (CRAB ratings-wise*) E D C B A 0 80 160 240 320 400 Rs. Bn. It is due to economic activities being heavily concentrated in the Western province and the headquarters of most borrowing entities being located there that a geographical analysis (Graph 24) reflects a high concentration of loans and advances to other customers in the Province. Product-wise analysis of the lending portfolio (Graph 25) too reveals the efficacy of the Bank’s credit policies with risk being diversified across a range of credit products. Graph – 25: Product-wise analysis of loans and advances to other customers as at December 31, 2021 Overdrafts Trade finance Lease receivables Credit cards Pawning Staff loans Housing loans Personal loans Long-term loans Short-term loans Bills of exchange 170 Commercial Bank of Ceylon PLC 11% 9% 4% 1% 1% 1% 7% 5% 39% 17% 5% The relatively high exposure of 39% to long-term loans is rigorously monitored and mitigated with collateral. Counterparty risk The Bank manages counterparty risk through the laid down policies/procedures and limit structures including single borrower limits and group exposure limits with sub-limits for products etc. The Bank has set limits far more stringent than those stipulated by the regulator, providing it a greater leeway in managing concentration levels with regard to the counterparty exposures. A major component of counterparty risk is in relation to loans and receivables to banks, both local and foreign. A specific set of policies, procedures and a limit structure are in place to monitor it. Whilst market information on the financial/economic performance of these counterparties is subject to a rigorous scrutiny throughout the year, the counterparty bank exposures are monitored against the established prudent limits at frequent intervals and the limits are revised to reflect the latest information, where deemed necessary. The analysis uses Fitch Ratings for local banks in Sri Lanka and Credit Ratings Agency in Bangladesh (CRAB) ratings for local banks in Bangladesh (Equivalent CRISL/Alpha ratings are used where CRAB ratings are not available). Exposures for local banks in Sri Lanka rated AAA to A category stood at 94% (Graph 26) whilst 100% of exposure of Annual Report 2021 > Risk Governance and Management AAA to AA BBB to B 100% 0% *Equal CRISL/Alpha ratings are given where CRAB ratings are unavailable. Cross-border risk It is the risk that the Bank will be unable to secure payments from its customers or third parties on their contractual obligations due to certain actions taken by foreign governments, mainly relating to convertibility and transferability of foreign currency. Assets exposed to cross-border risk comprise loans and advances, interestbearing deposits with other banks, trade and other bills and acceptances and those predominantly relating to short-term money market activities. Limit structures in place, continuous monitoring of macroeconomic and market developments of the countries with exposure to counterparties and stringent evaluation of counterparties and maintaining frequent dialogue with them help to minimize risk arising from over concentration of cross-border risk. Timely action is taken to suspend/revise limits to countries with adverse economic/political developments. The Bank’s total cross-border exposure is only 5% of its total assets (Graph 29 on page 171). The Bank has cross-border exposures to a spread of countries which primarily include the Maldives, India, Singapore, USA, Denmark, Malaysia, etc.
  173. Graph – 28: The concentration of cross-border exposure (Sri Lanka and Bangladesh Operations) - S&P Rating wise as at December 31, 2021 92.3% 7.7% AAA to BBBBelow BBB- and Unrated Note : Excluding the investment in Bangladesh Operations & Direct Lending in Maldives/Bangladesh. Graph – 29: Cross border exposure of the Bank (Sri Lanka and Bangladesh operations) Maldives India Singapore USA Denmark Malaysia UK Kenya Indonesia Germany Hong Kong Korea Others Total Assets* Other Assets Cross border Assets 95% 5% 19.87% 18.61% 18.48% 18.12% 3.60% 3.02% 3.00% 2.90% 1.69% 1.42% 1.27% 0.92% 7.10% Total Assets inclusive of Guarantees Market risk Market risk is the risk of loss arising from movements in market driven variables such as interest rates, exchange rates, commodity prices, equity and debt prices and their correlations against the expectations the Bank had at the time of making decisions. The Bank’s operations are exposed to these variables and correlations in varying magnitudes. Table - 50: Market risk categories Major market risk category Risk components Interest rate Description Tools to monitor Severity Impact Exposure High Medium Medium Risk of loss arising from movements or volatility in interest rates Re-pricing Re-pricing gap limits and Differences in amounts of interest earning assets and interest-bearing liabilities getting interest rate sensitivity re-priced at the same time or due to timing limits differences in the fixed rate maturities and appropriately re-pricing of floating rate assets, liabilities and off-balance sheet instruments Yield curve Unanticipated changes in shape and gradient of the yield curve Rate shocks and reports High High High Basis Differences in the relative movements of rate indices which are used for pricing instruments with similar characteristics Rate shocks and reports High Medium Medium Foreign exchange Possible impact on earnings or capital arising from movements in exchange rates arising out of maturity mismatches in foreign currency positions other than those denominated in base currency, Sri Lankan Rupee (LKR) Risk tolerance limits for individual currency exposures as well as aggregate exposures within regulatory limits for NOP High Medium Medium Equity Possible loss arising from changes in prices and volatilities of individual equities Low Mark-to-market calculations are carried out daily for Fair Value Through Profit and Loss (FVTPL) and Fair Value Through Other Comprehensive Income (FVOCI) portfolios Low Negligible Commodity Exposures to changes in prices and volatilities of individual commodities Mark to market calculations Low Negligible > Risk Governance and Management Low Commercial Bank of Ceylon PLC Annual Report 2021 171
  174. Managing market risk Review of market risk Market risk portfolio analysis Market risk is managed through the market risk management framework approved by the Board , which comprises a robust risk governance structure and a comprehensive suite of risk management processes which include policies, market risk limits, Management Action Triggers (MATs), risk monitoring and risk assessment. Market risk arises mainly from the NonTrading Portfolio (Banking Book) which accounted for 92.05% of the total assets and 94.05% of the total liabilities as at December 31, 2021. Exposure to market risk arises mainly from IRR and FX risk as the Bank has negligible exposure to commodity related price risk and equity and debt price risk which was less than 12% of the total risk weighted exposure for market risk. The gap report is prepared by stratifying Rate Sensitive Assets (RSA) and Rate Sensitive Liabilities (RSL) into various time bands according to maturity (if they are fixed rated) or time remaining to their next re-pricing (if they are floating rated). Balances of savings deposits are distributed in line with the findings of a behavioural analysis conducted by the Bank and based on the guidelines of the CBSL on overdrafts and credit cards. Vulnerability of the Bank to interest rate volatility is indicated by the gap between Refer Table 51). RSA and RSL ( The Bank’s exposure to market risk analysed by Trading Book and Non-Trading Portfolios (or Banking Book) is set out in the Note 67.3.1 on page 331. Table - 51: Interest rate sensitivity gap analysis of assets and liabilities of the Banking Book as at December 31, 2021 – Bank 0-90 Days 3-12 Months 1-3 Years 3-5 Years Over 5 years Non-sensitive Total as at 31/12/2021 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Total financial assets 570,948,878 325,874,708 426,432,258 205,863,555 204,935,130 121,006,704 1,855,061,233 Total financial liabilities 679,465,109 576,555,364 130,206,477 91,360,929 244,974,815 17,110,538 1,739,673,232 Interest rate sensitivity gap (108,516,231) (250,680,656) 296,225,781 114,502,626 (40,039,685) 103,896,166 115,388,001 Cumulative gap (108,516,231) (359,196,887) (62,971,106) 51,531,520 11,491,835 115,388,001 2.25 0.84 Description RSA/RSL 0.84 Interest rate risk (IRR) 0.57 Table - 52: Sensitivity of NII to rate shocks Extreme movements in interest rates expose the Bank to fluctuations in Net Interest Income (NII) and have the potential to impact the underlying value of interestearning assets and interest-bearing liabilities and off-balance sheet items. The main types of IRR to which the Bank is exposed to are repricing risk, yield curve risk and basis risk. Sensitivity of projected NII Regular stress tests are carried out on Interest Rate Risk in Banking Book (IRRBB) encompassing changing positions and new economic variables together with systemic and specific stress scenarios. Change in value of the Fixed Income Securities (FIS) portfolio in FVTPL and FVOCI categories due to abnormal market movements is measured using both Economic Value of Equity (EVE) and Earnings At Risk (EAR) perspectives. Results of stress tests on IRR are analyzed to identify the impact of such scenarios on the Bank’s profitability and capital. Impact on NII due to rate shocks on LKR and FCY is continuously monitored to ascertain the Bank’s vulnerability to sudden Refer Table 52). interest rate movements ( 172 Commercial Bank of Ceylon PLC 3.28 2021 2020 Parallel increase Parallel decrease Rs. ’000 Rs. ’000 Parallel increase Parallel decrease Rs. ’000 Rs. ’000 As at December 31, 195,232 (195,288) Average for the year 237,725 (195,758) 708,924 (648,050) Maximum for the year 655,218 (655,219) 1,060,589 (1,040,835) Minimum for the year (161,529) 245,713 249,878 (132,005) Foreign exchange risk Stringent risk tolerance limits for individual currency exposures as well as aggregate exposures within the regulatory limits ensure that potential losses arising out of fluctuations in FX rates are minimised and maintained within the Bank’s risk appetite. USD/LKR exchange rate depreciated by 7.0% (Source - CBSL) during the year under review. refer to Note 67.3.3 – Exposure Please to currency risk - non trading portfolio on pages 333 and 334. Stress testing is conducted on NOP by applying rate shocks ranging from 2% to 15% in order to estimate the impact on profitability and capital adequacy of the Refer Table 56 on page 178). The Bank ( Annual Report 2021 > Risk Governance and Management 267,122 (132,005) impact of a 1% change in exchange rate on the foreign currency position indicated a loss of Rs. 373.47 Mn. on the positions as Refer Graph 47 at December 31, 2021 ( on page 333). Equity price risk Although the Bank’s exposure to equity price risk is negligible, mark to market calculations are conducted daily on FVTPL and FVOCI portfolios. The Bank has also calculated VaR on equity portfolio. Note 67.3.4 on page 335 summarizes the impact of a shock of 10% on equity price on profit, other comprehensive income (OCI) and equity. Commodity price risk The Bank has a negligible exposure to commodity price risk which is limited to the extent of the fluctuations in gold price on the pawning portfolio.
  175. Liquidity risk The key ratios used for measuring liquidity under the stock approach are given in below : Liquidity risk is the Bank’s inability to meet “on” or “off” balance sheet contractual and contingent financial obligations as they fall due, without incurring unacceptable losses. Table - 54: Key ratios used for measuring liquidity under the stock approach Banks are vulnerable to liquidity and solvency problems arising from mismatches in maturities of assets and liabilities. Consequently, the primary objective of liquidity risk management is to assess and ensure availability of funds required to meet obligations at appropriate times, both under normal and stressed conditions. Liquid assets ratios as at December 31, 2021 are given below: As at December 31, 2021 Liquidity ratios % As at December 31, 2020 Loans to customer deposits 0.75 0.75 Net loans to total assets 0.52 0.52 Liquid assets to short-term liabilities 0.58 0.60 Purchased funds to total assets 0.22 0.23 (Large liabilities – Temporary Investments) to (Earning assets – Temporary Investments) 0.19 0.18 Commitment to total loans 0.18 0.24 Table - 53: Statutory Liquidity Ratios 2021 2020 % % DBU 38.73 44.99 OBC 36.39 32.70 Rupee 425.97 599.38 All Currencies 242.52 422.86 Net Stable Funding Ratio (NSFR) 157.47 157.49 Statutory Liquid Assets Ratio (SLAR) Liquidity Coverage Ratio (LCR) Managing liquidity risk The Bank manages liquidity risk through policies and procedures, measurement approaches, mitigation measures, stress testing methodologies and contingency funding arrangements. As experienced across the industry, relatively slow credit growth compared to deposit inflow, caused the Bank to have an excess liquidity situation throughout the year, as can be seen by the ratios given in Table 53. It was a challenge for the Bank to manage such excess liquidity to generate an optimum return. Major portion of the excess liquidity had to be invested in Government securities, both denominated in LKR and FCY at optimum yields to minimize adverse effects on profitability. Liquidity risk review The net loans to deposits ratio is regularly monitored by the ALCO to ensure that the asset and liability portfolios of the Bank are geared to maintain a healthy liquidity position. NSFR indicating stability of funding sources compared to loans and advances granted was maintained well above the policy threshold of 100%, which is considered healthy to support the Bank’s business model and growth. > Risk Governance and Management Maturity gap analysis Funding diversification by product Maturity gap analysis of assets and liabilities of the Bank as at December 31, 2021 is given in Note 67.2.2 (a) to the Financial Statements on pages 326 and 327. The Bank’s primary sources of funding are deposits from customers and other borrowings. The Graph 30 provides a product-wise analysis of the Bank’s funding diversification as at end of 2021 and 2020. Maturity analysis of financial assets and financial liabilities of the Bank indicates sufficient funding for foreseeable adverse situations based on prescribed behavioural patterns observed. Graph – 30: Funding diversification by product Maturity analysis of financial assets and financial liabilities of the Bank does not indicate any adverse situation when due cognisance is given to the fact that cash outflows include savings deposits which can be considered as a quasi-stable source of funds based on historical behavioural patterns of such depositors as explained below. 2021 Behavioural analysis on savings accounts In the absence of a contractual agreement about maturity, savings deposits are treated as a non-maturing demand deposit. There is no exact re-pricing frequency for the product and the Bank resets rate offered on these deposits based on re-pricing gap, liquidity and profitability etc. Since there is no exact re-pricing frequency and that it is not sensitive to market interest rates, segregation of savings products among the predefined maturity buckets in the maturity gap report is done based on the regular simulations carried out by the Bank in line with a behavioural study. 2020 Term deposits Other borrowings Due to Banks Current account balances Saving deposits 2021 2020 49% 2% 5% 9% 35% 47% 12% 6% 6% 29% The liquidity position is measured in all major currencies at both individual and aggregate levels to ensure that potential risks are within specified threshold limits. Additionally, potential liquidity commitments resulting from loan disbursements and undrawn overdrafts are also monitored to ensure sufficient funding sources. Commercial Bank of Ceylon PLC Annual Report 2021 173
  176. Operational risk Operational risk is the risk of losses stemming from inadequate or failed internal processes , people and systems, or from external events such as natural disasters, social or political events. It is inherent in all banking products and processes and the Bank’s objective is to control it in a cost-effective manner. Operational risk includes legal risk but excludes strategic and reputational risk. Managing operational risk The Bank manages operational risk through policies, risk assessment, risk mitigation including insurance coverage, procedures relating to outsourcing of business activities, managing technology risk, a comprehensive Business Continuity Plan (BCP) and a Disaster Recovery Plan (DRP), creating a culture of risk awareness across the Bank, stress testing and monitoring and reporting. Policies and procedures relating to outsourcing of business activities of the Bank ensure that all significant risks arising from outsourcing arrangements of the Bank are identified and effectively managed on a continuous basis. Details of all outsourced functions are reported to the CBSL annually. Due diligence tests on outsourced vendors are carried out by respective risk owners prior to executing new agreements and renewal of existing agreements. Further, biannual review meetings are conducted with key IT service providers to monitor service performance levels and to verify adherence to the agreements. Business continuity management Business Continuity Management (BCM) framework of the Bank encompasses business continuity, disaster recovery, crisis management, incident management, emergency management and contingency planning activities. These activities will ensure that the Bank is committed to serve all its stakeholders with minimum business interruptions in the event of an unforeseen disruption to its business activities arising from man-made, natural or technical disasters. In 2018, the BCP of the Bank was revamped in line with industry best practices in consultation with an external BCP expert. IT Disaster Recovery Plan, which is a key component of BCP was also reviewed and approved by the Board of Directors. IT system recovery capabilities of core banking and other critical systems of the Bank has been further strengthened by way of introducing a secondary high-availability set-up leading to improved redundancy. A BCP exercise (working day) was carried out in July 2021, which was conducted over a period of one week, beyond the current CBSL requirement of one working day. During the week of the BCP drill, the core banking and other critical systems were running from the DR systems. The exercise was a great success with minimum disruptions, which bears testimony to the maturity attained by the Bank by conducting such exercises over the years. Commercial Bank of Ceylon PLC Composition of losses – business line Payment and Settlement – 64% Composition of losses – category Review of operational risk The Bank has a low appetite for operational risk and has established tolerance levels for all types of material operational risk losses based on historical loss data, budgets and forecasts, performance of the Bank, existing systems and controls governing Bank operations etc. Following thresholds have been established based on audited financial statements for monitoring purposes: Composition of losses – business line Retail Banking – 36% Composition of losses – category z Alert level – 3% of the average gross income for the past three years z Maximum level – 5% of the average gross income for the past three years Operational losses for the financial year 2021 were below the internal alert level at 0.78% (of average audited gross income for the past three years). The Bank has been consistently maintaining operational losses below the alert level for the past ten years, reflecting the “tone at the top”, effectiveness of the governance structures and the rigour of processes and procedures in place to manage operational risk. The Graph 31 analyses the operational risk losses incurred by the Bank in 2021 under each business line/category. The scope of the BCM includes programme initiation and management, risk evaluation and business impact analysis, developing business continuity strategies, emergency preparedness and response, developing and implementing business continuity plans, awareness building and training, business continuity plan exercise, audit and maintenance, crisis communications and coordination with external agencies. 174 Graph – 31: Composition of losses – 2021 Annual Report 2021 Payment and settlement Retail Banking Business disruption and system failures Execution, delivery and process management Internal frauds Damage to physical assets External frauds Clients products and business practices Business disruption and system failures 64% 36% 100% 81% 1% 8% 2% 2% 6% When analysing the losses incurred during 2021 under the Basel II defined business lines, it is evident that the majority (64%) of losses with financial impact falls under the business line of “Payment and Settlement”, followed by the losses reported under the “Retail Banking” business line (36%). Losses relating to other business lines remained negligible. The Graphs 32 and 33 depict the comparison of operational losses reported during 2021 and 2020 under each Basel II loss event type, both in terms of number of occurrences and value. > Risk Governance and Management
  177. Graph – 32: Operational loss events by category – % of total losses by number of events 2021 2020 Execution, delivery and process management Internal frauds External frauds Employment practices and work place safety Clients, products and business practice Damage to physical assets Business disruption and system failures 2021 2020 90% 0% 1% 90% 0% 1% 0% 0% 0% 3% 0% 3% 6% 6% Graph – 33: Operational loss events by category –% of total losses by value 2021 > Risk Governance and Management During the year, the Financial Intelligence Unit of the CBSL imposed a penalty of Rs. 3 Mn. on the Bank for certain lapses in relation to AML compliance. Following this, the Bank further strengthened AML compliance with new audit reports for monitoring transactions and ensuring compliance with KYC requirements. When considering the values of the losses incurred by the Bank during the year, they can mainly be categorized under Business Disruption and System Failures related, Execution, Delivery and Process Management related and Damages to Physical Assets. The losses for the year were primarily driven by a limited number of events in these three categories majority of which the Bank managed to resolve through subsequent recovery / rectification with minimum financial impact to the Bank. Further, necessary process improvements and system changes have been introduced to prevent recurrence. Capital allocation pertaining to operational risk for 2021 under Alternative Standardised Approach as per Basel III is Rs.12.23 Bn., whereas the net losses after discounting the subsequent recoveries amounts to a mere 0.207% of this capital allocation. This trend of exceptionally low levels of operational risk losses of the Bank bears testimony to the effectiveness of the Bank’s operational risk management framework and the internal control environment. IT risk 2020 Execution, delivery and process management Internal frauds External frauds Employment practices and work place safety Clients, products and business practice Damage to physical assets Business disruption and system failures As typical with operational risk losses, majority of the losses encountered by the Bank during 2021 consisted of high frequency/low financial impact events mainly falling under the loss category Execution, Delivery and Process Management. These low value events are mainly related to cash and ATM operations of the Bank’s service delivery network consisting of over 1,000 points across Sri Lanka and Bangladesh. Individual events with monetary values less than Rs.100,000 accounted for more than 90% of the total loss events for the year. Also, the number of loss events for the year when compared to the number of transactions performed during the year stands at a mere 0.0047%. 2021 2020 29% 0% 1% 75% 0% 12% 0% 0% 1% 3% 0% 1% 66% 12% IT risk is the business risk associated with use, ownership, operation, involvement, influence and adoption of IT within an organisation. It is a major component of operational risk comprising IT-related events such as system interruptions / failures, errors, frauds through system manipulations, cyberattacks, obsolescence in applications, falling behind competitors concerning the technology etc., that could potentially affect the whole business. Given the uncertainty with regard to frequency and magnitude, managing IT risk poses challenges. Hence, the Bank has accorded top priority to addressing IT risk, giving more focus to cyber security strategies and continually investing on improving the cyber security capabilities. The Bank’s cyber security strategy is focused on securely enabling new technology and business initiatives while maintaining a persistent focus on protecting the Bank and its customers from cyber threats. The IT Risk Unit of the IRMD is responsible for implementing the IT risk management framework for the Bank, ensuring that the appropriate governance framework, policies, processes and technical capabilities are in place to manage all significant IT risks. The IT Risk Management Policy, aligned with the Operational Risk Management Policy complements the Information Security Policy, the related processes, objectives and procedures relevant for managing risk and improving information security of the Bank. Risk Control Self Assessment (RCSA) is used as one of the core mechanisms for IT risk identification and assessment, while the IT Risk Unit carries out independent IT risk reviews in line with the established structure of the operational risk management process. Results of these independent IT risk assessments together with audit findings, analysis of information, security incidents, internal and external loss data are also employed for IT risk identification and assessment purposes. IT risk mitigation involves prioritizing, evaluating and implementing the appropriate risk-reducing controls or risk treatment techniques recommended from the risk identification and assessment process. The Bank has a multi-layered approach of building controls into each layer of technology, including data, applications, devices, network, etc. This ensures robust end-to-end protection, while enhancing the cyber threat detection, prevention, response and recovery controls. Bank is certified under the globally accepted, de-facto standard for Information Security Management System (ISMS) – ISO/IEC 27001:2013 and Payment Card Industry Data Security Standard (PCI DSS), both focusing on ensuring Confidentiality, Integrity and Availability of data/ information. The ISMS is independently validated on an annual basis by the ISO 27001 ISMS external auditors and Qualified Security Assessors of the PCI Council. The Bank has continued to invest in information security, by enhancing information security governance in line with the CBSL directions and intensifying focus on information and cyber security with the Baseline Security Standards (BSS) being rolled-out across the branch network and in the Head Office. Initiatives taken in this regard are given under Key Developments in 2021 on pages 159 and 160 of this report. Given that risk management relies heavily on an effective monitoring mechanism, the IT Risk Unit carries out continuous, independent monitoring of the Bank’s IT risk profile using a range of tools and techniques including Key IT Risk Indicators (KIRIs). The KIRI review process Commercial Bank of Ceylon PLC Annual Report 2021 175
  178. involves monitoring a range of indicators including information security-related incidents , supplemented by trend analysis that accentuates high-risk or emerging issues so that prompt action can be taken to address them. Legal risk Legal risk is an integral part of operational risk and is defined as the exposure to the adverse effects arising from inaccurately drawn up contracts, their execution, the absence of written agreements or inadequate agreements It includes, but is not limited to, exposure to reprimanding, fines, penalties, or punitive damages resulting from supervisory actions, as well as cost of private settlements. The Bank manages legal risk by ensuring that applicable regulations are fully taken into consideration in all relations and contracts with individuals and institutions who maintain business relationships with the Bank and supported by required documentation. Potential risk of any rules and regulations being breached is managed by the establishment and operation of an effective system for verifying conformity of operations with relevant regulations. Compliance and regulatory risk Compliance and regulatory risk refers to the potential risk to the Bank resulting from non-compliance with applicable laws, rules and regulations and codes of conduct and could result in regulatory fines, financial losses, disruptions to business activities and reputational damage. A compliance function reporting directly to the Board of Directors is in place to assess the Bank’s compliance with external and internal regulations on an ongoing basis. A comprehensive Compliance Policy defines how this key risk is identified, monitored and managed by the Bank in a structured manner. The Bank’s culture and the Code of Ethics too play a key role in managing this risk. Strategic risk Strategic risk is related to strategic decisions and may manifest in the Bank not being able to keep up with the evolving market dynamics, resulting in loss of market share and failure to achieve strategic goals. Corporate planning and budgeting process and critical evaluation of their alignment with the Bank’s vision, mission and the risk appetite facilitate management of strategic risk. The detailed scorecard-based qualitative model aligned to ICAAP is used to measure and monitor strategic risk of the Bank. This scorecard-based approach takes a number of variables into account, including the size and sophistication of the Bank, the nature and complexity of its operations and highlights the areas that require focus to mitigate potential strategic risks. 176 Commercial Bank of Ceylon PLC Reputational risk Reputational risk is the risk of adverse impact on earnings, assets and liabilities or brand value arising from negative stakeholder perception of the Bank’s business practices, activities and financial position. The Bank recognizes that reputational risk is driven by a wide range of other business risks relating to the “conduct” of the Bank that must all be actively managed. In addition, the proliferation of social media has widened the stakeholder base and expanded the sources of reputational risk. Accordingly, reputational risk is broadly managed through the systems and controls adopted for all other risk types such as credit, market, operational risk etc., which are underpinned by the code of conduct, Anti-Bribery and Anti-Corruption Policy, Communication Policy and business ethics that prohibit unethical behaviour and promote employees to live by the claims made. Further, the detailed scorecard which was available to measure and monitor reputational risk under ICAAP was formalized and implemented as Group Reputational Risk Management Policy framework during the year 2020. Conduct risk As an organization that thrives on public trust and confidence, yet is faced with many conflicting interests and tradeoffs, aligning of the Bank’s interests with those of the customers is imperative for the Bank’s success and sustainability. Unfair business practices, professional misbehaviour, ethical lapses, inefficient operations, bribery and corruption, compliance failures, governance weaknesses etc. dent customer confidence on the Bank. Proper conduct with fair outcomes to the customer is closely associated with the culture, governance structure and the tone at the top of the Bank. The Bank has a customer centric approach that encompasses accountability, remuneration structures, compliance with the laws, rules and regulations in spirit, learning culture, transparency, public disclosures, Service Level Agreements and monitoring thereof, customer complaint handling procedure and customer engagement to maintain high standards of behaviour and integrity with a view to minimize conduct risk. The Bank is currently in the process of developing a comprehensive Conduct Risk policy framework covering the entire Group. Contagion Risk From a banking perspective, Contagion (Systemic) Risk refers to the risk of a financial stress or shock in one country, market, industry or a counterparty spilling across to other countries, markets, industries or counterparties, triggering disturbance and even defaults, given the highly integrated Annual Report 2021 > Risk Governance and Management nature of the global financial systems and cross market linkages. The impact of a single shock can amplify existing stresses, leading to larger and sustained impacts on lives and livelihoods. The spill-over effects, a form of negative externalities, can create financial volatility and cause damage to financial systems. Although the COVID-19 began as a viral outbreak, it has already created a financial contagion in global markets. In the current fragile context where the outlook for the pandemic and the path to economic recovery continuing to remain uncertain, the Bank is to take additional steps to incorporate identifying risk elevated industries and monitor levels of distress among customers, industry sectors, regions etc. that may cause contagion risk, through the EWS, based on internal data, with a view to limit the potential impact. Model Risk A subset of Operational Risk, Model Risk is the risk that occurs when financial models used to measure quantitative information fail, leading to adverse outcomes for the Bank. The Bank uses a number of models that apply statistical, economic, financial and mathematical theories, techniques and assumptions to process data into quantitative estimate, for the management of various risks. Model failures can occur due to programming errors, incorrect data, technical errors as well as from misinterpretation of model outputs. The Bank uses extensive testing, robust governance policies and independent reviews to manage model risk. Bribery and corruption related risks Bribery and Corruption is illegal, dishonest and damages the reputation of the Bank and therefore, the Bank expects all its employees to refrain from giving or accepting bribes, kickbacks or commissions nor taking part in any form of corruption. The Bank has a Board approved Anti-Bribery and AntiCorruption Policy setting out the principles for countering bribery and corruption and managing bribery and corruption risk which has been made available at https:// www.combank.lk/info/file/91/anti-briberyand-anti-corruption-policy as well as in the intranet of the Bank. In addition, the Bank has a Whistleblowers Charter and guidelines on accepting and/offering gifts or other illegal gratification, collection and borrowing of funds/obtaining undue favours from customers and suppliers, holding a Directorship/being a Partner/Shareholder in private companies enumerated in the Code of Ethics and administrative circulars. In implementing the Code of Ethics and affirming its commitment to the 10th Principle of the UN Global Compact, the Bank expects all employees not only to
  179. fight corruption , but also to demonstrate that they do not abuse the power of their position as employees for personal financial or non-financial gain, solicit or accept gifts, compromise employees or the Bank. No employee of the Bank should offer any bribe or other illegal gratification in order to obtain business for the Bank. Table - 55: Target and actual capital Capital Regulatory ratios minimum Goal (Internal requirement) % % CET 1 7.50 >7.50 HLA 1.50 >1.50 2021 2020 % % 11.923 13.217 Capital Adequacy and ICAAP Framework Tier I 9.00 >9.00 11.923 13.217 In line with the Basel requirements and as prescribed in the ICAAP framework, the Bank uses internal models to assess and quantify the risk profile, to stress test risk drivers and to assess capital requirements to support them. Internal limits which are more stringent than the regulatory requirements provide early warnings with regard to capital adequacy. Total 13.00 >13.00 15.650 16.819 ICAAP supports the regulatory review process providing valuable inputs for evaluating the required capital in line with future business plans. It integrates strategic focus and risk management plans with the capital plan in a meaningful manner with inputs from Senior Management, Management Committees, Board Committees and the Board and also takes into account potential risk of capital being inadequate under stressed conditions. It also supports profit optimisation through proactive decisions on exposures both current and potential through measurement of vulnerabilities by carrying out stress testing and scenario-based analysis. The ICAAP process also identifies gaps in managing qualitative and quantitative aspects of reputational risk and strategic risk which are not covered under Pillar 1 of Basel III. The Bank is compliant with both regulatory and its own prudential requirements of capital adequacy. With a loyal base of shareholders and profitable operations, the Bank is also well positioned to meet capital requirements in the longer term to cover its material risks and to support business expansion, as a Domestic Systemically Important Bank (D-SIB). Basel III minimum capital requirements and buffers The Banking Act Direction No. 01 of 2016 introduced capital requirements for licensed commercial banks under Basel III starting from July 1, 2017 with specified timelines to progressively increase minimum capital ratios to be fully implemented by January 1, 2019 which included Higher Loss Absorbency component for D-SIBs. However, as an extraordinary regulatory measure for licensed banks to support businesses and individuals affected by the outbreak of COVID-19, the CBSL permitted D-SIBs to draw down their Capital Conservation Buffers by 100 basis points. > Risk Governance and Management A comparison of the status as at December 31, 2021 and the minimum capital requirement prescribed by the CBSL effective from January 1, 2019 as tabulated above demonstrates the capital strength of the Bank and bears testimony to the ability to meet stringent requirements imposed by the regulator. The ICAAP helps the Bank to periodically evaluate the capital requirements for the next five years, develop capital augmentation plans based thereon and submit same for review by the CBSL. Consequently, despite the non-conducive operating environment, SLFRS 9 adoption and taxes and levies that impacted internal capital generation capabilities of the Bank in 2019 and 2020, the Bank has been able to secure availability of capital to fund its expansion plans and meet Higher Loss Absorbency (HLA) requirements prescribed by the CBSL for D-SIBs. In particular, issue of upto USD 50 Mn. worth shares to IFC through a private placement in 2020 and issue of Rs. 8.595 Bn. worth Basel III compliant – Tier 2, Listed, Rated, Unsecured, Subordinated, Redeemable debentures with a Non-viability Conversion in 2021 enabled the Bank to increase its stated capital and the Tier 2 capital base respectively. The Bank has a “Basel Workgroup” consisting of members from a cross section of business and support units to assess capital adequacy in line with strategic direction of the Bank. While ICAAP acts as a foundation for such assessment, the Basel Workgroup is continuously searching for improvements amidst changing landscape in different frontiers, to recommend the desired way forward to the ALCO including indications on current and future capital requirements, anticipated capital expenditure-based assessments and desirable capital levels, etc. Being in a capital-intensive business, the Bank is cognisant of the importance of capital. The Bank has access to a loyal base of shareholders who takes a long-term view of the Bank as well as profits retained over the years by adopting prudent dividend policies, etc. Moreover, in order to achieve an optimized level of capital allocation, the Bank is continuously finding ways to improve judicious allocation of capital to requirements associated with its day-to-day operations. The challenges associated with mobilizing capital from external sources are also taken into account, but not excluded as a sustainable option to boost the capital in the long run. The Bank is comfortable with the available capital buffer to support its growth plans / withstand stressed market conditions. However, the Bank is never complacent with current comfort levels and believes in providing stakeholder confidence that the Bank is known for, through sound capital buffer levels. Stress testing As an integral part of ICAAP under Pillar II, the Bank conducted stress testing for severe but plausible shocks on its major risk exposures on a periodic basis to evaluate the sensitivity of the current and forward risk profile relative to risk appetite and their impact on resilience of capital, funding, liquidity and earnings. It also supports strategic planning, the ICAAP including capital management, liquidity management, setting of risk appetite triggers and risk tolerance limits, mitigating risks through reviewing and adjusting limits, restricting or reducing exposures and hedging thereof, facilitating the development of risk mitigation or contingency plans across a range of stressed conditions supporting communication with internal and external stakeholders. The Bank’s governance framework for stress testing sets out the responsibilities and approaches to stress testing activities undertaken at the Bank, business line and risk type levels. The Bank uses a range of stress testing techniques, including scenario analysis, sensitivity analysis and reverse stress testing to perform stress testing for different purposes. The framework covers all the material risks such as credit risk, credit concentration risk, operational risk, liquidity risk, FX risk, IRRBB using EVE and EAR perspectives. The Bank evaluates various degrees of stress levels identified in the Stress Testing Policy as Minor, Moderate and Severe. The resulting impact on the capital is then carefully evaluated. Where stress tests point to a deterioration of the capital which has no impact on the policy level on capital maintenance, same is described as Minor risk, while a deterioration of up to 1% is considered as Moderate risk. If the impact results in the capital falling below the statutory minimum, such a level would be regarded as Severe risk, warranting immediate attention of the Management to rectify the situation. Commercial Bank of Ceylon PLC Annual Report 2021 177
  180. Stress testing is an effective communication tool to senior management , risk owners and risk managers as well as supervisors and regulators sine it offers a broader view of all risks borne by the Bank in relation to its risk tolerance and strategy in hypothetical stress scenarios. The outcomes of stress testing are reported to the EIRMC and BIRMC on a quarterly basis for appropriate, proactive decision making. Extracts from the stress testing results are set out in Table 56. Table - 56: Impact on CAR at Minor, Moderate and Severe stress levels: Particulars 2021 Description Credit risk – asset quality downgrade Increasing the direct non- performing facilities over the direct performing facilities for the entire portfolio Operational risk Impact of; 2021 Minor Moderate Severe Minor Moderate Severe % % % % % % -0.14 -0.35 -0.68 -0.15 -0.38 -0.74 -0.05 -0.11 -0.22 -0.05 -0.13 -0.25 -0.10 -0.20 -0.47 -0.06 -0.13 -0.29 -0.06 -0.14 -0.27 -0.03 -0.11 -0.26 -0.27 -0.41 -0.42 -0.15 -0.30 -0.44 1.Top five operational losses during last five years 2.Average of yearly operational risk losses during last three years whichever is higher Foreign exchange Percentage shock in the exchange rates for the risk Bank and Maldives operations (gross positions in each Book without netting) Liquidity risk (LKR) – 1.Withdrawal of percentage of the clients, banks and other banking institution deposits from the Bank within a period of three months 2. Rollover of loans to a period greater than three months Interest rate risk – To assess the long-term impact of changes in EAR and EVE (LKR) interest rates on Bank’s EVE through changes in the economic value of its assets and liabilities – Sri Lanka and to assess the immediate impact of changes in interest rates on Bank’s earnings through changes in its net interest income Monitoring and reporting Risk management function of the Bank is responsible for identifying, measuring, monitoring and reporting risk. To enhance the effectiveness of its role, staff attached to it is given regular training, enabling them to develop and refine their skills. They are well supported by IT systems that have made data extraction, analysis and modelling possible scenarios. Regular and ad-hoc reports are generated on Key Risk Indicators and risk matrices of the Bank as well as the subsidiaries, for review by the senior management, Executive and Board Committees, and the Board which rely on such reports for evaluating risk and providing strategic direction. 178 Commercial Bank of Ceylon PLC The reports provide information on aggregate measures of risks across products, portfolios, tenures and geographies relative to agreed policy parameters, providing a clear representation of the risk profile and sensitivities of the risks assumed by the Bank and the Group. Basel III – Market Discipline Refer Annex 2 on pages 361 to 374 for the minimum disclosure requirements under Pillar III as per the Banking Act Direction No. 01 of 2016. Refer pages 373 and 374 on Annex 2 for the D-SIB Assessment Exercise disclosed as required by the Banking Act Direction No. 10 of 2019. Annual Report 2021 > Risk Governance and Management
  181. FINANCIAL REPORT The Financial Statements , including Accounting Policies and accompanying notes, are in compliance with all applicable Accounting Standards and are free from material misstatement. As opined in the Auditors’ Report, the Financial Statements provide a true and fair view of the Bank’s performance, financial position, changes in equity and cash flows. Our Auditors have expressed their unqualified opinion on these Financial Statements as indicated in their “Independent Auditors’ Report” to the shareholders. 181 182 185 186 187 – – – – – Financial Calendar – 2021 and 2022 Independent Auditors’ Report Financial Statements Highlights – Bank Financial Statements – Table of Contents Income Statement 188 – Statement of Profit or Loss and Other Comprehensive Income 189 – Statement of Financial Position 190 – Statement of Changes in Equity – Group 194 – Statement of Changes in Equity – Bank 198 – Statement of Cash Flows 199 – Notes to the Financial Statements > Commercial Bank of Ceylon PLC Annual Report 2021 179
  182. Financial Calendar – 2021 and 2022 Dividend Calendar 2021 2022 – Cash: To shareholders provided accurate dividend instructions On April 05, 2021 On April 07, 2022 On April 09, 2021 On April 25, 2022 First and final dividend for the previous year paid/payable To shareholders not provided accurate dividend instructions On April 09, 2021 – Scrip First interim dividend for the year paid/payable Second interim dividend for the year paid / payable On April 11, 2022 Note 01 In the fourth quarter of 2022* Note 01 In the first quarter of 2023* On March 30, 2022 Final dividend for the year to be proposed In March 2023 Final Dividend for the current year to be paid – Cash: To shareholders provided accurate dividend instructions On April 07, 2022** On April 25, 2022** To shareholders not provided accurate dividend instructions On April 11, 2022** – Scrip *Subject to approval by Directors In April 2023*** **Subject to approval by Shareholders ***Subject to recommendation by Directors and approval by Shareholders Note 01: The Bank did not declare interim cash dividends during the year 2021 (for the year ended December 31, 2021), in conformity with the requirements of the Banking Act Direction No. 11 of 2021, dated July 13, 2021, on "Restrictions on Discretionary Payments of Licensed Banks" issued by the Central Bank of Sri Lanka. Annual General Meeting (AGM) Calendar Annual Report and Accounts signed/to be signed Annual General Meeting to be held For the year 2021 For the year 2022 For the year 2021 For the year 2022 On February 25, 2022 In February 2023 On March 30, 2022 In March 2023 Interim Financial Statements Calendar Submission to the Colombo Stock Exchange (CSE) (In terms of Rule 7.4 of the CSE and as per the requirements of the Central Bank of Sri Lanka) 2021 Submitted on 2022 To be submitted on or before Publication in the News Papers (As per the Direction Ref. No. 02/04/003/0401/001 dated January 26, 2006 and the Direction Ref. No. 02/04/003/0401/001 dated February 21, 2006 of the Central Bank of Sri Lanka) 2021 Published on/to be published on or before English For the three months ended/ ending March 31, (unaudited) Sinhala 2022 To be published on or before Tamil In all three languages May 12, 2021 May 13, 2022 May 21, 2021 May 31, 2021 May 31, 2021 May 31, 2022 August 12, 2021 August 15, 2022 August 18, 2021 August 26, 2021 August 27, 2021 August 31, 2022 For the nine months ended/ ending September 30, (unaudited) November 15, 2021 November 15, 2022 November 23, 2021 November 29, 2021 November 29, 2021 November 30, 2022 For the six months ended/ ending June 30, (audited) For the year ended/ ending December 31, (audited) February 25, 2022 February 28, 2023 March 31, 2022 March 31, 2022 March 31, 2022 Commercial Bank of Ceylon PLC March 31, 2023 Annual Report 2021 181
  183. Independent Auditors ’ Report Ernst & Young Chartered Accountants 201, De Saram Place P.O. Box 101 Colombo 10, Sri Lanka Tel Fax (Gen) Fax (Tax) Email ey.com : +94 11 246 3500 : +94 11 269 7369 : +94 11 557 8180 : eysl@lk.ey.com HMAJ/WDPL TO THE SHAREHOLDERS OF COMMERCIAL BANK OF CEYLON PLC Report on the audit of the financial statements Opinion We have audited the financial statements of Commercial Bank of Ceylon PLC (“the Bank”) and the consolidated financial statements of the Bank and its subsidiaries (“the Group”), which comprise the statement of financial position as at December 31, 2021, and the statement of profit or loss, the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies. In our opinion, the accompanying financial statements of the Bank and the Group gives a true and fair view of the financial position of the Bank and the Group as at December 31, 2021, and of its financial performance and its cash flows for the year then ended in accordance with Sri Lanka Accounting Standards. Partners: Basis for opinion We conducted our audit in accordance with Sri Lanka Auditing Standards (SLAuSs). Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report. We are independent of the Group in accordance with the Code of Ethics issued by CA Sri Lanka (Code of Ethics) and we have fulfilled our other ethical responsibilities in accordance with the Code of Ethics. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in the audit of the financial statements of the current period. These matters were addressed in the context of the audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context. H M A Jayesinghe FCA FCMA, R N de Saram ACA FCMA, Ms. N A De Silva FCA, W R H De Silva FCA ACMA, Ms. Y A De Silva FCA, Ms. K R M Fernando FCA ACMA, N Y R L Fernando ACA, W K B S P Fernando FCA FCMA, Ms. L K H L Fonseka FCA, D N Gamage ACA ACMA, A P A Gunasekera FCA FCMA, A Herath FCA, D K Hulangamuwa FCA FCMA LLB (London), Ms. A A Ludowyke FCA FCMA, Ms. G G S Manatunga FCA, A A J R Perera ACA ACMA, Ms. P V K N Sajeewani FCA N M Sulaiman ACA ACMA, B E Wijesuriya FCA FCMA, C A Yalagala ACA ACMA Principals: G B Goudian ACMA, Ms. P S Paranavitane ACMA LLB (Colombo), T P M Ruberu FCMA FCCA A member firm of Ernst & Young Global Limited 182 We have fulfilled the responsibilities described in the Auditor’s responsibilities for the audit of the financial statements section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the financial statements. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying financial statements. Commercial Bank of Ceylon PLC Annual Report 2021
  184. Key audit matter How our audit addressed the key audit matter Provision for credit impairment on financial assets carried at amortised cost and debt instruments carried at fair value through other comprehensive income We assessed the alignment of the Bank ’s provision for credit impairment computations and underlying methodology including consideration of COVID-19 impacts and related industry responses with its accounting policies, based on the best available information up to the date of our report. Our audit procedures included amongst others the following: Provision for credit impairment on financial assets carried at amortised cost and debt instruments carried at fair value through other comprehensive income as stated in Notes 34, 35 & 36 respectively is determined by management in accordance with the accounting policies described in Note 7.1.12. This was a key audit matter due to: z materiality of the reported provision for credit impairment which involved complex calculations; and z degree of management judgement, significance of assumptions and level of estimation uncertainty associated with its measurement z We evaluated the design, implementation and operating effectiveness of controls over estimation of impairment, which included assessing the level of oversight, review and approval of provision for credit impairment policies and procedures by the Board and management z We checked the completeness and accuracy of the underlying data used in the impairment computation by agreeing details to relevant source documents and accounting records of the Bank. We also checked the underlying calculations. In addition to the above, the following procedures were performed: For loans and advances assessed on an individual basis for impairment: z We assessed the reasonableness and timeliness of Management’s internal assessments of credit quality based on the borrower’s particular circumstances z We evaluated the reasonableness of key inputs used in the provision for credit impairment made with particular focus on the ongoing impact of COVID-19. Such valuations were carried out considering value and timing of cash flow forecasts, elevated risk industries, status of recovery action and collateral values Key areas of significant judgements, estimates and assumptions used by management in the assessment of the provision for credit impairment included the following; For financial assets assessed on a collective basis for impairment: z management overlays to incorporate the z We tested the key calculations used in the provision for credit impairment probable ongoing impacts of COVID-19 and related industry responses such as Government stimulus packages and debt moratorium relief measures granted by the Bank; z the incorporation of forward-looking information to reflect current and anticipated future external factors, including judgments related to the ongoing impact of COVID-19, both in the multiple economic scenarios and the probability weighting determined for each of these scenarios. Information Technology (IT) systems and controls over financial reporting A significant part of the Bank’s financial reporting process is primarily reliant on multiple IT systems with automated processes and internal controls. Further, key financial statement disclosures are prepared using data and reports generated by IT systems, that are compiled and formulated with the use of spreadsheets. Accordingly, IT systems and related internal controls over financial reporting was considered a key audit matter. z We assessed whether judgements, estimates and assumptions used by the Management in the underlying methodology and the management overlays were reasonable. Our testing included evaluating the reasonableness of forward-looking information used, economic scenarios considered and probability weighting assigned to each of those scenarios z We assessed the adequacy of the related financial statement disclosures set out in Notes 34 & 67. Our audit procedures included the following: z We obtained an understanding of the internal control environment of the processes relating to financial reporting and related disclosures. z We identified and test checked relevant controls of key IT systems related to the Bank’s financial reporting process. z We involved our internal specialized resources to evaluate the design and operating effectiveness of IT controls, including those related to user access and change management. z We checked key source data of the reports used to generate key disclosures for accuracy and completeness, including review of the general ledger reconciliations. z We also obtained a high-level understanding, primarily through inquiry, of the cybersecurity risks affecting the bank and the actions taken to address these risks. Further, we checked changes if any have been made to security monitoring procedures, given the increase in remote workers including the bank’s monitoring on remote workers activities. > Independent Auditors’ Report Commercial Bank of Ceylon PLC Annual Report 2021 183
  185. Other information included in the 2021 Annual Report Other information consists of the information included in the Annual Report , other than the financial statements and our auditor’s report thereon. Management is responsible for the other information. Our opinion on the financial statements does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of management and those charged with governance for the financial statements Management is responsible for the preparation of financial statements that give a true and fair view in accordance with Sri Lanka Accounting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, management is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Bank’s and the Group’s financial reporting process. 184 or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with SLAuSs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: z Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. z Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the internal controls of the Bank and the Group. z Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. z Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. Auditor’s responsibilities for the audit of the financial statements z Evaluate the overall presentation, structure Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with SLAuSs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. Commercial Bank of Ceylon PLC and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. Annual Report 2021 > Independent Auditors’ Report We also provide those charged with governance with a statement that we have complied with ethical requirements in accordance with the Code of Ethics regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Report on Other Legal and Regulatory Requirements As required by section 163 (2) of the Companies Act No. 07 of 2007, we have obtained all the information and explanations that were required for the audit and, as far as appears from our examination, proper accounting records have been kept by the Bank. CA Sri Lanka membership number of the engagement partner responsible for signing this independent auditor’s report is 1884. Chartered Accountants February 25, 2022 Colombo
  186. Financial Statements Highlights – Bank Graph – 34: Gross income Graph – 35: Net interest income Graph – 36: Net fee and commission income Rs. Bn. Rs. Bn. Rs. Bn. 175 75 12.5 140 60 10.0 7.46% 105 30.34% 45 30 5.0 35 15 2.5 0 2020 2021 0 26.95% 7.5 70 2020 0 2021 2020 Graph – 37: Net gains/(losses) from derecognition of financial assets Graph – 38: Profit before tax Graph – 39: Profit after tax Rs. Bn. Rs. Bn. Rs. Bn. 7.5 35 25 6.0 28 20 (53.03%) 4.5 36.11% 21 14 10 1.5 7 5 2020 2021 0 44.17% 15 3.0 2020 0 2021 2021 2020 2021 Graph – 40: Total assets Graph – 41: Financial assets at amortised cost – Loans and advances to other customers Graph – 42: Financial liabilities at amortised cost – Due to depositors Rs. Bn. Rs. Bn. Rs. Bn. 2,000 1,250 1,500 1,600 1,000 1,200 1,200 12.27% 750 13.13% 900 800 500 600 400 250 300 0 2020 0 2021 2020 13.99% 0 2021 2020 2021 Graph – 43: Earnings per share – Basic Graph – 44: Interest margin Graph – 45: Financial intermediation margin Rs. % % 20 4.0 10 16 3.2 8 12 33.49% 2.4 34bps 6 8 1.6 4 4 0.8 2 0 2020 2021 0 2020 2021 86bps 0 Commercial Bank of Ceylon PLC 2020 2021 Annual Report 2021 185
  187. Financial Statements – Table of Contents Page No Primary Financial Statements Income Statement 187 Statement of Profit or Loss and Other Comprehensive Income 188 Statement of Financial Position 189 Statement of Changes in Equity – Group 190 Statement of Changes in Equity – Bank 194 Statement of Cash Flows 198 33. Financial Assets at Amortised Cost – Loans and Advances to Banks 245 34. Financial Assets at Amortised Cost – Loans and Advances to Other Customers 246 35. Financial Assets at Amortised Cost – Debt and Other Financial Instruments 250 36. Financial Assets measured at Fair Value through Other Comprehensive Income 251 37. Investment in Subsidiaries 254 38. Investment in Associate 255 39. Property, Plant and Equipment and Right-of-Use Assets 257 40. Investment Properties 269 41. Intangible Assets 270 207 42. Deferred Tax Assets and Liabilities 272 6. Significant Accounting Policies – General 209 43. Other Assets 274 7. Significant Accounting Policies – Recognition of Assets and Liabilities 210 8. Significant Accounting Policies – Recognition of Income and Expense 219 9. Significant Accounting Policies – Tax Expense 219 Notes to the Financial Statements – General 1. Reporting Entity 199 2. Basis of Accounting 200 3. Financial Risk Management 204 4. Fair Value Measurement 207 5. Changes in Accounting Policies Notes to the Financial Statements – Statement of Financial Position: Liabilities and Equity 44. Due to Banks 274 10. Significant Accounting Policies – Statement of Cash Flows 220 45. Derivative Financial Liabilities 275 11. Amendments to Accounting Standards Issued But Not Yet Effective 47. Financial Liabilities at Amortised Cost – Other Borrowings 276 46. Financial Liabilities at Amortised Cost – Due to Depositors 275 220 Notes to the Financial Statements – Income Statement 48. Current Tax Liabilities 276 49. Other Liabilities 277 50. Due to Subsidiaries 285 12. Gross Income 222 13. Net Interest Income 222 51. Subordinated Liabilities 286 14. Net Fee and Commission Income 224 52. Stated Capital 287 15. Net Gains/(Losses) from Trading 225 53. Share-based Payment 288 291 16. Net Gains/(Losses) from derecognition of Financial Assets 225 54. Statutory Reserves 17. Net Other Operating Income 226 55. Retained Earnings 292 18. Impairment Charges and Other Losses 226 56. Other Reserves 292 19. Personnel Expenses 230 57. Non-Controlling Interest 294 20. Depreciation and Amortisation 230 21. Other Operating Expenses 231 22. Value Added Tax on Financial Services 231 Notes to the Financial Statements – Other Disclosures 23. Income Tax Expense 232 58. Contingent Liabilities and Commitments 295 24. Earnings Per Share (EPS) 233 59. Net Assets Value per Ordinary Share 297 25. Dividends on Ordinary Shares 234 60. Litigation Against the Bank 297 61. Maturity Analysis – Group 298 62. Operating Segments 300 63. Related Party Disclosures 302 64. Non-Cash Items Included in Profit Before Tax 306 Notes to the Financial Statements – Statement of Financial Position: Assets 26. Classification of Financial Assets and Financial Liabilities 235 27. Fair Value Measurement 236 28. Cash and Cash Equivalents 240 65. Change in Operating Assets 307 29. Balances with Central Banks 241 66. Change in Operating Liabilities 307 30. Placements with Banks 241 67. Financial Risk Review 308 31. Derivative Financial Assets 242 68. Repurchase and reverse repurchase transactions in scripless treasury bonds and scripless treasury bills 336 242 69. Events After the Reporting Period 336 32. Financial Assets Recognised through Profit or Loss – Measured at Fair Value 186 Page No Commercial Bank of Ceylon PLC Annual Report 2021
  188. Income Statement GROUP For the year ended December 31 , BANK 2021 Rs. ’000 2020 Rs. ’000 Change % 2021 Rs. ’000 2020 Rs. ’000 Change % 7.70 160,885,882 149,711,481 7.46 Note Page No. Gross income 12 222 163,675,312 151,966,413 Interest income 13.1 222 132,818,178 124,087,713 7.04 130,443,030 122,330,386 6.63 Less: Interest expense 13.2 223 66,401,846 73,218,911 (9.31) 65,832,418 72,759,045 (9.52) Net interest income 13 222 66,416,332 50,868,802 30.56 64,610,612 49,571,341 30.34 Fee and commission income 14.1 224 15,917,337 11,839,689 34.44 15,410,402 11,268,543 36.76 Less: Fee and commission expense 14.2 225 3,675,143 2,018,014 82.12 3,658,939 2,012,138 81.84 Net fee and commission income 14 224 12,242,194 9,821,675 24.64 11,751,463 9,256,405 26.95 Net gains/(losses) from trading 15 225 1,936,007 1,878,060 3.09 1,936,007 1,878,086 3.08 Net gains/(losses) from derecognition of financial assets 16 225 3,001,574 6,390,197 (53.03) 3,001,574 6,390,197 (53.03) Net other operating income 17 226 10,002,216 7,770,754 28.72 10,094,869 7,844,269 28.69 93,598,323 76,729,488 21.98 91,394,525 74,940,298 21.96 18 226 25,139,926 21,419,532 17.37 24,692,343 21,483,698 14.94 68,458,397 55,309,956 23.77 66,702,182 53,456,600 24.78 12.05 16,321,317 14,563,999 12.07 Total operating income Less: Impairment charges and other losses Net operating income Less: Expenses Personnel expenses 19 230 16,799,212 14,992,748 Depreciation and amortisation 20 230 3,220,066 3,102,695 3.78 3,178,628 2,989,031 6.34 Other operating expenses 21 231 9,638,461 8,167,170 18.01 9,391,810 7,886,936 19.08 29,657,739 26,262,613 12.93 28,891,755 25,439,966 13.57 38,800,658 29,047,343 33.58 37,810,427 28,016,634 34.96 5,845,230 4,531,381 28.99 5,809,224 4,505,322 28.94 32,955,428 24,515,962 34.42 32,001,203 23,511,312 36.11 1,896 3,898 (51.36) 32,957,324 24,519,860 34.41 Total operating expenses Operating profit before value added tax on financial services Less: Value Added Tax on financial services 22 231 Operating profit after value added tax on financial services Share of profits of associate, net of tax 38.1 256 Profit before tax Less: Income tax expense 23 232 Profit for the year – 32,001,203 – 23,511,312 – 36.11 8,667,036 7,433,063 16.60 8,395,152 7,137,823 17.62 24,290,288 17,086,797 42.16 23,606,051 16,373,489 44.17 24,062,469 16,939,950 42.05 23,606,051 16,373,489 44.17 227,819 146,847 55.14 24,290,288 17,086,797 42.16 23,606,051 16,373,489 44.17 Profit attributable to: Equity holders of the Bank Non-controlling interest 57 294 Profit for the year – – – Earnings per share Basic earnings per ordinary share (Rs.) 24.1 233 20.15 15.32 31.53 19.77 14.81 33.49 Diluted earnings per ordinary share (Rs.) 24.1 233 20.15 15.32 31.53 19.77 14.81 33.49 The Notes appearing on pages 199 to 336 form an integral part of these Financial Statements. Commercial Bank of Ceylon PLC Annual Report 2021 187
  189. Statement of Profit or Loss and Other Comprehensive Income GROUP For the year ended December 31 , Note Page No. Profit for the year BANK 2021 Rs. ’000 2020 Rs. ’000 Change % 2021 Rs. ’000 2020 Rs. ’000 Change %  24,290,288 17,086,797 42.16 23,606,051 16,373,489 44.17 Other comprehensive income, net of tax Items that will never be reclassified to profit or loss 10,944 (228,745) 104.78 6,051 (223,039) 102.71 Gains/(losses) on remeasurement of defined benefit liability/asset 33,309 (295,594) 111.27 26,549 (287,668) 109.23 Less: Deferred tax charge/(reversal) on actuarial gains/(losses) – includes the effect of tax rate change in 2020 but adjusted in 2021 22,365 (66,849) 133.46 20,498 (64,629) 131.72 532,740 Net actuarial gains/(losses) on defined benefit plans Net change in revaluation surplus 56.1 293 589,166 2,674,142 (77.97) 3,684,535 (100.00) 1,010,393 (158.31) (532,740) 156,573 72,255 116.70 156,573 72,255 116.70 – Changes in revaluation surplus/(deficit) Less: Deferred tax charge/(reversal) on revaluation surplus – includes the effect of tax rate change in 2020 but adjusted in 2021 (589,166) Net change in fair value of investments in equity Change in fair value of investments in equity at fair value through other comprehensive income 2,574,858 (79.31) 3,585,430 (100.00) 1,010,572 (152.72) 156,573 72,255 116.70 156,573 72,255 116.70 – Transfer of fair value gains/(losses) o/a reclassification of debt instruments from fair value through other comprehensive income to amortised cost, net of tax – 5,626 (100.00) – 5,626 (100.00) Gain on disposal of investments in equity instruments – 1,719 (100.00) – 1,719 (100.00) (1,512) 3,436 (144.00) – 114.32 Share of other comprehensive income of associate – – Items that are or may be reclassified to profit or loss Net gains/(losses) arising from translating the Financial Statements of foreign operations 1,278,891 596,723 Net gains/(losses) on investment in financial assets at fair value through other comprehensive income 1,152,856 439,883 (12,598,258) (1,400,936) Fair value gains/(losses) that arose during the year, net of tax (12,917,795) 1,537,097 (799.27) (12,599,079) (1,400,991) (799.30) (940.40) (12,918,616) 1,537,042 (940.49) Fair value gains/(losses) realised to the Income Statement on disposal, net of tax (2,281,196) (4,026,616) Fair value gains/(losses) recycled to the Income Statement as impairment, net of tax 43.35 (2,281,196) (4,026,616) 43.35 2,600,733 1,088,583 138.91 2,600,733 1,088,583 138.91 46,169 (64,139) 171.98 46,169 (64,139) 171.98 Other comprehensive income for the year, net of tax (10,518,027) 1,660,081 (733.59) (10,704,690) 1,406,172 (861.26) Total comprehensive income for the year 13,772,261 18,746,878 (26.54) 12,901,361 17,779,661 (27.44) 13,435,179 18,553,575 (27.59) 12,901,361 17,779,661 (27.44) 337,082 193,303 74.38 13,772,261 18,746,878 (26.54) Cash flow hedges – effective portion of changes in fair value, net of tax 56.4 56.6 293 294 162.08 Attributable to: Equity holders of the Bank Non-controlling interest Total comprehensive income for the year The Notes appearing on pages 199 to 336 form an integral part of these Financial Statements. 188 Commercial Bank of Ceylon PLC Annual Report 2021 – 12,901,361 – 17,779,661 – (27.44)
  190. Statement of Financial Position GROUP As at December 31 , Assets Cash and cash equivalents Balances with Central Banks Placements with banks Securities purchased under resale agreements Derivative financial assets Financial assets recognised through profit or loss – measured at fair value Financial assets at amortised cost – Loans and advances to banks Financial assets at amortised cost – Loans and advances to other customers Financial assets at amortised cost – Debt and other financial instruments Financial assets measured at fair value through other comprehensive income Investments in subsidiaries Investment in associate Property, plant and equipment and right-of-use assets Investment properties Intangible assets Deferred tax assets Other assets Total assets Liabilities Due to banks Derivative financial liabilities Securities sold under repurchase agreements Financial liabilities at amortised cost – due to depositors Financial liabilities at amortised cost – other borrowings Current tax liabilities Deferred tax liabilities Other liabilities Due to subsidiaries Subordinated liabilities Total liabilities Equity Stated capital Statutory reserves Retained earnings Other reserves Total equity attributable to equity holders of the Bank Non-controlling interest Total equity Total liabilities and equity Contingent liabilities and commitments Net assets value per ordinary share (Rs.) BANK 2021 Rs. ’000 2020 Rs. ’000 2021 Rs. ’000 2020 Rs. ’000 Change %  242 69,335,379 56,777,465 12,498,709 3,000,490 3,245,120 51,255,030 115,358,732 16,421,867 – 2,636,717 35.28 (50.78) (23.89) 100.00 23.07 68,078,076 52,897,908 11,584,952 3,000,490 3,245,120 50,250,627 110,971,105 15,938,982 – 2,636,717 35.48 (52.33) (27.32) 100.00 23.07 32 33 242 245 23,436,123 – 35,189,471 779,705 (33.40) (100.00) 23,436,123 – 35,189,471 779,705 (33.40) (100.00) 34 246 1,029,584,075 909,829,172 13.16 1,014,618,580 896,845,453 13.13 35 250 385,390,598 302,059,529 27.59 369,417,889 292,727,566 26.20 36 37 38 39 40 41 42 43 251 254 255 257 269 270 272 274 335,953,802 278,716,794 – – 60,428 64,155 24,744,634 25,386,630 72,400 67,116 2,272,639 1,800,516 10,036,105 2,735,566 27,083,177 20,195,153 1,983,491,144 1,762,496,153 20.54 – (5.81) (2.53) 7.87 26.22 266.87 34.11 12.54 335,463,338 278,461,369 5,808,429 5,808,429 44,331 44,331 23,075,467 23,212,394 – – 1,724,864 1,232,863 9,793,129 2,499,860 27,024,475 19,619,149 1,949,213,171 1,736,218,021 20.47 – – (0.59) – 39.91 291.75 37.75 12.27 44 45 274 275 46 47 48 42 49 50 51 275 276 276 272 277 285 286 73,801,195 88,248,056 2,092,198 1,501,262 151,424,854 91,411,522 1,472,640,456 1,286,616,399 32,587,051 54,555,933 9,486,772 6,991,005 349,106 403,846 33,253,518 33,572,283 – – 38,303,466 38,247,138 1,813,938,616 1,601,547,444 (16.37) 39.36 65.65 14.46 (40.27) 35.70 (13.55) (0.95) – 0.15 13.26 73,777,420 87,451,306 2,092,198 1,501,262 151,911,842 91,437,612 1,443,093,453 1,265,965,918 32,587,051 54,555,933 9,294,180 6,777,992 – – 33,210,883 33,037,669 48,699 97,015 38,303,466 38,247,138 1,784,319,192 1,579,071,845 (15.64) 39.36 66.14 13.99 (40.27) 37.12 – 0.52 (49.80) 0.15 13.00 52 54 55 56 287 291 292 292 57 294 54,566,957 52,187,747 10,590,338 9,285,233 9,890,762 8,124,261 92,426,660 89,595,571 167,474,717 159,192,812 2,077,811 1,755,897 169,552,528 160,948,709 1,983,491,144 1,762,496,153 4.56 14.06 21.74 3.16 5.20 18.33 5.35 12.54 54,566,957 52,187,747 10,204,368 9,024,065 9,028,265 7,596,260 91,094,389 88,338,104 164,893,979 157,146,176 – – 164,893,979 157,146,176 1,949,213,171 1,736,218,021 4.56 13.08 18.85 3.12 4.93 – 4.93 12.27 58 59 295 297 Note Page No. 28 29 30 240 241 241 31 685,379,028 140.24 Change % 730,561,685 136.42 Memorandum information Number of employees Number of customer service centres (6.18) 2.80 682,399,783 138.08 728,711,698 134.67 5,072 5,057 287 287 (6.36) 2.53 The Notes appearing on pages 199 to 336 form an integral part of these Financial Statements. Certification These Financial Statements have been prepared in compliance with requirements of the Companies Act No. 07 of 2007. K D N Buddhipala Group Chief Financial Officer The Board of Directors is responsible for the preparation and presentation of these Financial Statements. Approved and signed for and on behalf of the Board. Justice K Sripavan Prof A K W Jayawardane Chairman Deputy Chairman February 25, 2022 Colombo S Renganathan R A P Rajapaksha Managing Director/ Company Secretary Group Chief Executive Officer Commercial Bank of Ceylon PLC Annual Report 2021 189
  191. Statement of Changes in Equity – Group Note Page No. Balance as at December 31, 2019 Stated capital Statutory reserve fund Rs. ’000 Rs. ’000 40,916,958 8,387,701 Total comprehensive income for the year 2020 Profit for the year – Other comprehensive income, net of tax – – – Net actuarial gains/(losses) on defined benefit plans – – Gain on disposal of investments in equity instruments – – Share of other comprehensive income of associate, net of tax – – Net change in revaluation surplus – – Net fair value gains/(losses) on remeasuring financial assets measured at fair value through other comprehensive income – – Net gains/(losses) arising from translating the Financial Statements of foreign operations – – Cash flow hedges – effective portion of changes in fair value, net of tax – – – – Total comprehensive income for the year 2020 Transactions with owners recognised directly in equity, contributions by and distributions to owners Proceeds on issue of ordinary voting shares to IFC parties (private placement) 52 287 Issue of ordinary voting shares under employee share option plans 52 287 – – Transfer o/a share-based payment transactions 52 287 – – Transfer of cost o/a of expired ESOP shares (net of tax) 55 & 56.5 292 & 294 – – Dividends to equity holders 2,055,014 Second interim dividend for 2019 25 234 Final cash dividend for 2019 Final dividend for 2019 satisfied in the form of issue and allotment of new shares 25 234 – – – – – – 2,055,014 – Unclaimed dividend absorbed/(dividend paid) in respect of previous years – – Interim Dividend for 2020 – – – – – – Share-based payment transactions 56.5 294 Movement due to change in ownership Transfers during the year 190 9,215,775 54 to 56 291 to 294 – 897,532 Total transactions with equity holders 11,270,789 897,532 Balance as at December 31, 2020 52,187,747 9,285,233 Commercial Bank of Ceylon PLC Annual Report 2021
  192. Retained earnings Revaluation reserve Fair value reserve Rs . ’000 Rs. ’000 Rs. ’000 7,837,785 1,783,503 5,182,185 16,939,950 (225,018) – 2,662,469 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 67,120,003 468,494 134,424,249 1,589,234 136,013,483 – 16,939,950 146,847 17,086,797 – – 1,613,625 46,456 1,660,081 – – (226,737) (2,008) (228,745) – – – – – – 1,719 – 1,719 – 3,436 – – – – 3,436 – 3,436 – – – – – 2,662,469 – – – – (1,323,055) – 2,662,469 – – – – – – – – 2,662,469 (1,323,055) (1,319,619) 559,932 – 559,932 (64,139) Rs. ’000 – – 559,932 – Total equity – 1,719 16,714,932 – (38,372) Shareholders’ Non-controlling funds interest – – (1,319,619) 2,765,992 General Employee share reserve option reserve – (226,737) – – Other reserves Foreign Hedging currency reserve translation reserve Rs. ’000 Rs. ’000 – – 559,932 (64,139) – – (64,139) (64,139) – – 18,553,575 9,215,775 11,673 – 36,791 – 193,303 (1,323,055) 596,723 (64,139) 18,746,878 – – – – – – – – – – – – – – – – – – – – – – – – – – – 105,980 – – – – – (5,137,434) – – – – – (3,082,520) – (147,194) (41,214) – (3,082,420) (3,082,520) – – – – – – – – – – – – – 2,674,142 – (15,996) – – (13,620) 9,215,775 (41,214) (3,098,416) (3,082,520) (13,620) (2,055,014) – – – – – – – – – 100 – – – – – – 100 24 124 – – – – – – – – (2,400) (2,400) – – – – – – 6,130 4,514 – – – – 112,203 – – 10,644 (10,644) – – – – 7,850,000 4,514 – – – 7,850,000 (34,991) 6,214,988 (26,640) 6,188,348 8,124,261 10,504,768 74,970,003 433,503 159,192,812 1,755,897 160,948,709 > Statement of Changes in Equity – Group (102,511) – – (8,747,532) 3,325,924 – 112,203 (13,772,856) 463,884 – 112,203 Commercial Bank of Ceylon PLC – Annual Report 2021 191
  193. Statement of Changes in Equity – Group (Contd.) Note Page No. Stated capital Statutory reserve fund Rs. ’000 Rs. ’000 Total comprehensive income for the year 2021 Profit for the year – – Other comprehensive income, net of tax – – Net actuarial gains/(losses) on defined benefit plans – – Gain on disposal of investments in equity instruments – – – – – – Net fair value gains/(losses) on remeasuring financial assets measured at fair value through other comprehensive income – – Net gains/(losses) arising from translating the Financial Statements of foreign operations – – Cash flow hedges – effective portion of changes in fair value, net of tax – – – – Share of other comprehensive income of associate, net of tax Net change in revaluation surplus 56.1 293 Total comprehensive income for the year 2021 Transactions with owners recognised directly in equity, contributions by and distributions to owners Issue of ordinary voting shares under employee share option plans 52 287 40,866 – Transfer o/a share-based payment transactions 52 287 3,646 – Transfer of cost o/a of expired ESOP Shares (net of tax) 55 & 56.5 292 & 294 – – Dividends to equity holders 2,334,698 First & Final dividend for 2020 satisfied in the form of cash First & Final dividend for 2020 satisfied in the form of issue and allotment of new shares – 25 234 Unclaimed dividend absorbed / (dividend paid) in respect of previous years Interim Dividend for 2021 Share-based Payment transactions 56.5 Transfers during the year 54 to 56 291 to 294 Total transactions with equity holders Balance as at December 31, 2021 The Notes appearing on pages 199 to 336 form an integral part of these Financial Statements. 192 Commercial Bank of Ceylon PLC Annual Report 2021 > Statement of Changes in Equity – Group 294 2,334,698 – – – – – – – – – – 1,305,105 2,379,210 1,305,105 54,566,957 10,590,338
  194. Retained earnings Revaluation reserve Fair value reserve Rs . ’000 Rs. ’000 Rs. ’000 24,062,469 8,647 8,647 – – – – 579,943 – 46,169 Rs. ’000 Rs. ’000 Shareholders’ Non-controlling funds interest Rs. ’000 – 24,062,469 227,819 24,290,288 – (10,627,290) 109,263 (10,518,027) 8,647 2,297 10,944 – – – – – – – – – – – – – (1,512) – – – – 579,943 – – – – (12,441,685) – – – 1,181,148 46,169 – – 46,169 46,169 – – 13,435,179 – 40,866 – (1,512) – – – (12,441,685) – – 579,943 – (12,443,197) 1,181,148 – 1,181,148 Rs. ’000 – – 579,943 Rs. ’000 Total equity – – – – – 1,181,148 General Employee share reserve option reserve – – 24,071,116 – (12,443,197) Other reserves Foreign Hedging currency reserve translation reserve Rs. ’000 Rs. ’000 – – – 9,223 – 97,743 – 337,082 – – (1,512) 589,166 (12,441,685) 1,278,891 46,169 13,772,261 – – – – – – – – – – – – (3,646) 244,188 – – – – – (321,300) (7,493,698) – – – – – – (5,159,000) (15,168) (5,174,168) (5,253,070) – – – – – – (5,253,070) (12,200) (5,265,270) – – (77,112) – (77,112) – – – – – – 94,070 – – – – – – – – – – – – – – – – – – (15,055,105) – – – – 13,750,000 (22,304,615) – – – – 13,750,000 (282,974) (5,153,274) (15,168) (5,168,442) 88,720,003 150,529 167,474,717 2,077,811 169,552,528 9,890,762 11,084,711 (11,979,313) > Statement of Changes in Equity – Group 4,507,072 (56,342) – – – – (2,334,698) 41,972 – 40,866 94,070 32 – (3,000) 41,972 – – – Commercial Bank of Ceylon PLC – 94,102 (3,000) 41,972 – Annual Report 2021 193
  195. Statement of Changes in Equity – Bank Note Page No. Balance as at December 31, 2019 Stated capital Statutory reserve fund Retained earnings Rs. ’000 Rs. ’000 Rs. ’000 40,916,958 8,205,391 5,144,433 Total comprehensive income for the year 2020 Profit for the year – Other comprehensive income, net of tax Net actuarial gains/(losses) on defined benefit plans Gain on disposal of investments in equity instruments – 16,373,489 – – (221,320) – – (223,039) 1,719 – – – – – Net fair value gains/(losses) on remeasuring financial assets measured at fair value through other comprehensive income – – – Net gains/(losses) arising from translating the Financial Statements of the foreign operations – – – Cash flow hedges – effective portion of changes in fair value, net of tax – – – – Net change in revaluation surplus 56.1 293 Total comprehensive income for the year 2020 – 16,152,169 Transactions with owners recognised directly in equity, contributions by and distributions to owners Proceeds on issue of ordinary voting shares to IFC parties (Private placement) 52 287 Issue of ordinary voting shares under employee share option plans 52 287 Transfer o/a share-based payment transactions 52 287 Transfer of cost o/a of expired ESOP Shares (net of tax) 55 & 56.5 292 & 294 Dividends to equity holders – – – – – – – – – – 105,980 – (5,137,648) – (3,082,520) – (2,055,014) 2,055,014 Second interim dividend for 2019 25 234 Final dividend for 2019 satisfied in the form of issue and allotment of new shares 25 234 Unclaimed dividend absorbed/(dividend paid) in respect of previous years – 2,055,014 – – (114) Share-based payment transactions 56.5 294 – – – Transfers during the year 54 to 56 291 to 294 – Total transactions with equity holders 194 9,215,775 Commercial Bank of Ceylon PLC Annual Report 2021 11,270,789 818,674 (8,668,674) 818,674 (13,700,342)
  196. Other reserves Revaluation reserve Fair value reserve Rs . ’000 Rs. ’000 Foreign currency translation reserve Rs. ’000 7,088,054 1,785,441 2,471,983 – 2,574,858 – (38,372) – Rs. ’000 Rs. ’000 Rs. ’000 67,120,003 468,494 133,162,385 – – 16,373,489 – – 1,406,172 – – – – (223,039) – – – – – – 1,719 – – – – – 2,574,858 – – – – (1,323,110) – – – 439,883 (64,139) – – (64,139) (64,139) – – 17,779,661 9,215,775 – – 2,574,858 (1,323,110) – 439,883 – (1,323,110) – 439,883 (64,139) Total equity – – 439,883 Rs. ’000 General Employee share reserve option reserve – 2,574,858 (1,323,110) – Hedging reserve – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – (3,082,634) – – – – – – (3,082,520) – – – – – – – – – – – – – – – – – – – – 7,850,000 - - - - 7,850,000 > Statement of Changes in Equity – Bank (147,194) – 112,203 – (34,991) (41,214) – (114) 112,203 – 6,204,130 Commercial Bank of Ceylon PLC Annual Report 2021 195
  197. Statement of Changes in Equity – Bank (Contd.) Stated capital Note Page No. Balance as at December 31, 2020 Statutory reserve fund Retained earnings Rs. ’000 Rs. ’000 Rs. ’000 52,187,747 9,024,065 7,596,260 Total comprehensive income for the year 2021 Profit for the year – – 23,606,051 Other comprehensive income, net of tax – – 6,051 Net actuarial gains/(losses) on defined benefit plans – – 6,051 Gain on disposal of investments in equity instruments – – – Net change in revaluation surplus – – – Net fair value gains/(losses) on remeasuring financial assets measured at fair value through other comprehensive income 56.1 293 – – – Net gains/(losses) arising from translating the Financial Statements of the foreign operations – – – Cash flow hedges – effective portion of changes in fair value, net of tax – – – – – Total comprehensive income for the year 2021 23,612,102 Transactions with owners recognised directly in equity, contributions by and distributions to owners Issue of ordinary voting shares under employee share option plans 52 287 40,866 – Transfer o/a share-based payment transactions 52 287 3,646 – Transfer of cost o/a of expired ESOP Shares (net of tax) 55 & 56.5 292 & 294 – – Dividends to equity holders 2,334,698 First & Final dividend for 2020 satisfied in the form of cash 25 234 First & Final dividend for 2020 satisfied in the form of issue and allotment of new shares 25 234 Unclaimed dividend absorbed / (dividend paid) in respect of previous years Share-based payment transactions Transfers during the year 56.5 294 54 to 56 291 to 294 Total transactions with equity holders Balance as at December 31, 2021 The Notes appearing on pages 199 to 336 form an integral part of these Financial Statements. 196 Commercial Bank of Ceylon PLC Annual Report 2021 > Statement of Changes in Equity – Bank – – 244,188 – (7,493,982) – (5,253,070) – (2,334,698) – – 93,786 – – – 2,334,698 – – 1,180,303 (14,930,303) 2,379,210 1,180,303 (22,180,097) 54,566,957 10,204,368 9,028,265
  198. Other reserves Revaluation reserve Rs . ’000 Rs. ’000 Foreign currency translation reserve Rs. ’000 9,662,912 462,331 2,911,866 – 532,740 Fair value reserve – (12,442,506) – 1,152,856 Hedging reserve (102,511) Rs. ’000 – 46,169 General Employee share reserve option reserve Total equity Rs. ’000 Rs. ’000 Rs. ’000 74,970,003 433,503 157,146,176 – – 23,606,051 – – (10,704,690) 6,051 – – – – – – – – – – – – – – – – – 532,740 – – – – (12,442,506) – 532,740 – (12,442,506) – – – – 532,740 (12,442,506) 1,152,856 – 1,152,856 – – – 1,152,856 46,169 – – 46,169 46,169 – – 12,901,361 – 40,866 – – – – – – – – – – (3,646) – – – – – (321,300) – – – – – – (5,159,284) – – – – – – (5,253,070) – – – – – – – – – – – – – – – – – – – – 13,750,000 – – – – 13,750,000 (282,974) 88,720,003 150,529 10,195,652 (11,980,175) 4,064,722 > Statement of Changes in Equity – Bank (56,342) – 41,972 – – (77,112) – 93,786 41,972 – (5,153,558) 164,893,979 Commercial Bank of Ceylon PLC Annual Report 2021 197
  199. Statement of Cash Flows GROUP For the year ended December 31 , Note Page No. BANK 2021 Rs. ’000 2020 Rs. ’000 2021 Rs. ’000 2020 Rs. ’000 32,957,324 24,519,860 32,001,203 23,511,312 Cash flows from operating activities Profit before income tax Adjustments for: Non-cash items included in profit before tax 64 306 30,473,593 24,764,927 30,013,192 24,705,430 Change in operating assets 65 307 (230,261,220) (374,761,711) (221,556,713) (369,030,667) Change in operating liabilities 66 307 208,070,200 325,708,382 200,391,382 322,115,757 (Gains)/losses on sale of property, plant and equipment 17 226 (4,054) (5,820) Share of profits of associate, net of tax 38.1 256 (1,896) (3,898) Dividends received from investments in associate and subsidiaries 17 226 Interest expense on subordinated liabilities 13.2 223 Net unrealised gains/(losses) arising from translating the Financial Statements of foreign operations 56.4 293 Benefits paid on defined benefit plans Income tax paid 48 276 Net cash from/(used in) operating activities – 3,398,554 – 3,756,921 (5,164) – (105,911) 3,398,554 (926) – (98,200) 3,756,921 1,278,891 596,723 1,152,856 439,883 (1,116,195) (673,106) (1,107,421) (670,487) (8,963,620) (7,748,870) (8,660,823) (7,428,411) 35,831,577 (3,846,592) 35,521,155 (2,699,388) (1,034,299) (1,159,712) Cash flows from investing activities Purchase of property, plant and equipment Purchase of investment properties 39.1 to 39.4 258 to 261 40 269 Proceeds from sale of property, plant and equipment – 49,463 Purchase of financial investments (5,607,000) Proceeds from sale and maturity of financial investments Purchase of intangible assets 484,800 41.1 & 41.2 271 & 272 (810,454) Investments in subsidiaries – Dividends received from investments in associate and subsidiaries 17 – 226 Net cash from/(used in) investing activities (6,917,490) (41) 8,901 (300,000) 2,368,509 (460,053) – – 457,604 (922,623) – 14,335 (5,607,000) 484,800 (768,047) – 105,911 (6,692,624) (1,106,641) – 2,829 (300,000) 2,368,509 (409,322) (1,125,000) 98,200 (471,425) Cash flows from financing activities Proceeds from issue of ordinary voting shares under employee share option plans 52 287 Proceeds from issue of ordinary voting shares to IFC parties (Private placement) 52 287 Proceeds from issue of subordinated liabilities 51 286 8,595,470 – 8,595,470 – Redemption of subordinated liabilities 51 286 (9,502,140) – (9,502,140) – 40,866 – 9,215,775 40,866 – – 9,215,775 Interest paid on subordinated liabilities (3,422,766) (3,802,023) (3,422,766) (3,802,023) Payment of lease liabilities/advance payment of right-of-use assets (1,366,628) (1,354,902) (1,548,914) (1,446,874) Dividend paid to non-controlling interest 57 294 Dividend paid to shareholders of the Bank Net cash from/(used in) financing activities (15,168) (15,996) (5,159,000) (3,082,420) (5,159,284) – (3,082,634) (10,829,366) 960,434 (10,996,768) 884,244 – Net increase/(decrease) in cash and cash equivalents 18,084,721 (2,428,554) 17,831,763 (2,286,569) Cash and cash equivalents as at January 1, 51,258,271 53,686,825 50,253,868 52,540,437 69,342,992 51,258,271 68,085,631 50,253,868 Gross cash and cash equivalents as at December 31, 28 240 Less: Impairment charges 28.1 240 Cash and cash equivalents as per Statement of Financial Position 28 240 (7,613) 69,335,379 The Notes appearing on pages 199 to 336 form an integral part of these Financial Statements. 198 – Commercial Bank of Ceylon PLC Annual Report 2021 (3,241) 51,255,030 (7,555) 68,078,076 (3,241) 50,250,627
  200. Notes to the Financial Statements 1 . Reporting entity 1.1 Corporate information Commercial Bank of Ceylon PLC (the “Bank”) is a public limited liability company listed on the Colombo Stock Exchange (CSE), incorporated on June 25, 1969 under the Companies Ordinance No. 51 of 1938, and domiciled in Sri Lanka. It is a licensed commercial bank regulated under the Banking Act No. 30 of 1988 and amendments thereto (Banking Act). The Bank was re-registered under the Companies Act No. 07 of 2007 on January 23, 2008, under the Company Registration No. PQ 116. The registered office of the Bank is situated at “Commercial House”, No. 21, Sir Razik Fareed Mawatha, Colombo 01, Sri Lanka. The ordinary shares of the Bank (both Ordinary Voting and Non-Voting shares) have a primary listing on the CSE. The unsecured subordinated debentures of the Bank are also listed on the CSE. The staff strength of the Group and the Bank was as follows: 2021 2020 Group 5,660 5,693 Bank 5,072 5,057 As at December 31, Corporate information is presented in the inner back cover of this Annual Report. 1.2 Consolidated Financial Statements The Consolidated Financial Statements as at and for the year ended December 31, 2021, comprise the Bank (Parent Company) and its Subsidiaries (together referred to as the “Group” and individually as “Group entities”) and the Group’s interest in its Associate. The Bank does not have an identifiable parent of its own. The Bank is the Ultimate Parent of the Group. 1.3 Principal business activities, nature of operations of the Group and ownership by the Bank in its subsidiaries and associate Figure – 36: Group Structure Commercial Development Company PLC 90% 2020 – 90% 90% Quoted CBC Tech Solutions Limited CBC Finance Limited Commercial Insurance Brokers (Pvt) Limited 2020 – 100% 2020 – 100% 2020 – 60% 100% 100% 100% Local subsidiaries 100% 60% 60% Equity Investments Lanka Limited 22.92% 2020 – 22.92% 22.92% Unquoted Unquoted Commercial Bank of Ceylon PLC Local associate Foreign subsidiaries Unquoted 55% 100% 100% Commercial Bank of Maldives Private Limited (Maldives) CBC Myanmar Microfinance Company Limited (Myanmar) Commex Sri Lanka S.R.L. (Italy) 2020 – 55% 2020 – 100% 2020 – 100% 55% 100% 100% Direct holdings 1 Commercial Bank of Ceylon PLC Annual Report 2021 199
  201. Table – 57: Principal business activities and nature of business operations of the Group Entity Principal business activities Commercial Bank of Ceylon PLC Banking and related activities such as accepting deposits, personal banking, trade financing, offshore banking, RFC & NRFC operations, travel-related services, corporate and retail credit, syndicated financing, project financing, investment banking, development banking, lease & hire purchase, rural credit, issuing of local and international debit and credit cards, internet banking, mobile banking, money remittance facilities, dealing in Government Securities and treasuryrelated products, salary remittance package, bullion trading, export and domestic factoring, pawning, margin trading, digital banking services, bancassurance and Islamic banking products and services etc. Local subsidiaries Commercial Development Company PLC (CDC) Property development, related ancillary services and providing manpower needs for various support services which are unrelated to providing core banking services to the customers of the Bank (parent). CBC Tech Solutions Limited Providing Information & Communication Technology (ICT) related products, services and solutions to the corporate sector. CBC Finance Limited Granting of lease facilities, hire purchase, mortgage loans and other credit facilities and accepting deposits. Commercial Insurance Brokers (Pvt) Limited (CIB) Providing professional service and handling all insurance portfolios of individuals as well as many leading and reputed organizations in Sri Lanka engaged in diverse business activities. Foreign subsidiaries Commercial Bank of Maldives Private Limited (CBM) Offering of an extensive range of banking and related financial services such as accepting deposits, retail banking, trade financing, corporate and retail credit, project financing, development banking, tele-banking, internet banking, mobile banking, money remittance facilities, dealing in Government securities and treasury-related products etc. CBC Myanmar Microfinance Company Limited Operating as a non-deposit taking microfinance institution throughout Myanmar providing micro financial services to the lower segment of the market, and to engage in all activities reasonably allowed by the Microfinance Supervisory Authority of Myanmar. Commex Sri Lanka S.R.L-Italy (Commex) Operating as an agent to the Bank (parent) for opening accounts, providing money transfer services, issuance and encashment of foreign currencies and travelers cheques, collecting applications for credit facilities and handling of ATM cards etc. Local associate Equity Investments Lanka Limited 2. Basis of Accounting 2.1 Statement of compliance The Consolidated Financial Statements of the Group and the separate Financial Statements of the Bank, have been prepared and presented in accordance with the Sri Lanka Accounting Standards (SLFRSs and LKASs), laid down by The Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka) and in compliance with the requirements of the Companies Act No. 07 of 2007 and amendments thereto (Companies Act) and the Banking Act and provide appropriate disclosures as required by the Listing Rules of the CSE. These Financial Statements, except for information on cash flows have been prepared following the accrual basis of accounting. 1 2 These SLFRSs and LKASs are available at the website of CA Sri Lanka – www.casrilanka.com 200 Commercial Bank of Ceylon PLC Project financing in the form of Equity, Quasi Equity and other corporate debt instruments of new and existing ventures in Sri Lanka. The Group did not adopt any inappropriate accounting treatments, which are not in compliance with the requirements of the SLFRSs and LKASs, regulations governing the preparation and presentation of the Financial Statements. Details of the Group’s Significant Accounting Policies followed during the year are given in Notes 6 to 10 on pages 209 to 220. The formats used in the preparation and presentation of the Financial Statements and the disclosures made therein also comply with the specified formats prescribed by the CBSL in the Circular No 02 of 2019 dated January 18, 2019, on “Publication of Annual and Quarterly Financial Statements and Other Disclosures by Licensed Banks”. The Bank also published annual and quarterly financial information and other disclosures Annual Report 2021 > Notes to the Financial Statements in the Annual Report, Press and the Website in compliance with Section 4.2 of the aforementioned Circular. 2.2 Responsibility for Financial Statements The Board of Directors of the Bank is responsible for the preparation and presentation of the Financial Statements of the Group and the Bank as per the provisions of the Companies Act and Sri Lanka Accounting Standards. The Board of Directors acknowledges their responsibility for Financial Statements as set out in the “Annual Report of the Board of Directors”, “Statement of Directors’ Responsibility for Financial Reporting” and the certification on the Statement of Financial Position on pages 3, 152 and 189, respectively.
  202. These Financial Statements include the following components : z Income Statement and a Statement of Profit or Loss and Other Comprehensive Income (OCI) – which provides the information on the financial performance of the Group and the Bank for the year Refer pages 187 and 188; under review. z Statement of Financial Position (SOFP) – which provides the information on the financial position of the Group and the Refer page 189; Bank as at the year end. z Statement of Changes in Equity- which depicts all changes in shareholders’ funds during the year under review of the Group Refer pages 190 to 197; and the Bank. z Statement of Cash Flows- which provides the information to the users, on the ability of the Group and the Bank to generate cash and cash equivalents and utilisation Refer page 198; of those cash flows. z Notes to the Financial Statements comprising Significant Accounting Policies and other explanatory information. Refer pages 199 to 336. 2.3 Approval of Financial Statements by the Board of Directors The Financial Statements of the Group and the Bank for the year ended December 31, 2021 (including comparatives for 2020), were approved and authorised for issue by the Board of Directors in accordance with Resolution of the Directors on February 25, 2022 (The Financial Statements of the Group and the Bank for the year ended December 31, 2020, were approved and authorised for issue by the Board of Directors on February 24, 2021). 2.4 Basis of measurement The Financial Statements of the Group have been prepared on the historical cost basis except for the following material items stated in the SOFP. Table – 58: Basis of Measurement Items Basis of measurement Note No./s Page/s Financial instruments measured at fair value through profit or loss including derivative financial instruments Fair value 31, 32 & 242 & 45 275 Financial assets measured at fair value through other comprehensive income Fair value 36 251 Land and buildings Measured at cost at the time of acquisition 39 and subsequently at revalued amounts which are the fair values at the date of revaluation 257 Investment property Measured at cost at the time of acquisition 40 and subsequently at Fair value. 269 Defined benefit obligation Net liability for defined benefit obligations 49 are recognised as the present value of the defined benefit obligation, less net total of the plan assets, plus unrecognised actuarial gains, less unrecognised past service cost, and unrecognised actuarial losses 277 Equity settled sharebased payment arrangements Fair value on grant date 288 53 2.5 Going concern basis of accounting The Management has made an assessment of its ability to continue as a going concern and is satisfied that it has the resources to continue in business for the foreseeable future. Furthermore, the Management is not aware of any material uncertainties that may cast significant doubt upon the Group’s ability to continue as a going concern. Therefore, the Financial Statements of the Group continue to be prepared on a going concern basis. Given the continued unpredictability of the impact of the COVID-19 outbreak, the management took into consideration the existing and anticipated effects of the pandemic on the Group’s activities based on all available information about the future that was obtained after the reporting date, up until the date on which the financial statements are issued. Subsequent to the outbreak of COVID-19, the Group has strictly adhered to the guidelines and directions issued by both the Governments and Central Banks in the countries that we operate when conducting its business operations. Further, the Group has provided reliefs for the affected businesses and individuals in line with the directions issued by the Governments and Central Banks in the countries that we operate. These relief measures include deferment of repayment terms of credit facilities, offering concessionary rates of interest to eligible loan products (debt moratorium) and waiving off certain fees and charges. Considering a wide range of factors including history of profitable operations, strong liquidity positions and the availability of stable external funding sources, diversified lending profile and the initiatives taken to strengthen risk monitoring at borrower level, the Management is satisfied that the going concern basis is appropriate. 2.6 Functional and presentation currency Items included in these Financial Statements are measured using the currency of the primary economic environment in which the Bank operates (the functional currency). Each entity in the Group determines its own functional currency and items included in the Financial Statements of these entities are measured using that functional currency. There was no change in the Group’s presentation and functional currency during the year under review. These Financial Statements are presented in Sri Lankan Rupees, the Group’s functional and presentation currency. > Notes to the Financial Statements Commercial Bank of Ceylon PLC Annual Report 2021 2 201
  203. The information presented in US Dollars in Annex 6 in the Section on “Supplementary Information” on pages 386 and 387 does not form part of the Financial Statements and is made available solely for the information of stakeholders. 2.7 Presentation of Financial Statements The assets and liabilities of the Group presented in the SOFP are grouped by nature and listed in an order that reflects their relative liquidity and maturity pattern. No adjustments have been made for inflationary factors affecting the Financial Statements. An analysis on recovery or settlement within 12 months and more than 12 months from the reporting date is presented in Note 61 on pages 298 and 299. 2.8 Rounding The amounts in the Financial Statements have been rounded-off to the nearest rupees thousands, except where otherwise indicated as permitted by the Sri Lanka Accounting Standard – LKAS 1 on “Presentation of Financial Statements” (LKAS 1). 2.9 Offsetting Financial assets and financial liabilities are offset and the net amount reported in the SOFP, only when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis or to realise the assets and settle the liabilities simultaneously. Income and expenses are not offset in the Income Statement, unless required or permitted by an Accounting Standard or Interpretation (issued by the IFRS Interpretations Committee and Standard Interpretations Committee) and as specifically disclosed in the Significant Accounting Policies of the Bank. 2.10 Materiality and aggregation Each material class of similar items is presented separately in the Financial Statements. Items of dissimilar nature or function are presented separately, unless they are immaterial as permitted by the LKAS 1 and amendments to the LKAS 1 on “Disclosure Initiative” which was effective from January 1, 2016. Notes to the Financial Statements are presented in a systematic manner which ensures the understandability and comparability of Financial Statements of the Group and the Bank. Understandability of the Financial Statements is not compromised by obscuring material information with immaterial information or by aggregating material items that have different natures or functions. 2 202 Commercial Bank of Ceylon PLC 2.11 Comparative information Comparative information including quantitative, narrative and descriptive information is disclosed in respect of the previous period in the Financial Statements in order to enhance the understanding of the current period’s Financial Statements and to enhance the inter period comparability. The presentation and classification of the Financial Statements of the previous year are amended, where relevant for better presentation and to be comparable with those of the current year. 2.12 Use of significant accounting judgements and assumptions and estimates In preparing the Financial Statements of the Group in conformity with SLFRSs and LKASs, the Management has made judgements, estimates and assumptions which affect the application of Accounting Policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised prospectively. The Group considered the impact of COVID‑19 in preparing the Financial Statements in line with the circulars and guidelines issued by the CBSL and the CA Sri Lanka. While the specific areas of judgement may not change, due to the emergence of new variants of the virus, continued uncertainty surrounding economic activities, and the limited experience of the economic and financial impacts of such events, application of further judgements and changes to estimates in the measurement of Group’s assets were made where applicable. Significant areas of critical judgements, assumptions and estimation uncertainty, in applying the Accounting Policies that have most significant effects on the amounts recognised in the Financial Statements of the Group are as follows: A. Significant accounting judgements Information about judgements made in applying the Accounting Policies that have most significant effects on the amounts recognised in these Financial Statements is included in Notes 2.12.1 to 2.12.3 below. 2.12.1 Determination of control over investees Management applies its judgement to determine whether the control indicators set out in Note 37 on page 254 indicates that the Group controls the investees. 2.12.2 Classification of financial assets and liabilities The Significant Accounting Policies of the Group provides scope for financial assets to be classified and subsequently Annual Report 2021 > Notes to the Financial Statements measured into different categories, namely, at Amortised Cost (AC), Fair Value through Other Comprehensive Income (FVOCI) and Fair Value Through Profit or Loss (FVTPL) based on the following criteria; z The entity’s business model for managing the financial assets as set out in Note 7.1.3.1 on page 210. z The contractual cash flow characteristics of the financial assets as set out in Note 7.1.3.2 on page 210. 2.12.3 Classification of investment property Management uses its judgment to determine whether a property qualifies as an investment property. A property that is held either to earn rental income or for capital appreciation or both and thus generates cash flows largely independently of the other assets held by the Group are classified as Investment Property. On the other hand, a property used in the production or supply of goods and services or for administrative purposes and thus generates cash flows that are attributable not only to that property but also to other assets used in the production or supply process are classified as Property, Plant & Equipment. The Group assesses on an annual basis, the accounting classification of its investment properties, taking into consideration the current use of such properties. B. Assumptions and estimation uncertainties Information about assumptions and estimation uncertainties that have a significant risk of resulting in material adjustments are included in Notes 2.12.4 to 2.12.13 below. 2.12.4 Fair value of financial instruments The fair values of financial assets and financial liabilities recognised on the SOFP, for which there is no observable market price are determined using a variety of valuation techniques that include the use of mathematical models. The Group measures fair value using the fair value hierarchy that reflects the significance of input used in making measurements. Methodologies used for valuation of financial instruments and fair value hierarchy are stated in Note 27 on pages 236 to 240. 2.12.5 Impairment losses on financial assets The measurement of impairment losses across the categories of financial assets under Sri Lanka Accounting StandardSLFRS 9 on “Financial Instruments” (SLFRS 9) requires judgement, in particular, the estimation of the amount and timing of future cash flows and collateral values when determining impairment losses. Accordingly, the Group reviews its individually significant loans and advances portfolio at each reporting date to assess whether an impairment loss should be
  204. recognised in the Income Statement . In particular, the Management’s judgement is required in the estimation of the amount and timing of future cash flows when determining the impairment loss. In estimating these cash flows, Management makes judgements about a borrower’s financial situation and the net realisable value of any underlying collateral. Each impaired asset is assessed on its merits, and the workout strategy and estimate of cash flows considered recoverable. These estimates are based on assumptions about a number of factors and hence actual results may differ, resulting in future changes to the impairment allowance made. A collective impairment provision is established for: z groups of homogeneous loans and advances that are not considered individually significant; and z groups of assets that are individually significant but that were not found to be individually impaired. As per SLFRS 9, the Group’s Expected Credit Loss (ECL) calculations are outputs of complex models with a number of underlying assumptions regarding the choice of variable inputs and their interdependencies. Elements of the Group’s ECL models that are considered accounting judgements and estimates include: z Criteria for qualitatively assessing whether there has been a significant increase in credit risk (SICR) and if so allowances for financial assets measured on a Life Time Expected Credit Loss (LTECL) basis. z Segmentation of financial assets when their ECL is assessed on a collective basis. z Various statistical formulas and the choice of inputs used in the development of ECL models. z Associations between macro-economic inputs, such as GDP growth, inflation, interest rates, exchange rates and unemployment and the effect of these inputs on Probability of Default (PDs), Loss Given Default (LGD) and Exposure At Default (EAD). z Forward-looking macro-economic scenarios and their probability weightings. As such, the accuracy of the impairment provision depends on the model assumptions and parameters used in determining the ECL calculations. The Bank has provided reliefs such as deferment of repayment terms of credit facilities, for the affected businesses and individuals due to the COVID-19 pandemic in line with the directions issued by the CBSL. Utilization of a payment deferral program does not, all else being equal, automatically trigger a SICR. As such, key issue will be to distinguish between cases where the payment holidays provide relief from > Notes to the Financial Statements short-term liquidity constraints impacting the borrower that do not amount to a SICR. Given the high degree of uncertainty and unprecedented circumstances in the shortterm economic outlook, the Management exercised judgements in the assessment of the impact of the COVID-19 outbreak on the loans and advances portfolio of the Group, relying more on the long-term outlook as evidenced by past experience and taking into consideration various relief measures including concessionary financing and payment moratorium. The impact of the outbreak has been assessed and adjusted in these Financial Statements based on the available information and assumptions made as at reporting date in line with the guidelines issued by the CBSL and the CA Sri Lanka. In response to the COVID-19 outbreak and the Group’s expectations of economic impacts, key assumptions used in the Group’s calculation of ECL have been revised. As at the reporting date, the expected impacts of COVID-19 pandemic have been captured via the modelled outcome as well as a separate management overlay reflecting the considerable uncertainty remaining in the modelled outcome given the unprecedented impacts of COVID-19. Although the credit model inputs and assumptions, including forward-looking macroeconomic assumptions, were revised in response to the COVID-19 pandemic, the fundamental credit model mechanics and methodology underpinning the Group’s calculation of ECL have remained consistent with prior periods. Accordingly, the Bank took steps to identify the customers showing distress signs in identifying SICR under the individual impairment assessment. Under the collective assessment, customers operating in risk elevated industries including Tourism and hospitality which includes resort hotels in the Maldives, private or commercial vehicles including motor cycles, hardware and building material distribution, restaurant and reception hall, building contracts and real estate were assessed for Lifetime ECL. Exposures outstanding from the borrowers operating in these industries have been classified as stage 2 unless such exposures are individually significant and have specifically been identified as stage 1 reflecting forward looking view of the economy in relation to the business. Further, during 2020, the Bank decided to increase the weightages assigned for worst case scenario while reducing the weightages assigned for base case scenario and best case scenario when assessing the probability weighted forward looking macro-economic indicators along with management overlays to qualitative indicators relating to forward looking macro-economic environment with the objective of capturing the impact of COVID-19 pandemic and uncertainties and volatilities in future outlook on the ECL computation. In addition, as per expert credit judgment, the Bank stressed the ECL parameters such as PDs and LGDs to reflect the real economic scenario that is not reflected due to the deferrals and concessions granted due to COVID-19 outbreak. Early observations of payment behaviour of expiries for this year were considered in the assessment of the changes in the risk of default occurring over the expected life of a financial instrument when determining staging and is a key input in determining migration. Refer Note 18 on page 226 for details. 2.12.6 Impairment of non-financial assets The Group assesses whether there are any indicators of impairment for an asset or a Cash Generating Unit (CGU) at each reporting date or more frequently, if events or changes in circumstances necessitate to do so. This requires the estimation of the Value in use (VIU) of such individual assets or the CGUs. Estimating VIU requires the Management to make an estimate of the expected future cash flows from the asset or the CGU and also to select a suitable discount rate in order to calculate the present value of the relevant future cash flows. This valuation requires the Group to make estimates about expected future cash flows and discount rates and hence, they are subject to uncertainty. Refer Note 7.6 on page 216 for details. 2.12.7 Revaluation of property, plant and equipment The Group measures land and buildings at revalued amounts with changes in fair value being recognised in Equity through OCI. The Group engages independent professional valuers to assess fair value of land and buildings in terms of Sri Lanka Accounting Standard – SLFRS 13 on “Fair Value Measurement” (SLFRS 13). The key assumptions used to determine the fair value of the land and building and sensitivity analyses are provided in Notes 39.5 (b) and 39.5 (c) on pages 263 to 267. 2.12.8 Useful life-time of the property, plant and equipment The Group reviews the residual values, useful lives and methods of depreciation of Property, Plant and Equipment at each reporting date. Judgement of the Management is exercised in the estimation of these values, rates, methods and hence they are subject to uncertainty. 2 Refer Note 20 on pages 230 and 231. Commercial Bank of Ceylon PLC Annual Report 2021 203
  205. 2 .12.10.1 Determination of the lease term for lease contracts with renewal and termination options (Group as a lessee) The Group determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extend the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if it is reasonably certain not to be exercised. The Group has several lease contracts that include extension and termination options. The Group applies judgement in evaluating whether it is reasonably certain whether or not to exercise the option to renew or terminate the lease. That is, it considers all relevant factors that create an economic incentive for it to exercise either the renewal or termination option. After the commencement date, the Group reassesses the lease term if there is a significant event or change in circumstances that is within its control that affects its ability to exercise or not to exercise the option to renew or to terminate (e.g., construction of significant leasehold improvements or significant customisation of the leased asset). 2.12.10.2 Estimating the incremental borrowing rate As the Group cannot readily determine the interest rate implicit in the lease, it uses its incremental borrowing rate (‘IBR’) to measure the lease liabilities. The IBR is the rate of interest that the Group would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment. The IBR therefore reflects what the Group ‘would have to pay’, which requires estimation when no observable rates are available (or when they need to be adjusted to reflect the terms and conditions of the lease). The Group estimates the IBR using observable input when available and is required to make certain entity-specific adjustments. 2 3 2.12.11 Deferred tax assets Deferred tax assets are recognised in respect of tax losses to the extent that it is probable that future taxable profit will be available 204 Commercial Bank of Ceylon PLC Refer Note 42 on pages 272 to 274 for details. 2.12.12 Defined benefit obligation The costs of the defined benefit plans are determined using an actuarial valuation. The actuarial valuation involves making assumptions about discount rates, expected rates of return on assets, future salary increases, mortality rates, future pension increase, etc. Due to the long-term nature of these plans, such estimates are subject to significant uncertainty. Refer Note 49 on pages 277 to 285 for the assumptions used. The Group has exposure mainly to the following risks arising out of financial activities that are undertaken in its day to day businesses: z Strategic and Business risk; z Credit risk; z Liquidity risk; z Market risk; and z Operational and Reputational risk. Figure – 37: Types of risk Strategic & Business Risk Reputational & Behavioural Risk Op tional Risk era uidity Risk Liq 2.12.13 Provisions for liabilities, commitments and contingencies The Group receives legal claims in the normal course of business. Management has made judgements as to the likelihood of any claim succeeding in making provisions. The time of concluding legal claims is uncertain, as is the amount of possible outflow of economic benefits. Timing and cost ultimately depends on the due processes in respective legal jurisdictions. Information about significant areas of estimation uncertainty and critical judgements in applying Accounting Policies other than those stated above that have significant effects on the amounts recognised in the Consolidated Financial Statements are described in Notes 7.10 to 7.15 on page 218. 2.13 Events after the reporting period Events after the reporting period are those events, favourable and unfavourable, that occur between the reporting date and the date when the Financial Statements are authorised for issue. In this regard, all material and important events that occurred after the reporting period have been considered and appropriate disclosures are made in Note 69 on page 336, where necessary. 3. Financial Risk Management 3.1 Introduction and overview Risk is inherent in the Bank’s activities, but is managed through a process of ongoing identification, measurement and monitoring, subject to risk limits and controls. This process of risk management is critical to maintaining Bank's continuing profitability and each officer of the Bank to whom a portfolio is assigned becomes accountable for the risk exposures relating to his/her portfolio. Annual Report 2021 > Notes to the Financial Statements is k 2.12.10 SLFRS 16 – Leases and can be utilised against such tax losses. Judgement is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and level of future taxable profits, together with future tax-planning strategies. isk Fair valuation of the investment property is ascertained by independent valuations carried out by Chartered valuation surveyors, who have recent experience in valuing properties at similar locations and categories. They have made reference to market evidence of transaction prices for similar properties, with appropriate adjustments for size and location. The key assumptions used to determine the fair value of investment property are provided in detail in Note 40 on pages 269 and 270. Mark et R 2.12.9 Fair valuation of investment property di Cre tR 3.2 Bank’s risk management framework The Board of Directors of the Bank has the overall responsibility for the establishment and oversight of the Bank’s Risk Management Framework. The Risk Management Framework of the Bank translates overall risk appetite on business activities in a holistic approach to provide the guidance required for convergence of strategic and risk perspectives of the Bank. The Group’s risk management policies are established to identify and analyse the risks faced by the Group, to set appropriate risk limits and controls to monitor risks and adherence to limits. The Risk Management Policy Framework constitutes the Credit Policy, Lending Guidelines, Credit Risk Review Policy, ALM Policy including Contingency Funding Plan, Foreign Exchange Policy, Operational Risk Policy, IT Risk Policy, Market Risk Policy, Stress Testing Policy, Financial & Risk Management Disclosure Policy, Environmental Risk Management Policy and Reputational Risk Management Policy etc., which have been firmly established to provide control and guidance for decision-making throughout the Bank in a uniform manner. The Committee structure embedded to the Risk Management Framework acts as a fact finding and decision making authority through deliberations and arriving at consensus arising out of multiple points of views. The Risk Management Committees
  206. effectively deliberate on matters at hand to provide guidance to the business lines with a view to managing risk in accordance with the strategic goals and risk appetite of the Bank . The Board of Directors of the Bank has formed the Board Integrated Risk Management Committee (BIRMC) as a mandatory Board Committee, as per Banking Act Direction No. 11 of 2007 on Corporate Governance. The performance of the Committee and the duties and roles of members are reviewed by the Board annually or more frequently if warranted. The meetings of the Executive Integrated Risk Management Committee (EIRMC) are conducted on a monthly basis to discuss Credit, Operational, Market and IT risk matters of the Bank. Assets and Liabilities Committee (ALCO), that convene at least once a fortnight, gives priority for liquidity, funding and profitability in line with the changes taken place in the market. Risk and Control Self-Assessment (RCSA) framework is adopted to identify risks involved in business activities of the Bank and to implement appropriate risk mitigatory measures after assessing criticality of such risks. The Integrated Risk Management Department (IRMD) carries out semi-annual Bank-wide RCSA function focusing on adherence to laws, regulations, and regulatory guidelines as well as internal controls and approved policies. Further, the Internal Audit function of the Bank independently monitors and evaluates the risk management function of the Bank and provides its views on the adequacy of the Risk Management Framework to the Board Audit Committee (BAC). Strategic and business risk Bank’s inability to keep up with the evolving market dynamics, resulting in loss of market share and failure to achieve strategic goals in line with its Mission and Vision is identified as Strategic risk. Business risk refers to any risk that stems from the Bank’s long-term business strategies and affects its profitability and relatively short term in nature. Management of strategic and business risk Corporate planning and budgeting process and continuous evaluation of their alignment with the Bank’s Vision, Mission and the risk appetite facilitate management of strategic risk. In the annual Internal Capital Adequacy Assessment Process (ICAPP) exercise of the Bank, detailed scorecard-based qualitative models are aligned to measure and monitor strategic risk of the Bank. This scorecardbased approach takes a number of variables into account, including the size and sophistication of the Bank, the nature and complexity of its operations and highlights the areas that require focus to mitigate potential strategic risks. Business risk of the Bank is managed through its day to day decisions made by the line managers and also at different Management Committees in identifying, assessing and remediating such risks. Credit risk The risk that the Bank will incur a loss due to its customers or counterparties failing to discharge their contractual obligations, is considered generally under the credit risk assessment. The Bank manages and controls credit risk by setting limits on the amount of risk it is willing to accept for individual counterparties, groups of counterparties, Figure – 38: Risk Management Framework Ba nk Risk management framework gy Bank's strategy ’s risk strate Risk policies, procedures and processes Risk appetite and tolerance level Risk assessment, control and mitigation Audit Use of appropriate systems, tools and techniques for monitoring and measurement Review, validate and report > Notes to the Financial Statements geographies, business sectors, and industries by monitoring exposures and possible adverse external factors in relation to such limits. Management of credit risk Lending Guidelines of the Bank has been formulated based on evolving practices of Lending to provide expected granularity of credit assessment and thereby, to ensure strict attention to risks emanating from lending proposals at the time of initiation, analysis, and approval. In addition, Lending Guidelines ensure objective assessment of acceptability of collateral as well as limits on exposures and concentration levels to various sectors, counterparties, geographies and segments etc. A robust risk grading system incorporating Basel guidelines on rating of facilities and counterparties is adopted by the Bank for evaluation of credit proposals. This risk grading framework consists 10 grades of varying degrees of risks as indicators for the Lending Officers to evaluate and arrive at suitable risk-reward trade-offs in their propositions. These risk grades are validated by internationally accepted consultants and are reviewed by the IRMD regularly. Credit Risk Review function covers over 30% of the advances portfolio of the Bank under the Loan Review Mechanism (LRM) each year to provide reasonable assurance that all major credit risks embedded in the Statement of Financial Position have been tracked. Early Warning Signals (EWS) system will reciprocally affect in detecting problematic advances, industries and evaluating potential lending opportunities by analysing historical data of borrowers which assures the quality of the loan book of the Bank. Portfolio level credit risk analyses are taken up at monthly EIRMC meetings as well as quarterly at BIRMC meetings. Individual credit proposals evaluated by the Lending Officers are approved by the Authorising Officers within the hierarchy in Delegated Authority Levels whilst ensuring a minimum of Four Eyes Principle when approving them. Escalation of approving Levels occurs based on Delegated Authority levels attached to exposure levels, final risk ratings as well as negative deviation of performance levels of previous facilities extended to borrowers. The Executive Credit Committee (ECC) and the Board Credit Committee (BCC) are entrusted with approval of high value credit facilities while the Board will be the ultimate authority for approving facilities beyond predetermined threshold levels. Deliberations take place at BCC level on facilities taken up for approval beyond the specified threshold and recommendations for approval of the Board are made based on quantum of exposures at various levels. Commercial Bank of Ceylon PLC Annual Report 2021 3 205
  207. The IRMD provides risk approval for individual proposals above predetermined threshold levels , consequent to a rigorous independent risk evaluation guided by Credit Policy, Lending Guidelines, and circular instructions within a limit framework stemming from risk appetite of the Bank. Across the globe, Banks are intensifying their approach towards early recognition of impaired credit assets and thereby, taking proactive efforts in readying their institutions to encounter possible economic downturns. Most regulators of the banking sector around the world expect the financial institutions in their markets to implement robust credit risk estimation models and align the decision making process based on such robust models. Forward looking impairment provision approach is significantly different from the traditional approach of providing for Incurred Loss Assets. The Expected Credit Loss (ECL) model introduced under the SLFRS 9 had replaced the Incurred Loss Model, which was considered inadequate in recognizing credit losses in a proactive manner and had failed in accurately estimating the credit losses during economic stress conditions. Accordingly, the Bank also had duly adopted the ECL modelling in impairment computations. Bringing in a more robust and specific approach for classification, recognition and measurement of credit facilities, the CBSL had issued the Banking Act Direction No. 13 of 2021, which spells out clear procedures to be adopted by banks in impairment computations. Commencing from January 01, 2022, IRMD has been entrusted with the responsibility of objective assessment of credit facilities for upgrading purpose as per the provisions of the Banking Act Direction No. 13 of 2021. Accordingly, models used for calculation of impairment would be evaluated/ recommended by the IRMD under the specific supervision of the Group Chief Risk Officer. Upgrading of restructured and rescheduled credit facilities shall only be carried out by the IRMD and shall be independent from the credit facility review mechanism. Liquidity risk The risk that the Bank will encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset is focused on this risk domain. Liquidity risk arises because of the possibility that the Bank might be unable to meet its payment obligations or not receiving what is due to the Bank when they fall due under both normal and stress circumstances. 3 To limit this risk, Management has arranged diversified funding sources in addition to its core deposit base and adopted a policy of managing assets with 206 Commercial Bank of Ceylon PLC liquidity in mind and monitoring future cash flows and liquidity on a daily basis. The Bank has developed internal control processes and contingency plans for managing liquidity risk. ratios and scenario based stress testing being carried out regularly would enable the Bank to take proactive measures towards overcoming an adverse liquidity position that may arise on a future date. Amidst the challenging economic conditions undergone by the country simultaneously with the COVID-19 pandemic, specially thorough assessment of expected foreign currency cash inflows and outflows had been required. Recent downgrading of the country by Rating Agencies could pose challenges in managing the foreign currency liquidity position of the financial sector amidst the global pandemic situation, a risk that the Bank closely monitoring and taking measures to mitigate at the moment. Management of liquidity risk Market Risk Management Policy and the ALM Policy of the Bank approved by the Board of Directors set the tone for managing liquidity risk of the Bank. Liquidity risk of the Bank is given utmost priority when managing a wide range of other risks due to the fact that it is considered as the most critical risk for any financial institution. The Bank’s Treasury Department is entrusted with managing liquidity of the Bank on real time basis to ensure smooth functioning of business activities of all other business units of the Bank. Additionally, a team of members of the Corporate Management, most of them being ALCO members, carefully analyse the foreign currency liquidity position of the Bank taking in to consideration of both short term and medium term cash flow gaps, in more frequent basis. Access to a substantial stable Current Account and Saving Account (CASA) base due to its wide branch network and the top of the mind perception created among the depositors, provide immense strength to the Bank in managing liquidity. Also, the growing balance sheet size, higher rating and continuous rapport maintained with the international counterparty banks have helped immensely to the Bank to maintain adequate foreign currency liquidity amidst the troubled waters. Having high quality liquid assets at the disposal of the Bank is another plus factor for the Bank. The strength of such portfolio is amply reflected in the Basel III computation the Bank carries out for arriving at Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) as per the CBSL Directions that recorded very healthy results as compared to regulatory minimum threshold levels. The Bank has experienced accumulation of rupee liquidity above the minimum regulatory requirements as a result of slowness of economic performance of the country in 2020-2021. However, the Bank has adopted many strategies to invest excess liquidity at optimum yields but in staggered maturities and thereby to minimise the negative impact on the bottom line as well as liquidity. Contingency funding plans in force, constant monitoring of salient liquidity Annual Report 2021 > Notes to the Financial Statements Market risk The risk that the fair value or future cash flows of financial instruments will fluctuate due to changes in market variables such as interest rates, foreign exchange rates and equity prices. The Bank classifies exposures to Market Risk into either Trading or Non-Trading portfolios (Banking Book) and manages each of those portfolios separately. The Market risk for the Trading portfolio is monitored and managed closely having paid attention to the changes on the prices of market. Management of market risk Market Risk Policy, ALM Policy and Foreign Exchange Risk Policy are the three main policies that constitute the framework governing the Market Risk Management function of the Bank. Due to the business model adopted by the Bank, exposure to equity and commodity risk was kept at bay throughout the year. However, Interest Rate Risk arising from the Banking Book as well as Trading Book and Foreign Exchange Risk arising from dealing in assets and liabilities denominated in currencies other than local currency, continued to expose the Bank to associated risk elements. Net Interest Margin (NIM) of the Bank was challenged due to the downward interest rate scenarios experienced in Sri Lanka during the first half of 2021. However, the escalation of the interest rates in the second half of the year too posed challenges to the NIM as the demand for advances had not risen up during the period due to the COVID-19 pandemic related business disruptions and the adverse economic conditions that prevailed in the country. Interest Rates of the Banking Book is subjected to varying degrees of rate shocks to identify impact on earnings perspective in such rate scenarios. The results reflected predictions which assisted the Bank in formulating strategies to manage the financial position in an effective manner with the limited choices available in the local market. Trading Book too was subjected to Value at Risk (VaR) framework internally carried out by the Bank on a regular basis. The Bank also
  208. carried out sensitivity analysis on a regular basis to ascertain the impact on portfolios maintained , mainly in Government Securities and marking to market of such portfolios to reflect fair value for the decisionmaking process. Foreign exchange positions were maintained within the regulatory framework in a market where a high volatility is observed in the major currency, compared to the previous year that the Bank deals in, i.e., US Dollars. The positions were subjected to continuous sensitivity analysis to provide insight to possible losses arising from possible currency depreciation, amidst the thin Foreign Currency Reserve position of the country, as the reporting currency of the Bank being Sri Lankan Rupees. Operational risk and reputational risk The risk that the Bank will incur a loss due to failure of systems, human errors, frauds or external events is focused on this risk domain. When controls fail to operate effectively, operational risks can cause damage to reputation, have legal or regulatory implications or lead to financial loss. The Bank cannot expect to eliminate all operational risks, but it endeavours to manage these risks through a control framework and by monitoring, escalating, reporting and responding to potential risks. The risk that the Bank’s reputation will be damaged by one or more than one reputation event, as reflected from negative publicity about the Bank’s business practices, conduct or financial condition. Such negative publicity, whether true or not, may impair public confidence in the Bank, result in costly litigation, or lead to a decline in its customer base, business or revenue. Controls include effective segregation of duties, access, authorisation and reconciliation procedures, staff education and assessment processes, such as the use of internal audit. Management of operational risk and reputational risk Sound Operational Risk Management practices are embedded into the work process through the Bank’s culture, internal policy framework and as per regulatory requirements. Circular Instructions and Operational Risk Management Policy play a major part in bringing together business practices with accepted benchmarks to ensure minimum disruption to processes, personnel, technology and infrastructure. Internal Control framework and audit function with firmly established “three lines of defences” serve the Bank to manage operational risk at current acceptable levels. IT Risk of the Bank is managed through strict monitoring of Key IT Risk Indicators > Notes to the Financial Statements while Vulnerability Assessment and Penetration Tests are being carried out by both internal and external parties at regular intervals to identify the relevant risks. Refer Note 67 on pages 308 to 336 for “Financial risk review”. A detailed write-up on how the risk management is carried out within the Bank’s Risk Management Framework with due consideration given to factors such as governance, identification, assessment, monitoring, reporting and mitigation are discussed in the Section on “Risk Governance and Management” on pages 159 to 178 The said write-up on“Risk Governance and Management” does not form part of the Financial Statements. 4. Fair value measurement “Fair value” is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or, in its absence, the most advantageous market to which the Group has access at that date. The fair value of a liability reflects its non-performance risk. When one is available, the Group measures the fair value of an instrument using the quoted price in an active market for that instrument. A market is regarded as active if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. If there is no quoted pricing in an active market, then the Group uses valuation techniques that maximise the use of relevant observable inputs and minimise the use of unobservable inputs. The chosen valuation technique incorporates all of the factors that market participants would take into account in pricing a transaction. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. The Group recognises transfers between levels of the fair value hierarchy as of the end of the reporting period during which the change has occurred. A fair value measurement of a nonfinancial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. External professional valuers are involved for valuation of significant assets such as land and building. An analysis of fair value measurement of financial and non-financial assets and liabilities is provided in Note 27 on pages 236 to 240. 5. Changes in Accounting Policies The Group has consistently applied the Accounting Policies as set out in Notes 6 to 10 on pages 209 to 220 to all periods presented in these Financial Statements. Further, the Group has not early adopted any other accounting standard, interpretation or amendment that has been issued but not effective. Amendments to SLFRS 16 Leases: COVID-19-Related Rent Concessions beyond June 30, 2021 On December 4, 2020 CA Sri Lanka issued COVID-19-Related Rent Concessions amendment to SLFRS 16 Leases. The amendments provide relief to lessees from applying SLFRS 16 guidance on lease modification accounting for rent concessions arising as a direct consequence of the COVID-19 pandemic. As a practical expedient, a lessee may elect not to assess whether a COVID-19 related rent concession from a lessor is a lease modification. A lessee that makes this election accounts for any change in lease payments resulting from the COVID-19 related rent concession the same way it would account for the change under SLFRS 16, if the change was not a lease modification. The amendment was intended to apply until June 30, 2021 but as the impact of the COVID-19 pandemic is continuing, on June 28, 2021, CA Sri Lanka extended the period of application of the practical expedient upto June 30, 2022. The amendment applies to annual reporting periods beginning on or after April 01, 2021. Amendments to SLFRS 9, LKAS 39, SLFRS 7, SLFRS 4 and SLFRS 16 – Interest Rate Benchmark Reform (Phase 1 & 2) – (“IBOR reform”) Working Groups in different jurisdictions have recommended robust, alternative Risk-free rates (RFRs) to transition away from existing interbank offered rates (IBORs). The RFR benchmarks are overnight whereas current use of IBOR is largely in term rates. IBOR reforms Phase 1 On January 15, 2021 CA Sri Lanka issued amendments to SLFRS 9, LKAS 39 and SLFRS 7 due to IBOR reform (Phase 1). A summary of Phase 1 amendments are as follows: z Highly Probable Requirement: According to SLFRS 9 and LKAS 39, when a forecast transaction is designated as a hedged item, that transaction must be highly probable to occur. By the Phase 1 amendments, when determining whether a forecast transaction is highly probable, an entity shall assume that the interest rate benchmark on which the hedged cash flows are based is not altered as a result of the reform. Commercial Bank of Ceylon PLC Annual Report 2021 3 4 5 207
  209. z Prospective assessments : A hedging relationship qualifies for hedge accounting only if there is an economic relationship between the hedged item and the hedging instrument (described in SLFRS 9) or the hedge is expected to be highly effective in achieving off-setting (described in LKAS 39). An entity must demonstrate such prospective assessments on a regular basis. By the Phase 1 amendments, when performing prospective assessments, an entity shall assume that the interest rate benchmark on which the hedged item, hedged risk and/or hedging instrument are based is not altered as a result of the IBOR reform. z LKAS 39 retrospective assessment: To apply hedge accounting under LKAS 39, an entity must demonstrate that the actual results of the hedge are within a range of 80% - 125%. This requirement is commonly known as the 'LKAS 39 retrospective assessment'. By the Phase 1 amendments, an entity is not required to undertake the LKAS 39 retrospective assessment for hedging relationships directly affected by the reform. However, the entity must comply with all other LKAS 39 hedge accounting requirements, including the prospective assessment. z Permit changes required by IBOR reform to be made to hedge designations and hedge documentation without the hedging relationship being discontinued. z Provide temporary relief to entities from having to meet the separately identifiable requirement when an RFR instrument is designated as a hedge of a risk component. The effective date of both IBOR reform Phase 1 and Phase 2 amendments is for annual reporting periods beginning on or after January 01, 2021 in the Sri Lankan context. However, the regulatory authorities and public and private sector working groups in several jurisdictions have been While there are some differences between SLFRS 9 and LKAS 39 regarding designation of risk components, both Standards require a risk component (or a portion) to be separately identifiable to be eligible for hedge accounting. An entity may designate an item in its entirety or a component of an item as a hedged item in a hedging relationship. SLFRS 9 and LKAS 39 require the component to be separately identifiable to qualify as a hedged item. By the Phase 1 amendments, for hedges of non-contractually specified benchmark component of interest rate risk, an entity shall apply the separately identifiable requirement only at the inception of such hedging relationships. IBOR reform Phase 2 In addition to Phase 1 amendments, CA Sri Lanka also issued amendments to SLFRS 9, LKAS 39, SLFRS 7, SLFRS 4 and SLFRS 16 due to IBOR Reform. The Phase 2 amendments provide temporary reliefs which address the financial reporting effects when an IBOR is replaced with an alternative RFR. The amendments include the following practical expedients. z A practical expedient to require contractual changes, or changes to cash flows that are directly required by the reform, to be treated as changes to a floating interest rate, equivalent to a movement in a market rate of interest. 208 Commercial Bank of Ceylon PLC Significant accounting policies The Significant Accounting Policies set out below have been applied consistently to all periods presented in the Financial Statements of the Group except as specified in Note 2.11 on page 202. These Accounting Policies have been applied consistently by the Group. Set out below is an index of Significant Accounting Policies, the details of which are available on the pages that follow: Table – 59: Index of significant accounting policies z Separately identifiable risk components: 5 discussing the alternatives to IBORs but there is still uncertainty over when these alternative rates will be available and how the reforms will impact specific financial products and services. Annual Report 2021 Note Description Page No. 6. Significant accounting policies – General 6.1 Basis of consolidation 209 6.2 Foreign currency 209 7. Significant accounting policies – Recognition of assets and liabilities 7.1 Financial instruments – Initial recognition, classification and subsequent measurement 7.2 Non-current assets held for sale and disposal groups 210 Reference to the Notes in Financial Statements 26 7.3 Property, plant and equipment 215 39 7.4 Investment property 216 40 41 7.5 Intangible assets 216 7.6 Impairment of non-financial assets 216 37 7.7 Dividends payable 216 25 7.8 Employee benefits 216 49.2 to 49.5 7.9 Other liabilities 218 49 7.10 Restructuring 218 7.11 Onerous contracts 218 7.12 Bank levies 218 7.13 Financial guarantees, letters of credit and undrawn loan commitments 218 58 7.14 Commitments 218 58 7.15 Contingent liabilities and commitments 218 58 7.16 Stated capital and reserves 218 52, 54, 55 & 56 7.17 Earnings per Share (EPS) 218 24 7.18 Operating segments 219 62 7.19 Fiduciary assets 219 8. Significant accounting policies – Recognition of income and expense 8.1 Interest income and interest expense 219 13 8.2 Fee and commission income and fee and commission expense 219 14 8.3 Net gains/(losses) from trading 219 15 8.4 Net gains/ (losses) from derecognition of financial assets 219 16 8.5 Dividend income 219 15 & 17 8.6 Leases 219 34.3, 39 & 49.1 8.7 Rental income and expense 219 17 & 21 9. Significant accounting policies – Tax Expense 23, 42 & 48 9.1 Income tax expense 219 9.2 Crop Insurance Levy (CIL) 219 9.3 Withholding tax (WHT) on dividends distributed by the Bank, subsidiaries, and associate 220 25 9.4 Value Added Tax on financial services (VAT FS) 220 22 9.5 Changes proposed by the Government Budget 2022 220 10. Significant accounting policies – Statement of Cash Flows 220 10.1 Statement of Cash Flows 220 > Notes to the Financial Statements
  210. 6 . Significant accounting policies – General 6.1 Basis of consolidation The Group’s Financial Statements comprise, Consolidated Financial Statements of the Bank and its Subsidiaries in terms of the Sri Lanka Accounting Standard – SLFRS 10 on “Consolidated Financial Statements” (SLFRS 10) and the proportionate share of the profit or loss and net assets of its Associates in terms of the Sri Lanka Accounting Standard – LKAS 28 on “Investments in Associates and Joint Ventures” (LKAS 28). The Bank’s Financial Statements comprise the amalgamation of the Financial Statements of the Domestic Banking Unit, the Offshore Banking Centre and the international operations of the Bank. 6.1.1 Business combinations Business combinations are accounted for using the acquisition method when control is transferred to the Group as per Sri Lanka Accounting Standard – SLFRS 3 on “Business Combinations” (SLFRS 3). The consideration transferred in the acquisition and identifiable net assets acquired are measured at fair value. Any goodwill that arises is tested Refer Note annually for impairment ( 7.6 on page 216). Any gain on a bargain purchase is recognised in profit or loss immediately. Transaction costs are expensed as incurred, except if they are related to the issue of debt or equity securities. The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognised in profit or loss. Any contingent consideration is measured at fair value at the date of acquisition. If an obligation to pay contingent consideration that meets the definition of a financial instrument is classified as equity, then it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes in the fair value of the contingent consideration are recognised in profit or loss. 6.1.2 Non-Controlling Interests (NCI) Details of NCI are given in Note 57 on page 294. 6.1.3 Subsidiaries Details of the Bank’s subsidiaries, how they are accounted in the Financial Statements of the Bank and their contingencies are set out in Notes 37 and 58.4 (a) on pages 254 & 255 and 296. 6.1.4 Loss of control When the Group loses control over a subsidiary, it derecognises the assets and liabilities of the subsidiary, and any related NCI and other components of equity. Any > Notes to the Financial Statements resulting gain or loss is recognised in profit or loss. Any interest retained in the former subsidiary is measured at fair value when control is lost. Subsequently, it is accounted for as an Associate or in accordance with the Group’s Accounting Policy for financial instruments depending on the level of influence retained. 6.1.5 Associates Details of the associate, how it is accounted in the Financial Statements of the investee, together with its fair values and the Group’s share of contingent liabilities of the associate is set out in Notes 38 and 58.4 (b) on pages 255 to 257 and 296. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are translated into the functional currency at the spot exchange rate at the date that the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate as at the date of the transaction. Foreign currency differences arising on translation are generally recognised in profit or loss. However, foreign currency differences arising from the translation of the following items are recognised in OCI: z Equity instruments measured at fair value through other comprehensive income 6.1.6 Transactions eliminated on consolidation z A financial liability designated as a Intra-group balances, transactions and any unrealised income and expenses (except for foreign currency transaction gains or losses) arising from intra-group transactions are eliminated in preparing the Consolidated Financial Statements. Unrealised gains arising from transactions with equity accounted investees are eliminated against the investment to the extent of the Group’s interest in the investee. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. 6.1.7 Material gains or losses, provisional values or error corrections There were no material gains or losses, provisional values or error corrections recognised during the year in respect of business combinations that took place in previous periods. hedge of the net investment in a foreign operation to the extent that the hedge is effective; and z Qualifying cash flow hedges to the extent that the hedge is effective. 6.2.2 Foreign currency translations The Group’s Consolidated Financial Statements are presented in Sri Lankan Rupees, which is also the Bank’s Functional Currency. The Financial Statements of the Offshore Banking Centre of the Bank and the Financial Statements of the foreign operations of the Bank have been translated into the Group’s Presentation Currency as explained under Notes 6.2.3 and 6.2.4 below. 6.2.3 Transactions of the offshore banking centre 6.2 Foreign currency 6.2.1 Foreign currency transactions and balances Foreign currency transactions are translated into the functional currency, which is Sri Lankan Rupees, using the exchange rates prevailing at the dates of the transactions. In this regard, the Bank’s practice is to use the middle rate of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies as at the reporting date are translated into the functional currency at the middle exchange rate of the functional currency ruling as at the reporting date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency as at the beginning of the year adjusted for effective interest and payments during the year and the amortised cost in foreign currency translated at the exchange rate as at the reporting date. These are recorded in accordance with Note 6.2.1 above, except the application of the annual weighted average exchange rate for translation of the Income Statement and the Statement of Profit or Loss and Other Comprehensive Income. Net gains and losses are dealt through the profit or loss. 6.2.4 Foreign operations The results and financial position of foreign operations that have a functional currency different from the Bank’s presentation currency are translated into the Bank’s presentation currency as follows: z Assets and liabilities, including goodwill and fair value adjustments arising on acquisition, are translated at the rates of exchange ruling as at the reporting date. z Income and expenses are translated at the average exchange rate for the period, unless this average rate is not a reasonable approximation of the rate prevailing at the transaction date, in which case income and expenses are translated at the exchange rates ruling at the transaction date. 6 z All resulting exchange differences are recognised in the OCI and accumulated in the Foreign Currency Translation Reserve Commercial Bank of Ceylon PLC Annual Report 2021 209
  211. (Translation Reserve), which is a separate component of Equity, except to the extent that the translation difference is allocated to the NCI. When a foreign operation is disposed of such that the control is lost, the cumulative amount in the translation reserve related to that foreign operation is reclassified to profit or loss as part of the gain or loss on disposal. If the Group disposes of only part of its interest in a subsidiary that includes a foreign operation while retaining control, then the relevant proportion of the cumulative amount of the translation reserve is re-attributed to NCI. 7. Significant accounting policies – recognition of assets and liabilities 7.1 Financial instruments – initial recognition, classification and subsequent measurement 7.1.1 Date of recognition The Group initially recognises loans and advances, deposits and subordinated liabilities, etc., on the date on which they are originated. All other financial instruments (including regular-way purchases and sales of financial assets) are recognised on the trade date, which is the date on which the Group becomes a party to the contractual provisions of the instrument. The classification of financial instruments at initial recognition depends on their cash flow characteristics and the business model Refer for managing the instruments. Notes 7.1.3 and 7.1.4 for further details on classification of financial instruments. A financial asset or financial liability is measured initially at fair value plus or minus transaction costs that are directly attributable to its acquisition or issue, except in the case of financial assets and financial liabilities at fair value through profit or loss as per SLFRS 9 and trade receivables that do not have a significant financing component as defined in SLFRS 15. Transaction cost in relation to financial assets and financial liabilities at fair value through profit or loss are dealt with through the Income Statement. Trade receivables that do not have a significant financing component are measured at their transaction price at initial recognition as defined in SLFRS 15. When the fair value of financial instruments (except trade receivables that do not have a significant financing component) at initial recognition differs from the transaction price, the Group accounts for the Day 1 profit or loss, as described below. 210 Commercial Bank of Ceylon PLC When the transaction price of the instrument differs from the fair value at origination and fair value is based on a valuation technique using only inputs observable in market transactions, the Group recognises the difference between the transaction price and fair value in net gains/(losses) from trading. In those cases, where the fair value is based on models for which some inputs are not observable, the difference between the transaction price and the fair value is deferred and is only recognised in profit or loss when the inputs become observable, or when the instrument is derecognised. The “Day 1 loss” arising in the case of loans granted to employees at concessionary rates under uniformly applicable schemes is deferred and amortised using Effective Interest Rates (EIR) in “Interest income” and “Personnel expenses” over the remaining service period of the employees or tenure of the loan whichever is shorter. Refer Notes 13 and 19 on pages 222 to 224 and 230. 7.1.3 Classification and subsequent measurement of financial assets As per SLFRS 9, the Group classifies all of its financial assets based on the business model for managing the assets and the assets’ contractual terms measured at either; z Amortised cost 7.1.2 Initial measurement of financial instruments 6 7 7.1.2.1 “Day 1” profit or loss z Fair value through other comprehensive income (FVOCI) z Fair value through profit or loss (FVTPL) The subsequent measurement of financial assets depends on their classification. 7.1.3.1 Business model assessment The Group makes an assessment of the objective of a business model in which an asset is held at a portfolio level and not assessed on instrument-by-instrument basis because this best reflects the way the business is managed and information is provided to management. The information considered includes: z the stated policies and objectives for the portfolio and the operation of those policies in practice. In particular, whether management’s strategy focuses on earning contractual interest revenue, maintaining a particular interest rate profile, matching the duration of the financial assets to the duration of the liabilities that are funding those assets or realising cash flows through the sale of the assets; z how the performance of the portfolio is evaluated and reported to the Bank’s management; Annual Report 2021 > Notes to the Financial Statements z the risks that affect the performance of the business model (and the financial assets held within that business model) and how those risks are managed; z how managers of the business are compensated – e.g. whether compensation is based on the fair value of the assets managed or the contractual cash flows collected; and z the frequency, volume and timing of sales in prior periods, the reasons for such sales and its expectations about future sales activity. However, information about sales activity is not considered in isolation, but as part of an overall assessment of how the Bank’s stated objective for managing the financial assets is achieved and how cash flows are realized. The business model assessment is based on reasonably expected scenarios without taking “worst case” or “stress case” scenarios into account. If cash flows after initial recognition are realised in a way that is different from the Bank's original expectations, the Bank does not change the classification of the remaining financial assets held in that business model, but incorporates such information when assessing newly originated or newly purchased financial assets going forward. 7.1.3.2 Assessment of whether contractual cash flows are solely payments of principal and interest (SPPI test) As a second step of its classification process the Group assesses the contractual terms of financial assets to identify whether they meet the SPPI test. For the purposes of this assessment, “principal” is defined as the fair value of the financial asset on initial recognition and may change over the life of the financial asset (for example, if there are repayments of principal or amortisation of the premium/discount). “Interest” is defined as consideration for the time value of money and for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs, as well as profit margin. In contrast, contractual terms that introduce a more than de minimis exposure to risks or volatility in the contractual cash flows that are unrelated to a basic lending arrangement do not give rise to contractual cash flows that are solely payments of principal and interest on the principal amount outstanding. In such cases, the financial asset is required to be measured at FVTPL. In assessing whether the contractual cash flows are solely payments of principal and interest on principal amount outstanding, the Group considers the
  212. contractual terms of the instrument . This includes assessing whether the financial asset contains a contractual term that could change the timing or amount of contractual cash flows such that it would not meet this condition. In making the assessment, the Group considers: z contingent events that would change the amount and timing of cash flows; z leverage features; z prepayment and extension terms; z terms that limit the Group’s claim to cash flows from specified assets; and z features that modify consideration of the time value of money. The Group holds a portfolio of long-term fixed rate loans for which the Group has the option to propose to revise the interest rate at periodic reset dates. These reset rights are limited to the market rate at the time of revision. The borrowers have an option to either accept the revised rate or redeem the loan at par without penalty. The Group has determined that the contractual cash flows of these loans are solely payments of principal and interest because the option varies the interest rate in a way that is consideration for the time value of money, credit risk, other basic lending risks and costs associated with the principal amount outstanding. 7.1.3.3.2 Securities purchased under resale agreements (reverse repos) When the Group purchases a financial asset and simultaneously enters into an agreement to resale the asset (or a similar asset) at a fixed price on a future date (reverse repo), the arrangement is accounted for as a financial asset in the SOFP reflecting the transaction’s economic substance as a loan granted by the Group. Subsequent to initial recognition, these securities issued are measured at amortised cost using the EIR with the corresponding interest income/ receivable being recognised as interest income in profit or loss. Details of “Securities purchased under resale agreements” are given in the SOFP on page 189. Details of “Debt and other financial instruments measured at amortised cost” are given in Note 35 on pages 250 and 251. 7.1.3.3.4 Cash and cash equivalents Details of “Cash and cash equivalents” are given in Note 28 on page 240. 7.1.3.3.5 Balances with central banks Details of “Balances with central banks” are given in Note 29 on page 241. 7.1.3.3.6 Placements with banks 7.1.3.3 Financial assets measured at amortised cost 7.1.3.4 Financial assets measured at FVOCI z The asset is held within a business model whose objective is to hold assets to collect contractual cash flows; and z The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. Financial assets measured at amortised cost are given in Notes 7.1.3.3.1 to 7.1.3.3.6 below: 7.1.3.3.1 Loans and advances to banks and other customers Loans and advances to banks and other customers include amounts due from banks, loans and advances and lease receivables of the Group. Details of “Loans and advances to banks and other customers” are given in Notes 33 and 34 on pages 245 to 249. > Notes to the Financial Statements All financial assets other than those classified at amortised cost or FVOCI are classified as measured at FVTPL. Financial assets measured at FVTPL include financial assets that are held for trading or managed and whose performance is evaluated on a fair value basis because they are neither held to collect contractual cash flows nor held both to collect contractual cash flows and to sell as discussed in Notes 7.1.3.5.1 and 7.1.3.5.2 below. 7.1.3.5.1 Financial assets held for trading Details of “Financial Assets held for trading” are given in Note 32 on pages 242 to 245. 7.1.3.5.1.1 Derivatives recorded at FVTPL 7.1.3.3.3 Debt and other financial instruments measured at amortised cost Refer Notes 7.1.3.3 to 7.1.3.5 below for details on different types of financial assets recognised on the SOFP. A financial asset is measured at amortised cost if it meets both of the following conditions and is not designated as at FVTPL: 7.1.3.5 Financial assets measured at FVTPL Details of “Placements with banks” are given in Note 30 on pages 241 and 242. Financial assets at FVOCI include debt and equity instruments measured at fair value through other comprehensive income. For financial assets measured at FVOCI Refer Notes 7.1.3.4.1 and 7.1.3.4.2. 7.1.3.4.1 Debt instruments measured at FVOCI Debt instruments are measured at FVOCI if they are held within a business model whose objective is to hold for collection of contractual cash flows and selling financial assets, where the asset’s contractual cash flows represent payments that are solely payments of principal and interest on principal outstanding. Details of “Debt instruments at FVOCI” are given in Note 36 on pages 251 to 253. 7.1.3.4.2 Equity instruments designated at FVOCI Upon initial recognition, the Group elects to classify irrevocably some of its equity instruments held for strategic and regulatory purposes as equity instruments at FVOCI. Details of “Equity instruments at FVOCI” are given in Note 36 on pages 251 to 253. Details of “Derivative financial assets” recorded at fair value through profit or loss are given in Note 31 on page 242. 7.1.3.5.2 Financial assets designated at FVTPL On initial recognition, the Group may irrevocably designate a financial asset that otherwise meets the requirements to be measured at amortised cost or at FVOCI as at FVTPL when such designation eliminates or significantly reduces an accounting mismatch that would otherwise arise from measuring the assets or liabilities or recognising gains or losses on them on a different basis. Financial assets designated at FVTPL are recorded in the SOFP at fair value. Changes in fair value are recorded in “Net gain or loss on financial assets and liabilities designated at FVTPL”. Interest earned is accrued in “Interest Income”, using the EIR, while dividend income is recorded in “Other operating income” when the right to receive the payment has been established. The Group has not designated any financial assets upon initial recognition as at FVTPL as at the end of the reporting period. 7.1.4 Classification and subsequent measurement of financial liabilities The Group classifies financial liabilities, other than financial guarantees and loan commitments into one of the following categories: z Financial liabilities at FVTPL, and within this category as – – Held-for-trading; or – Designated at FVTPL; z Financial liabilities measured at amortised cost. 7 The subsequent measurement of financial liabilities depends on their classification. Refer Notes 7.1.4.1 and 7.1.4.2 as detailed below: Commercial Bank of Ceylon PLC Annual Report 2021 211
  213. 7 .1.4.1 Financial liabilities at FVTPL Financial liabilities at FVTPL include financial liabilities held for trading and financial liabilities designated upon initial recognition Refer Notes 7.1.4.1.1 and as at FVTPL. 7.1.4.1.2 below. 7.1.4.1.1 Financial liabilities held for trading Details of “Derivative financial liabilities” classified under financial liabilities held for trading are given in Note 45 on page 275. 7.1.4.1.2 Financial liabilities designated at FVTPL Financial liabilities designated at FVTPL are recorded in the SOFP at fair value when; z The designation eliminates, or significantly reduces, the inconsistent treatment that would otherwise arise from measuring the assets or liabilities or recognising gains or losses on them on a different basis, or z A group of financial liabilities or financial assets and financial liabilities is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the group is provided on that basis to entity’s key management personnel, or z The liabilities containing one or more embedded derivatives, unless they do not significantly modify the cash flows that would otherwise be required by the contract, or it is clear with little or no analysis when a similar instrument is first considered that separation of the embedded derivative(s) is prohibited. Changes in fair value are recorded in “Net fair value gains/ (losses) from financial instruments at FVTPL” with the exception of movements in fair value of liabilities designated at FVTPL due to changes in the Bank’s own credit risk. Such changes in fair value are recorded in the own credit reserve through OCI and do not get recycled to profit or loss. Interest paid/payable is accrued in “Interest expense”, using the EIR. The Group has not designated any financial liabilities as at FVTPL as at the end of the reporting period. 7.1.4.2 Financial liabilities at amortised cost Financial liabilities issued by the Group that are not designated at FVTPL are classified as financial liabilities at amortised cost under “Due to banks”, “Securities sold under repurchase agreements”, “Due to depositors”, “Other borrowings” or “Subordinated liabilities” as appropriate, where the substance of the contractual arrangement results in the Group having an obligation either to deliver cash or another financial asset to the holder, or to satisfy the obligation other than by the exchange 7 212 Commercial Bank of Ceylon PLC of a fixed amount of cash or another financial asset for a fixed number of own equity shares. The Group classifies capital instruments as financial liabilities or equity instruments in accordance with the substance of the contractual terms of the instrument. After initial recognition, such financial liabilities are subsequently measured at amortised cost using the EIR method. Amortised cost is calculated by taking into account any discount or premium on acquisition and fee or costs that are an integral part of the EIR. The EIR amortisation is included in “Interest expense” in the profit or loss. Gains and losses too are recognised in the profit or loss when the liabilities are derecognised as well as through the EIR amortisation process. 7.1.4.2.1 Due to banks Details of “Due to banks” are given in Note 44 on page 274. 7.1.4.2.2 Securities sold under repurchase agreements (repos) When the Group sells a financial asset and simultaneously enters into an agreement to repurchase the asset (or a similar asset) at a fixed price on a future date (repos), the arrangement is accounted for as a financial liability in the SOFP reflecting the transaction’s economic substance as a deposit. Subsequent to initial recognition, these securities are measured at amortised cost using the EIR with the corresponding interest payable being recognised as “interest expense” in profit or loss. Details of “Securities sold under repurchase agreements (repos)” are given in the SOFP on page 189. 7.1.4.2.3 Due to depositors Details of “Due to depositors” are given in Note 46 on pages 275 and 276. 7.1.4.2.4 Other Borrowings Details of “Other borrowings” are given in Note 47 on page 276. 7.1.4.2.5 Subordinated liabilities Details of “Subordinated liabilities” are given in Note 51 on pages 286 and 287. 7.1.5 Derivatives held for risk management purposes and hedge accounting Derivatives held for risk management purposes include all derivative assets and liabilities that are not classified as trading assets and liabilities. Derivatives held for risk management purposes are measured at fair value in the SOFP. The Group designates certain derivatives held for risk management as well as certain non-derivative financial instruments as Annual Report 2021 > Notes to the Financial Statements hedging instruments in qualifying hedging relationships. On initial designation of the hedge, the Group formally documents the relationship between the hedging instrument and hedged item, including risk management objective and strategy in undertaking the hedge, together with the method that will be used to assess the effectiveness of the hedging relationship. The Group makes an assessment, both at inception of the hedge relationship and on an ongoing basis, of whether the hedging instrument is expected to be highly effective in offsetting the changes in fair value or cash flow of the respective hedged item during the period for which the hedge is designated, and whether the actual results of each hedge are within a range of 80% to 125%. The Group makes an assessment for a cash flow hedge of a forecast transaction, of whether the forecast transaction is highly probable to occur and presents an exposure to variations in cash flows that could ultimately affect profit or loss. The Group currently uses cash flow hedging relationships for risk management purposes. Different types of hedges and derivatives are discussed in Notes 7.1.5.1 to 7.1.5.5 below: 7.1.5.1 Fair value hedges When a derivative is designated as the hedging instrument in a hedge of the change in fair value of a recognised asset or liability or a firm commitment that could affect the profit or loss, changes in the fair value of the derivative are recognised immediately in profit or loss in the same line item as the hedged item that is attributable to the hedged risk. If the hedging derivative expires or is sold, terminated or exercised, or the hedge no longer meets the criteria for fair value hedge accounting, or the hedge designation is revoked, then hedge accounting is discontinued prospectively. However, if the derivative is novated to a central counterparty by both parties as a consequence of laws or regulations without changes in its terms except for those are necessary for the novation, then the derivative is not considered as expired or terminated. Any adjustment up to the point of discontinuation to a hedged item for which the effective interest method is used, is amortised to profit or loss as a part of the recalculated EIR of the item over its remaining life. 7.1.5.2 Cash flow hedges When a derivative is designated as the hedging instrument in a hedge of the variability in cash flows attributable to a particular risk associated with a recognised asset or liability that could affect the profit or
  214. loss , the effective portion of changes in the fair value of the derivative are recognised in OCI and presented in the hedging reserve within equity. Any ineffective portion of changes in the fair value of the derivative is recognised immediately in profit or loss. The amount recognised in OCI is reclassified to profit or loss as a reclassification adjustment in the same period as the hedged cash flows affect profit or loss, and in the same line item in the Statement of Profit or Loss and OCI. If the hedging derivative expires or is sold, terminated or exercised, or the hedge no longer meets the criteria for cash flow hedge accounting, or the hedge designation is revoked, then hedge accounting is discontinued prospectively. However, if the derivative is novated to a central counterparty by both parties as a consequence of laws or regulations without changes in its terms except for those are necessary for the novation, then the derivative is not considered as expired or terminated. Details of “Cash flow hedges” are given in Note 45.1 on page 275. 7.1.5.3 Net investment hedges When a derivative instrument or a nonderivative financial liability is designated as the hedging instrument in a hedge of a net investment in a foreign operation, the effective portion of changes in the fair value of the hedging instrument is recognised in OCI and presented in the translation reserve within equity. Any ineffective portion of changes in the fair value of the derivative is recognized immediately in profit or loss. The amount recognised in OCI is reclassified to profit or loss as a reclassification adjustment on disposal of the foreign operation. 7.1.5.4 Other non-trading derivatives If the derivative is not held for trading, and is not designated in a qualifying hedging relationship, then all changes in its fair value are recognised immediately in profit or loss as a component of net income from other financial instruments at FVTPL. 7.1.5.5 Embedded derivatives An embedded derivative is a component of a hybrid instrument that also includes a non-derivative host contract with the effect that some of the cash flows of the combined instrument vary in a way similar to a stand-alone derivative. An embedded derivative causes some or all of the cash flows that otherwise would be required by the contract to be modified according to a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable, provided that, in the case of a non-financial variable, > Notes to the Financial Statements it is not specific to a party to the contract. A derivative that is attached to a financial instrument, but is contractually transferable independently of that instrument, or has a different counterparty from that instrument, is not an embedded derivative, but a separate financial instrument. Derivatives may be embedded in another contractual arrangement (a host contract). The Group treats derivatives embedded in financial liabilities and non-financial host contracts as separate derivatives, if: z the host contract is not itself carried at FVTPL; z the terms of the embedded derivative would meet the definition of a derivative if they were contained in a separate contract; and z the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract. Separated embedded derivatives are measured at fair value, with all changes in fair value recognised in profit or loss unless they form part of a qualifying cash flow or net investment hedging relationship. Separated embedded derivatives are presented in the SOFP together with the host contract. Derivatives embedded in financial assets are classified based on the business model and their contractual terms and are not separated as explained in Notes 7.1.3.1 and 7.1.3.2 on page 210. Separated embedded derivatives are measured at fair value, with all changes in fair value recognised in profit or loss unless they formed part of a qualifying cash flow or net investment hedging relationship. Separated embedded derivatives are presented in the SOFP together with the host contract. 7.1.6 Reclassification of financial assets and liabilities Financial assets are not reclassified subsequent to their initial recognition, except and only in those rare circumstances when the Group changes its objective of the business model for managing such financial assets which may include the acquisition, disposal or termination of a business line. Financial Liabilities are not reclassified as such reclassifications are not permitted by SLFRS 9. 7.1.6.1 Timing of reclassification of financial assets Consequent to the change in the business model, the Bank reclassifies all affected assets prospectively following the change in the business model (the reclassification date). Accordingly, prior periods are not restated. 7.1.6.2 Measurement of reclassification of financial assets 7.1.6.2.1 Reclassification of Financial Instruments at ‘FVTPL’ z To FVOCI The fair value on reclassification date becomes the new gross carrying amount. The EIR is calculated based on the new gross carrying amount. Subsequent changes in the fair value is recognised in OCI. z To Amortised Cost The fair value on reclassification date becomes the new carrying amount. The EIR is calculated based on the new gross carrying amount. 7.1.6.2.2 Reclassification of Financial Instruments at ‘FVOCI’ z To FVTPL The accumulated balance in OCI is reclassified to profit or loss on the reclassification date. z To Amortised Cost The financial asset is reclassified at fair value. The cumulative balance in OCI is removed and is used to adjust fair value on the reclassification date. The adjusted amount becomes the amortised cost. EIR determined at initial recognition and gross carrying amount are not adjusted as a result of reclassification. 7.1.6.2.3 Reclassification of Financial Instruments at ‘Amortised Cost’ z To FVOCI The asset is remeasured to fair value, with any difference being recognised in OCI. EIR determined at initial recognition is not adjusted as a result of reclassification. z To FVTPL The fair value on the reclassification date becomes the new carrying amount. The difference between amortised cost and fair value is recognised in profit or loss. 7.1.7 Derecognition of financial assets and financial liabilities 7.1.7.1 Financial assets The Group derecognises a financial asset (or where applicable a part of thereof ) when the contractual rights to the cash flows from the financial asset expire or it transfers the rights to receive the contractual cash flows in a transaction in which substantially all risks and rewards of ownership of the financial asset are transferred or in which the Group neither transfers nor retains substantially all risks and rewards of ownership and it does not retain control of the financial asset. Commercial Bank of Ceylon PLC Annual Report 2021 7 213
  215. On derecognition of a financial asset , the difference between the carrying amount of the asset (or the carrying amount allocated to the portion of the asset derecognised) and the sum of the consideration received (including any new asset obtained less any new liability assumed) and any cumulative gain or loss that had been recognised in OCI is recognised in profit or loss. However, cumulative gain/loss recognised in OCI in respect of equity investment securities designated as at FVOCI is not recognised in profit or loss on derecognition of such securities. Any interest in transferred financial assets that qualify for derecognition that is created or retained by the Group is recognised as a separate asset or liability. The Group enters into transactions whereby it transfers assets recognised on its SOFP, but retains either all or substantially all risks and rewards of the transferred assets or a portion of them. In such cases, the transferred assets are not derecognised. When assets are sold to a third party with a concurrent total rate of return swap on the transferred assets, the transaction is accounted for as a secured financing transaction similar to sale and repurchase transactions because the Group retains all or substantially all risks and rewards of ownership of such assets. When the Group has transferred its right to receive cash flows from an asset or has entered into a pass-through arrangement and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Group’s continuing involvement in the asset. In that case, the Group also recognises an associated liability. The transferred asset and the associated liability are measured on the basis that reflected the rights and obligations that the Group has retained. 7.1.7.2 Financial liabilities The Group derecognises a financial liability when its contractual obligations are discharged, cancelled or expired. 7.1.8 Modification of financial assets and financial liabilities 7.1.8.1 Modification of Financial assets If the terms of a financial asset are modified, the Group evaluates whether the cash flows of the modified asset are substantially different. If the cash flows are substantially different, then the contractual rights to cash flows from the original financial asset are deemed to have expired. In this case, the original financial asset is derecognised and a new financial asset is recognised at fair value. 7 214 Commercial Bank of Ceylon PLC If the cash flows of the modified asset carried at amortised cost are not substantially different, then the modification does not result in derecognition of the financial asset. In this case, the Group recalculates the gross carrying amount of the financial asset and recognises the amount arising from adjusting the gross carrying amount as a modification gain or loss in profit or loss. If such a modification is carried out because of financial difficulties of the borrower, then the gain or loss is presented together with impairment losses measured using a pre modification interest rate. In other cases, it is presented as interest income. 7.1.9 Offsetting of financial instruments As per Circular Nos. 5, 8 and 10 of 2021 issued by CBSL dated May 25, 2021, September 1, 2021 and September 13, 2021 respectively, the Bank granted payment deferrals to eligible customers affected by COVID-19, modifying the original contract. The CBSL directed the Banks to amalgamate the amounts fallen due during the previous and current deferment schemes into one new loan by Circular 8 of 2021. Accordingly, the Banks were allowed to recover interest on the new loan at a rate not exceeding the latest available 364 - days Treasury Bills auction rate as at August 31, 2021 plus 1 per cent per annum (i.e., 5.93% + 1% = 6.93%). The “amortised cost” of a financial asset or financial liability is the amount at which the financial asset or financial liability is measured on initial recognition minus the principal repayments, plus or minus the cumulative amortisation using the EIR method of any difference between that initial amount and the maturity amount and, for financial assets, adjusted for any ECL allowance. Modifications to the original terms and conditions of the loans due to the above COVID-19 moratoriums, did not result in de-recognition of the original loans as the Management concluded that the modifications were not substantial. Accordingly, a modification loss (Day 1 Modification Loss) has been recognized under interest income in Note 13.1, representing the difference between the original carrying amount of the loan (before modification) and the discounted present value of the revised cash flows (at the Original EIR) at the date of the loan modification. The Group recognizes the interest income on recalculated gross carrying amount based on the Original EIR from the commencement of moratorium to the end of the lifetime of the instrument. 7.1.8.2 Modification of Financial Liabilities Where an existing financial liability is replaced by another from the same lender on substantially different terms or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability. In this case, a new financial liability based on the modified terms is recognised at fair value. The difference between the carrying amount of the financial liability extinguished and the new financial liability with modified terms is recognised in profit or loss. Annual Report 2021 > Notes to the Financial Statements Financial assets and financial liabilities are offset and the net amount reported in the SOFP if, and only if, there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the assets and settle the liabilities simultaneously. Income and expenses are presented on a net basis only when permitted under SLFRSs, or for gains and losses arising from a group of similar transactions such as in the Group’s trading activity. 7.1.10 Amortised cost and gross carrying amount The “gross carrying amount of a financial asset” is the amortised cost of a financial asset before adjusting for any ECL allowance. 7.1.11 Fair value of financial instruments Fair value measurement of financial instruments including the fair value hierarchy is explained in Notes 4 and 27 on pages 207 and 236 to 240. 7.1.12 Identification and measurement of impairment of financial assets 7.1.12.1 Overview of the ECL principles The Group records an allowance for expected credit losses (ECL) for loans & advances from banks and other customers, debt and other financial instruments measured at amortised cost, debt instruments measured at FVOCI, loan commitments and financial guarantee contracts. SLFRS 9 outlines a “three-stage” model for impairment based on changes in credit quality since initial recognition. z Stage 1: A financial asset that is not originally credit-impaired on initial recognition is classified in Stage 1. Financial instruments in Stage 1 have their ECL measured at an amount equal to the proportion of lifetime expected credit losses (LTECL) that result from default events possible within next 12 months (12M ECL). z Stage 2: If a significant increase in credit risk (SICR) since origination is identified, the financial asset is moved to Stage 2 and the Group records an allowance for LTECL. Refer Note 7.1.12.2 for a description on how the Group determines when a SICR has occurred.
  216. z Stage 3 : If a financial asset is credit- impaired, it is moved to Stage 3 and the Group recognises an allowance for LTECL, with probability of default at 100%. Refer Note 7.1.12.3 for a description on how the Group defines default and credit impaired assets. Purchased or originated credit impaired (POCI) financial assets: Financial assets which are credit impaired on initial recognition are categorised within Stage 3 with a carrying value already reflecting the LTECL. The Group does not have POCI loans as at the reporting date. The key judgements and assumptions adopted by the Group in addressing the requirements of SLFRS 9 are discussed below: 7.1.12.2 Significant increase in credit risk (SICR) When determining whether the risk of default on a financial instrument has increased significantly since initial recognition, the Group considers reasonable and supportable information that is relevant and available without undue cost or effort. This includes both quantitative and qualitative information analysis, based on the Group’s historical experience and expert credit assessment and including forward looking information. The Group considers an exposure to have significantly increased credit risk when contractual payments of a customer are more than 30 days past due in accordance with the rebuttable presumption in SLFRS 9. The Group individually reviews at each reporting date, loans and advances above a predefined threshold to identify whether the credit risk has increased significantly since origination, before an exposure is in default. Such indicators include, inter-alia: z When the risk rating of a customer or an instrument has been downgraded to B+ by an external credit rating agency and/or when there is a two-notch downgrade in the banks internal rating system. z When reasonable and supportable forecasts of future economic conditions directly affect the performance of a customer/group of customers, portfolios or instruments. z When there is a significant change in the geographical locations or natural catastrophes that directly impact the performance of a customer/group of customers or an instruments. z When the value of collateral is significantly reduced and/or realisability of collateral is doubtful. z When a customer is subject to litigation, that significantly affects the performance of the credit facility. > Notes to the Financial Statements z Frequent changes in the senior management of an institutional customer. z Delay in the commencement of business operations/projects by more than two years from the originally agreed date. z When the customer is deceased/insolvent. z When the Bank is unable to contact or find the customer. z A fall of 50% or more in the turnover and/ or profit before tax of the customer when compared to the previous year for two consecutive years. z Erosion in net-worth by more than 25% when compared to the previous year. z Number of times credit facilities are re- structured. Credit facilities/exposures which have one or more of the above indicators are treated as facilities with SICR and assessed accordingly in ECL computations. The Group also considers the conditions stipulated in the Directions issued by the CBSL on identifying SICR criteria for assessing credit facilities for ECL computations. The Group regularly monitors the effectiveness of the criteria used to identify SICR to confirm that the criteria is capable of identifying SICR before an exposure is in default. For debt instruments having an external credit rating, which are measured at amortised cost or at FVOCI, the Group determines SICR based on the generally accepted investment/non-investment grade definitions published by international rating agencies. Debt instruments are moved to Stage 2 if their credit risk increases to the extent that they are no longer considered investment grade. 7.1.12.3 Definition of default and credit impaired assets The Group considers loans and advances to other customers be defaulted when: rescheduled credit facilities are assessed as Stage 3 exposure. 7.1.12.4 Movement between the stages Financial assets can be transferred between the different categories (other than POCI) depending on their relative change in credit risk since initial recognition. Financial instruments are transferred out of stage 2 if their credit risk is no longer considered to be significantly increased since initial recognition based on the assessments described in Note 7.1.12.2 and also as per the Policy on Upgrading of Credit Facilities. Financial instruments are transferred out of stage 3 when they no longer exhibit any evidence of credit impairment as described above as per the Policy on Upgrading of Credit Facilities. 7.1.12.5 Grouping financial assets measured on collective basis The Group calculates ECL either on a collective or an individual basis. Asset classes where the Group calculates ECL on individual basis include; z Credit impaired facilities of individually significant customers z The treasury, trading and interbank relationships (such as due from Banks, money at call and short notice, placements with Banks, Government securities, investments in debentures etc.) Those financial assets for which, the Group determines that no provision is required under individual impairment are then collectively assessed for ECL. For the purpose of ECL calculation on collective basis, financial assets are grouped on the basis of similar risk characteristics. Loans and advances to other customers are grouped in to homogeneous portfolios, based on a combination of product and customer characteristics. Details of the ECL calculation are given in Note 18 on pages 226 to 229. z The borrower is unlikely to pay its obligations to the Group in full, without recourse by the Group to actions such as realising security (if any is held); or z The borrower becomes 90 days past due on its contractual payments. In addition, the Group classifies the financial investments under Stage 3 when the external credit rating assigned to the particular investment is “default”. In assessing whether a borrower is in default, the Group reviews its individually significant loans and advances above a predefined threshold at each reporting date. Further, as per “CBSL Guidelines to Licensed Banks on the Adoption of Sri Lanka Accounting Standard – SLFRS 9: Financial Instruments”, all the credit facilities/ customers classified as non-performing as per CBSL Directions which also includes all 7.2 Non-current assets held for sale and disposal groups The Group intends to recover the value of Non-Current Assets and disposal groups classified as held for sale as at the reporting date principally through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable, the asset or disposal group is available-for-sale in its present condition, the management has committed to the sale, and the sale is expected to have been completed within one year from the date of classification. 7 As per the Sri Lanka Accounting Standard – SLFRS 5 on “Non-current Assets Held for Sale and Discontinued Operations”, (SLFRS 5) Commercial Bank of Ceylon PLC Annual Report 2021 215
  217. these assets are measured at the lower of the carrying amount and fair value , less costs to sell. Thereafter, the Group assesses at each reporting date or more frequently if events or changes in circumstances indicate that the investment or a group of investment is impaired. The Group recognises an impairment loss for any initial or subsequent write down of the assets to fair value less costs to sell and also recognises a gain for any subsequent increase in fair value less costs to sell of an asset, only to the extent of the cumulative impairment losses that have been recognised previously. Impairment loss is first allocated to goodwill, and then to the remaining assets and liabilities on a pro rata basis, except that no loss is allocated to financial assets, deferred tax assets or employee benefit assets which continue to be measured in accordance with the Group’s other accounting policies. As a result, once classified, the Group neither amortises nor depreciates the assets classified as held-for-sale. In the Income Statement of the reporting period and of the comparable period of the previous year, income and expenses from discontinued operations are reported separately from income and expenses from continuing operations, down to the level of profit after taxes, even when the Group retains a NCI in a subsidiary after the sale. The resulting profit or loss (after taxes) is reported separately in the Income Statement. 7.3 Property, plant and equipment Details of “Property, plant and equipment” are given in Note 39 on pages 257 to 268. 7.3.1 Depreciation Details of “Depreciation” are given in Note 20 on pages 230 and 231. 7.3.2 Borrowing costs As per the Sri Lanka Accounting Standard – LKAS 23 on “Borrowing Costs” (LKAS 23), the Group capitalises borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of the asset. A qualifying asset is an asset which takes a substantial period of time to get ready for its intended use or sale. Other borrowing costs are recognised in the profit or loss in the period in which they occur. 7.4 Investment Property Investment properties are initially measured at cost, including transaction costs. The Group subsequently measures investment properties under fair value model. Any gain or loss arising from a change in fair value and the rental income from the investment property is recognised under Net other operating income. 7 216 Commercial Bank of Ceylon PLC Details of “Investment Property” are given in Note 40 on pages 269 and 270. 7.5 Intangible assets Details of “Intangible assets” are given in Note 41 on pages 270 to 272. Amortisation recognised during the year in respect of intangible assets is included under the item of “Amortisation of intangible assets” under “Depreciation and amortisation” in profit or loss. Refer Note 20 on pages 230 and 231. 7.6 Impairment of non-financial assets At each reporting date, the Group reviews the carrying amounts of its non-financial assets (other than investment properties and deferred tax assets) to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. Goodwill is tested annually for impairment. For impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that is largely independent of the cash inflows of other assets or CGUs. Goodwill arising from a business combination is allocated to CGUs or groups of CGUs that are expected to benefit from the synergies of the combination. The “recoverable amount” of an asset or CGU is the greater of its VIU and its fair value less costs to sell. VIU is based on the estimated future cash flows, discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU. An impairment loss is recognised if the carrying amount of an asset or CGU exceeds its recoverable amount. The Group’s corporate assets do not generate separate cash inflows and are used by more than one CGU. Corporate assets are allocated to CGUs on a reasonable and consistent basis and tested for impairment as part of the testing of the CGUs to which the corporate assets are allocated. Impairment losses are recognised in profit or loss. They are allocated first to reduce the carrying amount of any goodwill allocated to the CGU, and then to reduce the carrying amounts of the other assets in the CGU on a pro rata basis. An impairment loss in respect of goodwill is not reversed. For other assets, an impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. Annual Report 2021 > Notes to the Financial Statements 7.7 Dividends payable Dividends on ordinary shares are recognised as a liability and deducted from equity when they are recommended and declared by the Board of Directors and approved by the shareholders. Interim dividends are deducted from Equity when they are declared and no longer at the discretion of the Bank. Dividends for the year, that are approved after the reporting date and not provided for, are disclosed as an event after the reporting period in accordance with the Sri Lanka Accounting Standard – LKAS 10 on “Events after the reporting period” (LKAS 10) in Note 69 on page 336. 7.8 Employee benefits 7.8.1 Defined Benefit Plans (DBPs) A DBP is a post-employment benefit plan other than a Defined Contribution Plan (DCP) as defined in the Sri Lanka Accounting Standard – LKAS 19 on “Employee Benefits” (LKAS 19). 7.8.1.1 Defined benefit pension plans 7.8.1.1.1 Description of the plans and employee groups covered The Bank operates two types of Defined Benefit Pension Plans for its employees as described below: (a) The Bank has an approved Pension Fund, which was established in 1992. As per the Deed of Trust, only those employees who were less than 45 years of age as at January 1, 1992 were covered by the Pension Fund in order to leave a minimum contribution for a period of 10 years before they are eligible to draw pension from the Pension Fund. Further, only the employees those who joined the Bank before January 1, 2000, became eligible for this pension scheme. During 2006, the Bank offered a restructured pension scheme to convert the DBP to a DCP for the pensionable employees of the Bank and over 99% of them accepted it. As a result, the above Pension Fund now covers only those employees who did not opt for the restructured pension scheme and those employees who were covered by the Pension Fund which was established in 1992, but retired before the restructured pension scheme came into effect; (b) Provision for pensions has been made for those employees who retired before January 1, 2000, and on whose behalf the Bank could not make contributions to the Retirement Pension Fund for more than 10 years. This liability although not funded has been provided for in full in the Financial Statements; The subsidiaries of the Bank do not operate Pension Funds.
  218. The Bank ’s net obligation in respect of Defined Benefit Pension Plans is calculated separately for each plan by estimating the amount of future benefit that employees have earned in the current and prior periods, discounting that amount and deducting the fair value of any plan assets, as per LKAS 19 as detailed in Note 49 on pages 277 to 285. When the benefits of a plan are changed or when a plan is curtailed, the resulting change in benefit that relates to past service or the gain or loss on curtailment is recognised immediately in profit or loss. The Group recognises gains and losses on the settlement of a DBP when the settlement occurs. The past service cost is recognised as an expense on a straight-line basis over the period until the benefits become vested. If the benefits are already vested following the introduction of, or changes to, a pension plan, past service cost is recognised immediately. Amounts recognised in profit or loss as expenses on DBPs and provisions made on DBPs together with the details of valuation methods are given in Notes 19 and 49 on pages 230 and 277 to 285, respectively. 7.8.1.1.2 Recognition of actuarial gains or losses Actuarial gains or losses are recognised in the OCI in the period in which they arise. 7.8.1.1.3 Recognition of retirement benefit obligation The defined benefit asset or liability comprises the present value of the defined benefit obligation, less past service cost not yet recognised and the fair value of the plan assets out of which the obligations are to be settled directly. The value of any asset is restricted to the sum of any past service cost not yet recognised and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan. The calculation of defined benefit obligations is performed annually by a qualified actuary using the Projected Unit Credit Method. When the calculation results in a potential asset for the Group, the recognised asset is limited to the present value of economic benefits available in the form of any future refunds from the plan or reductions in future contributions to the plan. To calculate the present value of economic benefits, consideration is given to any applicable minimum funding requirements. Remeasurement of the net defined benefit liability, which comprises actuarial gains and losses, the return on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest), are recognised immediately in OCI. The Group determines the net interest expense/ (income) on the net defined benefit liability/ (asset) for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the then net-defined benefit liability/(asset), taking into account any changes in the net-defined benefit liability/(asset) during the period as a result of contributions and benefit payments. Net interest expense and other expenses related to DBPs are recognised in profit or loss. > Notes to the Financial Statements 7.8.2.2 Employees’ Provident Fund The Bank and employees contribute to an approved Private Provident Fund at 12% and 8% respectively, on the salaries of each employee. Other local entities of the Group and their employees contribute at the same percentages as above to the Employees’ Provident Fund managed by the CBSL. 7.8.2.3 Employees’ Trust Fund The Bank and other local entities of the Group contribute at the rate of 3% of the salaries of each employee to the Employees’ Trust Fund managed by the CBSL. 7.8.2 Defined Contribution Plans (DCPs) A DCP is a post-employment plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligations to pay a further amount. Obligations to DCPs are recognised in the profit or loss as the related service is provided. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in future payments is available. The Group has four such plans as explained in Notes 7.8.2.1, 7.8.2.2, 7.8.2.3 and 7.8.2.4. Amounts recognised in profit or loss as expenses on DCPs are given in Note 19 on page 230. 7.8.2.1 Defined contribution pension plan As explained in Note 7.8.1.1.1(a), during 2006, the Bank restructured its pension scheme which was a DBP to a DCP. This restructured plan was offered on a voluntary basis to the eligible employees of the Bank. The scheme provides for lump sum payments instead of commuted/monthly pensions to the eligible employees at the point of their separation, in return for surrendering their pension rights. The lump sum offered consisted of a past service package and a future service package. The shortfall on account of the past service package in excess of the funds available in the Pension Fund was borne by the Bank in 2006. The future service package includes monthly contributions to be made by the Bank for the employees who accepted the offer, to be made during their remaining period of service, at predetermined contribution rates to be applied on their salaries, which are estimated to increase for this purpose at 10% p.a. based on the salary levels that prevailed as at the date of implementation of this scheme. In addition, interest to be earned on the assets of the DCP is also allocated to the employees who opted for the restructured pension scheme. The assets of this Fund are held separately from those of the Bank and are independently administered by the Trustees as per the provisions of the Trust Deed. 7.8.2.4 Defined Contribution Pension Fund (DCPF) Defined Contribution Pension Fund (DCPF) was established on March 1, 2020, which is managed by a Board of Trustees consisting of representatives of Employee Organizations and the Management. Employees who joined since the year 2000, and who are not covered under the ReStructured Pension Scheme of the Bank and are in the service of the Bank as at March 1, 2020 are eligible for the new DCPF. The initial lump sum, based on Gratuity entitlement as at February 29, 2020, is being transferred to the accounts opened in the names of individual eligible employees. The Bank contributes monthly, a percentage equivalent of seven decimals five per centum (7.5%) of the monthly salary of each eligible employee starting from March 1, 2020 until cessation of employment to the DCPF. Employees cannot withdraw money from the DCPF before cessation of employment. In the event of early separation prior to retirement (excluding death), eligible employees are entitled to withdraw the accumulated amounts in their respective DCPF accounts. However, the eligible employees are not entitled to receive any DCPF payment where the completed service is less than 5 years (similar to the Gratuity payments are done in case of a separation as per the Gratuity Act at the point of termination and separation). In the event of death of an employee whilst in service, the accumulated funds in the members account will be released in full to the nominated parties/legal heirs as the case may be, where the completed service is more than 5 years. 7.8.3 Other long-term employee benefits The Group’s net obligation in respect of longterm employee benefits other than pension plans is the amount of future benefits that employees have earned in return for their service in the current and prior periods. That benefit is discounted to determine its present value, and the fair value of any related assets is deducted. The discount rate Commercial Bank of Ceylon PLC Annual Report 2021 7 217
  219. used as the yield as at the reporting date is the current market rate that has been extrapolated to reflect long-term rate of discount based on market rates of interest on short-term Corporate /Government Bonds and anticipated long-term rate of inflation. The calculation is performed using the Projected Unit Credit Method. Remeasurements are recognised in profit or loss in the period in which they arise. The Group does not have any "Other long-term employee benefit plans". 7.8.4 Terminal benefits Termination benefits are expensed at the earlier of when the Group can no longer withdraw the offer of those benefits and when the Group recognises costs for a restructuring. If benefits are not expected to be wholly settled within 12 months of the reporting date, then they are discounted. 7.8.5 Short-term employee benefits Short-term employee benefits are expensed as the related service is provided. A liability is recognised for the amount expected to be paid if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. 7.8.6 Share-based payment arrangements Share-based payment arrangements in which the Bank receives services as consideration for its own equity instruments are accounted for as equity-settled sharebased payment transactions, regardless of how the equity instruments are obtained by the Bank. Executive Employees of the Bank receive remuneration in the form of share-based payment transactions, whereby employees render services as consideration for equity instruments (equity-settled transactions). The Group does not operate any cash-settled share-based payment transactions. The Group applies the requirements of the Sri Lanka Accounting Standard – SLFRS 2 on “Share-based Payment” (SLFRS 2) in accounting for equity-settled share-based payment transactions, if any, that were granted after January 1, 2012 and had not vested at the same date. As per SLFRS 2, on the grant date, fair value of equity-settled share-based payment awards (i.e., share options) granted to employees is recognised as personnel expense, with a corresponding increase in equity, over the period in which the employees unconditionally become entitled to the awards. The amount recognised as an expense is adjusted to reflect the number of share awards for which the related service and non-market performance vesting conditions are 7 218 Commercial Bank of Ceylon PLC expected to be met, so that the amount ultimately recognised as an expense is based on the number of share awards that do meet the related service and non-market performance conditions at the vesting date. For share-based payment awards with nonvesting conditions, the grant date fair value of the share-based payment is measured to reflect such conditions and there is no trueup for differences between expected and actual outcomes. The Employee Share Option Plan – 2019, which was granted is subjected to the above accounting treatment. The details of Employee Share Option Plan is given in Note 53 on pages 288 to 291. The dilutive effect of outstanding options is reflected as additional share dilution in the computation of diluted Earnings per Share as disclosed in Note 24.1 and Note 24.2 on pages 233 and 234. 7.13 Financial guarantees, letters of credit and undrawn loan commitments “Financial guarantees” are contracts that require the Group to make specified payments to reimburse the holder for a loss that it incurs because a specified debtor fails to make payment when it is due in accordance with the terms of a debt instrument. Undrawn loan commitments and letters of credits are commitments under which, over the duration of the commitment, the Bank is required to provide a loan with pre-specified terms to the customer. Financial guarantees are initially recognised in the Financial Statements (within other liabilities) at fair value, being the premium received. Subsequent to initial recognition, the Group’s liability under each guarantee is measured at the higher of the amount initially recognised less cumulative amortisation recognised in the income statement and ECL provision, if appropriate. 7.9 Other liabilities Details of “Other liabilities” are given in Note 49 on pages 277 to 285. The premium received is recognised in profit or loss in Note 14.1 on “Fee and commission income” on a straight line basis over the life of the guarantee. 7.10 Restructuring Provision for restructuring is recognised when the Group has approved a detailed and formal restructuring plan, and the restructuring either has commenced or has been announced publicly. Future operating losses arising on such restructuring are not provided for. The nominal contractual value of financial guarantees, letters of credit and undrawn loan commitments, where the loan agreed to be provided is on market terms, are not recorded on in the SOFP. The nominal values of these instruments together with the corresponding ECLs are disclosed in Note 58 on pages 295 and 296. The Group does not have any provision for restructuring as at the reporting date. 7.11 Onerous contracts A provision for onerous contracts is recognised when the expected benefits to be derived by the Group from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is established, the Group recognises any impairment loss on the assets associated with that contract. The Group does not have any onerous contracts as at the reporting date. 7.12 Bank levies A provision for bank levies is recognised when the condition that triggers the payment of the levy is met. If a levy obligation is subject to a minimum activity threshold so that the obligating event is reaching a minimum activity, then a provision is recognised when that minimum activity threshold is reached. Annual Report 2021 > Notes to the Financial Statements Loan commitments at below market interest rates are initially measured at fair value and subsequently measured at the higher of the amount of the ECL allowance and the amount initially recognised less the cumulative amount of income recognised, when appropriate. 7.14 Commitments All discernible risks are accounted for in determining the amount of known liabilities as explained in Note 7.9 above. Details of the Commitments are given in Note 58 on pages 295 and 296. 7.15 Contingent liabilities and commitments A detailed list of “Contingent liabilities and commitments” and “Litigation against the Bank” are given in Notes 58 and 60 on pages 295 & 296 and 297. 7.16 Stated capital and reserves Details of the “Stated capital and reserves” are given in Notes 52, 54, 55 and 56 to the Financial Statements on pages 287 & 288 and 291 to 294. 7.17 Earnings per Share (EPS) Details of “Basic and Diluted EPS” are given in Note 24 on pages 233 and 234.
  220. 7 .18 Operating segments Details of “Operating segments” are given in Note 62 on pages 300 and 301. 7.19 Fiduciary assets The Bank provides trust and other fiduciary services that result in the holding or investing of assets on behalf of its clients. Assets held in a fiduciary capacity are not reported in these Financial Statements as they do not belong to the Bank. 8. Significant accounting policies – Recognition of income and expense Details of “Income and expense” are given in Notes 12 to 21 on pages 222 to 231. 8.1 Interest income and Interest expense Details of “Interest income and Interest expense” are given in Note 13 on pages 222 to 224. 8.2 Fee and commission income and fee and commission expense Details of “Fee and commission income and commission expense” are given in Note 14 on pages 224 and 225. 8.3 Net gains/(losses) from trading Details of “Net gains/(losses) from trading” are given in Note 15 on page 225. 8.4 Net gains/ (losses) from derecognition of financial assets Details of “Net gains/ (losses) from derecognition of financial assets” are given in Note 16 on pages 225 and 226. 8.5 Dividend income Dividend income is recognised when the right to receive income is established. Usually, this is the ex-dividend date for quoted equity securities. Dividends are presented in net gains/ (losses) from trading, net gains/(losses) from financial investments or other income (net) based on the underlying classification of the equity investment. Details of “Dividend income” are given in Notes 15 and 17 on pages 225 and 226. 8.6 Leases The Group assesses at the inception of a contract, whether a contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration as per the guidelines of SLFRS 16. This assessment considers whether, throughout the period of use, the lessee has both the right to obtain all of the economic benefits from the use of the identified asset and the right to direct how and for what purpose the identified asset is used. > Notes to the Financial Statements After the assessment of whether a contract is, or contains, a lease, the Group determines whether it contains additional lease or non-lease (service) components based on the detailed guidance provided in SLFRS 16. Accordingly, the right to use of an identifying asset is a separate lease component if the lessee can benefit from the use of underlying asset either on its own or together with other resources readily available to the lessee and the underlying asset is neither highly dependent on, nor highly interrelated with, the other underlying assets in the contract. 8.6.1 Group as a lessee As per SLFRS 16, when the Group has determined that a contract contains a lease component and one or more additional lease components or non-lease components, the consideration in the contract is allocated to each lease component on the basis of relative stand-alone price of the lease component and the aggregate stand-alone price of the non-lease components. At the commencement date, the Group recognises right-of-use of an asset and a lease liability which is measured at the present value of the lease payments that are payable on that date. Lease payments are discounted using the IBR. and present them as a lease receivable at an amount equal to the net investment in the lease. Net investment in the lease is arrived at by discounting lease payments receivable at the interest rate implicit in the lease, i.e. the rate of interest which causes present value of lease payments to equal to the fair value of the underlying asset and initial direct costs. The Group’s net investment in lease is included in Note 33 on “Loans and advances to banks” or Note 34 “Loans and advances to other customers”, as appropriate. The finance income receivable is recognised in “interest income” over the periods of the leases so as to achieve a constant rate of return on the net investment in the leases. 8.6.2.2 Operating leases – Group as a lessor As per SLFRS 16, a lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership of an underlying asset. The Group recognises lease payments from operating leases as income on straightline basis. Initial direct costs incurred in negotiating operating leases are added to the carrying amount of the leased asset and are recognised over the lease term on the same basis as rental income. Contingent rents are recognised as revenue in the period in which they are earned. After initial recognition, the Group applies cost model for the right-of-use of an asset and depreciate the asset from commencement date to the end of the useful life of the underlying asset. Where the right does not transfer the ownership of the asset, the Group depreciates it from commencement date to the earlier of the end of the useful life of the right-of-use asset or end of the lease term. In addition, interest expense on the lease liability is recognised in the profit or loss. 8.7 Rental income and expenses Rental income and expense are recognised in profit or loss on an accrual basis. Details of “Right-of-use asset” and “Lease liability” are given in Notes 39 and 49 respectively on pages 257 to 261 and 277. 9.1.2 Deferred tax 8.6.2 Group as a lessor 9.1.3 Tax exposures Similar to above, at the commencement of the contract, the Group determines whether the contract contains a lease component and one or more additional lease components or non-lease components. When there is one or more additional lease or nonlease component, the Group allocates consideration based on the guidelines given in SLFRS 15. 8.6.2.1 Finance leases – Group as a lessor As per SLFRS 16, a lease which transfers substantially all the risks and rewards incidental to ownership of an underlying asset is classified as a finance lease. At the commencement date, the Group recognises assets held under finance lease in the SOFP 9. Significant Accounting Policies –Tax Expense 9.1 Income tax expense 9.1.1 Current tax Details of “Income tax expense” are given in Note 23 on pages 232 and 233. Details of “Deferred tax assets and liabilities” are given in Note 42 on pages 272 to 274. In determining the amount of current and deferred tax, the Group considers the favourable/adverse impact to the tax liability due to assessments, revision to legislature etc. Such changes to tax liabilities could impact the tax expense in the period in which such revision is considered, as an over or under provision. 9.2 Crop Insurance Levy (CIL) As per the provisions of the Section 14 of the Finance Act No. 12 of 2013, the CIL was introduced with effect from April 1, 2013 and is payable to the National Insurance Trust Fund. Currently, the CIL is payable at 1% of the profit after tax. Commercial Bank of Ceylon PLC Annual Report 2021 7 8 9 219
  221. 9 .3 Withholding Tax (WHT) on dividends distributed by the Bank, subsidiaries and associate 9.3.1 WHT on dividends distributed by the Bank As per the Inland Revenue (Amendment) Act No 10 of 2021, requirement to deduct WHT on dividends from residents had been removed effective January 01, 2020. Dividends paid to Non Residents had been exempted from Income Tax. Further, dividend paid by the Bank to shareholders to the extent that such dividend payment is attributable to, or derived from, gains and profits from dividend received by the Bank is exempt in the hands of shareholders. 9.3.2 WHT on dividends distributed by the subsidiaries and associate As per the Inland Revenue (Amendment) Act No 10 of 2021 requirement to deduct WHT on dividend had been removed effective January 01, 2020 as mentioned under Note 9.3.1 above. The dividend Income received from subsidiaries and associate will be liable to Income Tax at 14%. 9.4 Value Added Tax on Financial Services (VAT FS) The value addition attributable to the supply of financial services is calculated by adjusting the economic depreciation computed on rates prescribed by the Department of Inland Revenue to the accounting profit before income tax and emoluments payable. Emoluments payable include benefits in money and not in money including contribution or provision relating to terminal benefits. The amount of VAT FS charged in determining the profit or loss for the period is given in Note 22 on page 231. 9.5 Changes proposed by the Government Budget 2022 Following one time taxes were proposed in the Government Budget 2022; z Imposition of a Tax Surcharge As per provisions of the Government Bill issued on February 07, 2022 (to be passed in parliament for enactment), if the aggregate of the taxable income of the holding company and all subsidiaries in a group of companies, for the Year of Assessment 2020/21, exceed rupees two thousand million (2 Billion), each company in the group of companies is liable to pay Surcharge Tax calculated at twenty five per centum on the taxable income (after deducting profit from dividends received from subsidiaries included in the taxable income). The surcharge tax is payable in two equal instalments on or before, March 31 and June 30 of 2022, to the Commissioner General of Inland Revenue. 9 10 11 220 Commercial Bank of Ceylon PLC z Increase in the VAT FS rate from 15% to 18% As per provisions of the Government Bill issued on January 07, 2022 (to be passed in parliament for enactment) it has been proposed to increase the VAT FS payable by 3% and will be effective from January 01, 2022. z Imposition of tax on the Turnover – Social Security Contribution In order to rebuild the economy affected by the COVID-19 pandemic, a new tax is introduced at the rate of 2.5% for entities having a Turnover exceeding Rs. 120 Mn. per annum effective from April 01, 2022. Type of business segments that will be liable for this tax had not been specified. 10. Significant Accounting Policies – Statement of Cash Flows 10.1 Statement of Cash Flows The Statement of Cash Flows is prepared using the “Indirect Method” of preparing cash flows in accordance with the Sri Lanka Accounting Standard – LKAS 7 on “Statement of Cash Flows” (LKAS 7). Gross cash and cash equivalents comprise of short-term, highly liquid investments that are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value. Cash and cash equivalents as referred to in the Statement of Cash Flows are comprised of those items as explained in Note 28 on page 240. The Statement of Cash Flows is given on page 198. 11. Amendments to Accounting Standards issued but not yet effective The new amended standards and interpretations that are issued, but not yet effective, up to the date of issuance of the Bank’s Financial Statements are disclosed below. The Group/Bank intends to adopt these standards, if applicable, when they become effective. Amendments to “Provisions, Contingent Liabilities and Contingent Assets” (LKAS 37) : Onerous Contracts – Costs of Fulfilling a Contract On March 25, 2021 CA Sri Lanka issued amendments to “Provisions, Contingent Liabilities and Contingent Assets” (LKAS 37) to specify which costs an entity needs to include when assessing whether a contract is onerous or loss-making. The amendments apply a “directly related cost approach”. The costs that relate directly to a contract to provide goods or services include both incremental costs and an allocation of costs directly related to contract activities. General and administrative costs do not relate directly to a contract and Annual Report 2021 > Notes to the Financial Statements are excluded unless they are explicitly chargeable to the counterparty under the contract. The amendments are effective for annual reporting periods beginning on or after January 01, 2022. The Group does not expect this will result in a material impact on its Financial Statements. Amendments to “Property, Plant & Equipment” (LKAS 16) : Proceeds before Intended Use On March 25, 2021 CA Sri Lanka issued amendments to “Property, Plant and Equipment” (LKAS 16) — Proceeds before Intended Use, which prohibits entities deducting from the cost of an item of property, plant and equipment, any proceeds from selling items produced while bringing that asset to the location and condition necessary for it to be capable of operating in the manner intended by management. Instead, an entity recognizes the proceeds from selling such items, and the costs of producing those items, in profit or loss. The amendment is effective for annual reporting periods beginning on or after January 01, 2022 and must be applied retrospectively to items of property, plant and equipment made available for use on or after the beginning of the earliest period presented when the entity first applies the amendment. The Group does not expect this will result in a material impact on its Financial Statements. Amendments to “Business Combinations” (SLFRS 3): Updating a reference to conceptual framework On March 23, 2021 CA Sri Lanka issued amendments to “Business Combinations” (SLFRS 3) - Updating a Reference to the “Conceptual Framework for Financial Reporting”. The amendments are intended to replace a reference to the Framework for the Preparation and Presentation of Financial Statements, issued in 1989, with a reference to the “Conceptual Framework for Financial Reporting” issued in March 2018 without significantly changing its requirements. An exception was also added to the recognition principle of SLFRS 3 to avoid the issue of potential ‘day 2’ gains or losses arising for liabilities and contingent liabilities that would be within the scope of LKAS 37 or IFRIC 21 Levies, if incurred separately. At the same time, it was decided to clarify existing guidance in SLFRS 3 for contingent assets that would not be affected by replacing the reference to the Framework for the Preparation and Presentation of Financial Statements.
  222. The amendments are effective for annual reporting periods beginning on or after January 01 , 2022 and apply prospectively. The amendment is not expected to have a material impact on the Group’s Financial Statements. Amendments to “First-time Adoption of Sri Lanka Financial Reporting Standards” (SLFRS 1): Subsidiary as a first-time adopter As part of its 2018-2020 annual improvements to SLFRS standards process, CA Sri Lanka issued an amendment to “First-time Adoption of International Financial Reporting Standards” (SLFRS 1). The amendment permits a subsidiary that elects to apply paragraph D16(a) of SLFRS 1 to measure cumulative translation differences using the amounts reported by the parent, based on the parent’s date of transition to SLFRS. This amendment is also applied to an associate or joint venture that elects to apply paragraph D16(a) of SLFRS 1. The amendment is effective for annual reporting periods beginning on or after January 01, 2022 with earlier adoption permitted. Amendments to “Financial Instruments” (SLFRS 9) – Fees in the ’10 per cent’ test for derecognition of financial liabilities As part of its 2018-2020 annual improvements to SLFRS standards process, the CA Sri Lanka issued an amendment to “Financial Instruments” (SLFRS 9).The amendment clarifies the fees that an entity includes when assessing whether the terms of a new or modified financial liability are substantially different from the terms of the original financial liability. These fees include only those paid or received between the borrower and the lender, including fees paid or received by either the borrower or lender on the other’s behalf. An entity applies the amendment to financial liabilities that are modified or exchanged on or after the beginning of the annual reporting period in which the entity first applies the amendment. The amendment is effective for annual reporting periods beginning on or after January 01, 2022, with earlier adoption permitted. The Group will apply the amendments to financial liabilities that are modified or exchanged on or after the beginning of the annual period in which it will first apply the amendment and does not expect this will result in a material impact on its financial statements. 11 > Notes to the Financial Statements Commercial Bank of Ceylon PLC Annual Report 2021 221
  223. 12 . Gross income ACCOUNTING POLICY Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. GROUP BANK 2021 Rs. ’000 2020 Rs. ’000 2021 Rs. ’000 2020 Rs. ’000 222 132,818,178 124,087,713 130,443,030 122,330,386 14.1 224 15,917,337 11,839,689 15,410,402 11,268,543 15 225 1,936,007 1,878,060 1,936,007 1,878,086 Net gains/(losses) from derecognition of financial assets 16 225 3,001,574 6,390,197 3,001,574 6,390,197 Net other operating income 17 226 10,002,216 7,770,754 10,094,869 7,844,269 163,675,312 151,966,413 160,885,882 149,711,481 For the year ended December 31, Note Page No. Interest income 13.1 Fee and commission income Net gains/(losses) from trading Total 13. Net interest income ACCOUNTING POLICY Interest income and expense are recognised in the Income Statement using the effective interest rate (EIR) method. Interest income and expense presented in the Income Statement include: – Interest on financial assets measured at amortised cost (AC) calculated using EIR method; – Interest on financial assets measured at fair value through other comprehensive income (FVOCI) calculated using EIR method; – Interest on financial assets measured at fair value through profit or loss (FVTPL) calculated using EIR method; – Interest on financial liabilities measured at Stage 3, a credit-adjusted EIR is calculated using estimated future cash flows including ECLs. The credit-adjusted EIR is the interest rate that, at original recognition, discounts the estimated future cash flows (including credit losses) to the amortised cost. amortised cost calculated using EIR method. Effective interest rate (EIR) The EIR is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument to: The calculation of the EIR includes transaction costs and fees and points paid or received that are an integral part of the EIR. z the gross carrying amount of the financial asset; or z the amortised cost of the financial liability. When calculating the EIR for financial instruments other than credit-impaired assets, the Bank estimates future cash flows considering all contractual terms of the financial instrument, but not expected credit losses (ECLs). For credit-impaired financial assets which are classified under For financial assets that were creditimpaired on initial recognition, interest income is calculated by applying the creditadjusted EIR to the amortised cost of the asset. The calculation of interest income does not revert to a gross basis, even if the credit risk of the asset improves. GROUP 2021 Rs. ’000 2020 Rs. ’000 2021 Rs. ’000 2020 Rs. ’000 132,818,178 124,087,713 130,443,030 122,330,386 For the year ended December 31, Note Page No. Interest income 13.1 222 Less: Interest expense 13.2 223 Net interest income BANK 66,401,846 73,218,911 65,832,418 72,759,045 66,416,332 50,868,802 64,610,612 49,571,341 13.1 Interest income GROUP For the year ended December 31, Note 12 13 Page No. Cash and cash equivalents Balances with central banks 222 BANK 2021 Rs. ’000 2020 Rs. ’000 2021 Rs. ’000 2020 Rs. ’000 447,742 1,053,757 441,281 1,049,426 1,299,948 1,175,509 1,270,371 1,149,924 Placements with banks 778,021 777,425 737,349 754,313 Securities purchased under resale agreements 375,398 836,773 375,398 836,773 Commercial Bank of Ceylon PLC Annual Report 2021 > Notes to the Financial Statements
  224. GROUP For the year ended December 31 , Note Page No. Financial assets recognised through profit or loss BANK 2021 Rs. ’000 2020 Rs. ’000 2021 Rs. ’000 2020 Rs. ’000 1,101,385 1,831,327 1,101,385 1,831,327 Derivative financial instruments 167,377 34,902 167,377 34,902 Other financial instruments 934,008 1,796,425 934,008 1,796,425 Financial assets at amortised cost – Loans and advances to other customers 79,654,575 84,257,196 77,946,692 82,933,026 Financial assets at amortised cost – Debt and other financial instruments 25,951,467 13,206,226 25,422,968 12,893,403 Financial assets measured at fair value through other comprehensive income 22,034,788 18,053,545 22,015,431 18,031,388 1,174,854 2,895,955 1,132,155 2,850,806 132,818,178 124,087,713 130,443,030 122,330,386 Interest accrued on impaired loans and advances to other customers 34.2 (a) & 34.2 (b) 248 Total 13.2 Interest expense GROUP For the year ended December 31, Note Page No. Due to banks Derivative financial liabilities Securities sold under repurchase agreements Financial liabilities at amortised cost – due to depositors Refinance borrowings Foreign currency borrowings Subordinated liabilities Interest expense on lease liabilities 49.1 277 Total BANK 2021 Rs. ’000 2020 Rs. ’000 2021 Rs. ’000 2020 Rs. ’000 3,326,777 2,845,641 3,287,374 2,657,662 196,903 65,473 196,903 65,473 6,190,149 3,516,363 6,207,288 3,524,261 51,533,473 61,416,382 50,947,510 61,120,047 679,976 578,780 679,976 578,780 624,395 603,597 624,395 603,597 3,398,554 3,756,921 3,398,554 3,756,921 451,619 435,754 490,418 452,304 66,401,846 73,218,911 65,832,418 72,759,045 13.3 Net interest income from Government Securities Interest income and interest expenses on Government Securities given in the Notes 13.3 (a), 13.3 (b) and 13.3 (c) below have been extracted from interest income and interest expenses given in Notes 13.1 and 13.2 respectively and disclosed separately, as required by the guidelines issued by the Central Bank of Sri Lanka. 13.3 (a) Net interest income from Sri Lanka Government Securities GROUP BANK 2021 Rs. ’000 2020 Rs. ’000 2021 Rs. ’000 2020 Rs. ’000 46,873,585 31,523,186 46,854,228 31,501,029 Securities purchased under resale agreements 363,247 618,309 363,247 618,309 Financial assets recognised through profit or loss 418,180 662,961 418,180 662,961 Financial assets at amortised cost – Debt and other financial instruments 24,057,370 12,188,371 24,057,370 12,188,371 Financial assets measured at fair value through other comprehensive income 22,034,788 18,053,545 22,015,431 18,031,388 6,184,684 3,499,898 6,201,823 3,507,796 For the year ended December 31, Interest income Less: Interest expense Securities sold under repurchase agreements Net interest income > Notes to the Financial Statements 6,184,684 3,499,898 6,201,823 3,507,796 40,688,901 28,023,288 40,652,405 27,993,233 Commercial Bank of Ceylon PLC Annual Report 2021 13 223
  225. 13 .3 (b) Net interest income from Bangladesh Government Securities GROUP For the year ended December 31, Interest income Securities purchased under resale agreements Financial assets recognised through profit or loss Financial assets at amortised cost – Debt and other financial instruments Less: Interest expense Securities sold under repurchase agreements Net interest income BANK 2021 Rs. ’000 2020 Rs. ’000 2021 Rs. ’000 2020 Rs. ’000 1,419,812 1,823,578 1,419,812 1,823,578 12,151 218,464 12,151 218,464 515,828 1,133,464 515,828 1,133,464 891,833 471,650 891,833 471,650 5,465 16,465 5,465 16,465 5,465 16,465 5,465 16,465 1,414,347 1,807,113 1,414,347 1,807,113 13.3 (c) Net interest income from Maldives Government Securities GROUP For the year ended December 31, Interest income Financial assets at amortised cost – Debt and other financial instruments Net interest income BANK 2021 Rs. ’000 2020 Rs. ’000 2021 Rs. ’000 520,270 303,081 – – 520,270 303,081 – – 520,270 303,081 – – 2020 Rs. ’000 14. Net fee and commission income ACCOUNTING POLICY Fee and commission income and expenses that are integral to the EIR of a financial asset or financial liability are capitalised and included in the measurement of the EIR and recognised in the Income Statement over the expected life of the instrument. Other fee and commission income, including account servicing fees, investment management fees, sales commission, and placement fees are recognised as the related services are performed. If a loan commitment is not expected to result in the drawdown of a loan, then the related loan commitment fees are recognised on a straight-line basis over the commitment period. z The entity can identify each party’s rights regarding the goods or services to be transferred; z The entity can identify the payment terms for the goods or services to be transferred; z The contract has the commercial substance; Other fee and commission expenses relate mainly to transaction and service fees, which are expensed as the services are received. As per SLFRS 15, the Bank adopts principles based five step model for revenue recognition. Accordingly, revenue is recognised only when all of the following criteria are met: z It is probable that the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer. z The parties to the contract have approved The applicability of SLFRS 15 to the Bank is limited for fee and commission income. the contract/s; GROUP For the year ended December 31, Note Fee and commission income Less: Fee and commission expense Net fee and commission income Page No. BANK 2021 Rs. ’000 2020 Rs. ’000 2021 Rs. ’000 2020 Rs. ’000 11,268,543 14.1 224 15,917,337 11,839,689 15,410,402 14.2 225 3,675,143 2,018,014 3,658,939 2,012,138 12,242,194 9,821,675 11,751,463 9,256,405 14.1 Fee and commission income GROUP 13 14 2021 Rs. ’000 For the year ended December 31, Loans and advances related services Credit and debit cards related services Trade and remittances related services 224 Commercial Bank of Ceylon PLC Annual Report 2021 > Notes to the Financial Statements BANK 2020 Rs. ’000 2021 Rs. ’000 2020 Rs. ’000 995,957 861,317 923,230 787,785 6,011,952 3,723,129 6,007,304 3,723,129 5,618,954 4,431,425 5,418,288 4,250,211
  226. GROUP BANK For the year ended December 31 , 2021 Rs. ’000 2020 Rs. ’000 2021 Rs. ’000 2020 Rs. ’000 Deposits related services Guarantees related services Other financial services Total 1,152,602 1,151,909 1,129,868 1,122,747 1,091,690 908,508 1,087,614 900,485 1,046,182 763,401 844,098 484,186 15,917,337 11,839,689 15,410,402 11,268,543 14.2 Fee and commission expense GROUP BANK For the year ended December 31, 2021 Rs. ’000 2020 Rs. ’000 2021 Rs. ’000 2020 Rs. ’000 Loans and advances related services 52,020 48,591 48,802 47,443 Credit and debit cards related services 3,439,222 1,811,962 3,432,095 1,811,962 Trade and remittances related services 63,092 55,456 57,233 50,728 Other financial services Total 120,809 102,005 120,809 102,005 3,675,143 2,018,014 3,658,939 2,012,138 15. Net gains/(losses) from trading ACCOUNTING POLICY “Net gains/(losses) from trading” comprises gains less losses related to trading assets and trading liabilities, and also include all realised and unrealised fair value changes, related capital gains and losses, dividend income from trading assets, and foreign exchange gains/(losses). GROUP For the year ended December 31, Derivative financial instruments Foreign exchange gains/(losses) from banks and other customers Net mark-to-market gains/(losses) BANK 2021 Rs. ’000 2020 Rs. ’000 2021 Rs. ’000 2020 Rs. ’000 1,748,834 977,206 1,748,834 977,206 1,804,014 977,206 1,804,014 977,206 (55,180) – (55,180) – Financial assets recognised through profit or loss – measured at fair value Government Securities (162,829) 557,579 (162,829) 557,579 (583,205) 226,036 (583,205) 226,036 420,376 331,543 420,376 331,543 350,002 343,275 350,002 343,301 Net mark-to-market gains/(losses) 105,673 303,612 105,673 303,612 Net capital gains 207,954 20,468 207,954 20,506 Net mark-to-market gains/(losses) Net capital gains Equities Dividend income Total 36,375 19,195 36,375 19,183 1,936,007 1,878,060 1,936,007 1,878,086 16. Net gains/(losses) from derecognition of financial assets 14 15 16 ACCOUNTING POLICY Net gains/(losses) from derecognition of financial assets comprises all realised gains less losses related to debt instruments measured at FVOCI and financial assets measured at amortised cost. > Notes to the Financial Statements Commercial Bank of Ceylon PLC Annual Report 2021 225
  227. GROUP BANK 2021 Rs . ’000 2020 Rs. ’000 2021 Rs. ’000 2020 Rs. ’000 3,001,574 6,390,197 3,001,574 6,390,197 3,001,574 6,390,197 3,001,574 6,390,197 3,001,574 6,390,197 3,001,574 6,390,197 For the year ended December 31, Financial assets measured at fair value through other comprehensive income Government Securities Net capital gains Total 17. Net other operating income ACCOUNTING POLICY Net other operating income includes foreign exchange gains and losses, dividend income from equity instruments designated at fair value through other comprehensive income, dividend income from group entities, gains/losses on disposal of property, plant and equipment, and rental income. GROUP 2021 Rs. ’000 For the year ended December 31, Gains/(losses) on sale of property, plant and equipment Note Page No. 17.1 226 Gains on revaluation of foreign exchange Recoveries o/a loans written off 5,820 5,164 926 7,395,513 8,785,121 7,361,099 316,277 157,103 Dividend income from other equity securities 273,666 157,103 – – 101,800 98,200 4,111 – 4,111 48,638 Gain on fair valuation of investment properties 5,284 795,214 226 Less: Dividends received from associate transferred to investment account (4,111) Total 10,002,216 17.1 Gains/(losses) on sale of property, plant and equipment ACCOUNTING POLICY The gains or losses on disposal of property, plant and equipment are determined as the difference between the carrying amount of the assets at the time of disposal and the proceeds of disposal, net of incremental disposal costs. This is recognised as an item in “other operating income” in the year in which the Group transfers control of the asset to the buyer. Impairment charges as per SLFRS 9 The Group recognises loss allowances for expected credit loss (ECL) on the following financial instruments that are not measured at FVTPL: z Cash and cash equivalents; z Placements with banks; z Loans and advances to banks; z Loans and advances to other customers; Debt and other financial instruments; Rental and other income is recognised in the Income Statement on an accrual basis. 16 17 18 other comprehensive income; z Loan commitments and financial guarantee contracts. No impairment loss is recognised on equity investments. The assessment of credit risk and the estimation of ECL are required to be unbiased and probability-weighted, and 226 Commercial Bank of Ceylon PLC – 183,579 – 7,770,754 48,398 – 876,609 – 10,094,869 28,419 – 198,522 – 7,844,269 ACCOUNTING POLICY z Debt instruments at fair value through ACCOUNTING POLICY 28,739 – 18. Impairment charges and other losses z Financial assets at amortised cost – 17.2 Rental and other income 2020 Rs. ’000 4,054 Dividend income from associate 17.2 2021 Rs. ’000 8,832,749 Dividend income from subsidiaries Rental and other income BANK 2020 Rs. ’000 Annual Report 2021 > Notes to the Financial Statements should incorporate all available information relevant to the assessment, including information about past events, current conditions and reasonable and supportable forecasts of economic conditions at the reporting date. In addition, the estimation of ECL should take into account the time value of money. Impairment charges on loans and advances to customers For loans and advances above a predefined threshold, the Group individually assesses for significant increase in credit risk (SICR). If a particular loan is individually impaired, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows. If the Group determines that no provision is required under individual impairment, such financial assets are then collectively assessed for any impairments along with the remaining portfolio.
  228. The Group computes ECL using three main components ; a probability of default (PD), a loss given default (LGD) and the exposure at default (EAD) under the collective assessment. These parameters are generally derived from internally developed statistical models and historical data and then adjusted to reflect forward-looking information. z PD – The probability of default represents the likelihood of a borrower defaulting on its financial obligations (as per Note 7.1.12.3) either over the next 12-months (12m PD) or over the remaining lifetime (Lifetime PD) of the obligation. PD estimates are estimates at a certain date and days past due (DPD) is the primary input into the determination of the term structure of PD for exposures. DPD are determined by counting the number of days since the due date. The Group employs statistical models to analyse the data collected and generates estimates of the remaining lifetime PD of exposures and how these are expected to change as a result of the passage of time. z LGD – The loss given default is an estimate of the loss arising in the case where a default occurs at a given time. It is based on the difference between the contractual cash flows due and those that the lender would expect to receive, including from the realisation of any collateral. The Group estimates LGD parameters based on historical recovery rates of claims against defaulted counterparties. They are calculated on a discounted cash flow basis using EIR as the discounting factor. LGD is usually expressed as a percentage of the EAD. z EAD – The exposure at default represents the expected exposure in the event of a default. The Group estimates EAD, taking into account the repayment of principal and interest from the reporting date to the default event together with any expected drawdowns of committed facilities. To calculate EAD for a Stage 1 loan, the Group assesses the possible default events within 12-months. For all other loans, the EAD is considered for default events over the lifetime of the financial instrument. Impairment charges on financial investments Impairment charges on financial investments include ECL on debt instruments at FVOCI and financial assets at amortised cost. The Group does not have historical loss experience on debt instruments at amortised cost and debt instruments at FVOCI. Thus the Group considers PDs published by the external sources (i.e. Bloomberg) > Notes to the Financial Statements LGD for debt securities issued by the government of Sri Lanka in rupees is considered as 0%, LGD for foreign currency denominated securities issued by the government (Sri Lanka Development Bonds (SLDBs) and Sri Lanka Sovereign Bonds(SLSBs)) is considered as 20% and for all other instruments LGD is considered as 45% in accordance with the guideline issued by the Central Bank of Sri Lanka. EAD of a debt instrument is its gross carrying amount. Credit cards and revolving facilities The Group’s product offering includes a variety of corporate and retail overdraft and credit cards facilities. The Group reviews the sanction limits at least annually and therefore has the right to cancel and/or reduce the limits. Therefore, the Group calculates only the 12-month ECL (12m ECL) allowance on these facilities. The EAD is arrived by taking the maximum of either sanction limit adjusted for Credit Conversion Factor (CCF) and the gross carrying amount of the loan (utilised amount). EAD of Stage 3 contracts are limited to the gross carrying amount which is the utilised amount since it is assumed that the Group freeze the limits of those contracts up to the utilised amount. The expected 12-month default probabilities are applied to EAD and multiplied by the expected LGD and discounted by an approximation to the original EIR. Undrawn loan commitments When estimating Life Time ECL (LTECL) for undrawn loan commitments, the Group estimates the expected portion of the loan commitment that will be drawn down over its expected life. The ECL is then based on the present value of the expected shortfalls in cash flows if the loan is drawn down. The expected cash shortfalls are discounted at an approximation to the expected EIR on the loan. For loan commitments and letters of credit, the allowances for ECLs are recognised within “other liabilities”. Financial guarantee contracts The Bank’s liability under each guarantee is measured at the higher of the amount initially recognised less cumulative amortisation recognised in the Income Statement, and the ECL provision. For this purpose, the Bank estimates ECLs based on the present value of the expected payments to reimburse the holder for a credit loss that it incurs. The shortfalls are discounted by the risk-adjusted interest rate relevant to the exposure. The allowances for ECLs related to financial guarantee contracts are recognised within “other liabilities”. Forward-looking information The Group incorporates forward-looking information into both its assessment as to whether the credit risk of an instrument has increased significantly since its initial recognition and its measurement of ECL. The Group also obtained experienced credit judgement from economic experts and Credit and Risk Management Departments to formulate a base case, a best case and a worst case scenario. The base case represents a most-likely outcome and is aligned with information used by the Group for strategic planning and budgeting. The Group has identified and documented key drivers of credit risk both quantitative and qualitative for various portfolio segments. Quantitative economic factors are based on economic data and forecasts published by the CBSL and other reliable sources. Quantitative drivers of credit risk Qualitative drivers of credit risk GDP growth Status of industry business Unemployment rate Regulatory impact Interest rate (AWPLR) Government policies Rate of inflation Average loan to value ratio Exchange rate The calculation of ECLs The Group measures loss allowance at an amount equal to LTECL, except for following, which are measured as 12m ECL. z Loans and advances on which credit risk has not increased significantly since the initial recognition. z Debt instruments that are determined to have low credit risk at the reporting date. The Group considers a debt instrument to have a low credit risk when they have an “investment grade” credit risk rating. ECLs are measured as follows: z Financial assets that are not credit- impaired at the reporting date: as the present value of all cash shortfalls (i.e. the difference between the cash flows due to the entity in accordance with the contract and the cash flows that the Group expects to receive); z Financial assets that are credit-impaired at the reporting date: as the difference between the gross carrying amount and the present value of expected cash flows; z Undrawn loan commitments: as the 18 present value of the difference between the contractual cash flows that are due to the Group if the commitment is drawn down and the cash flows that the Group expects to receive; Commercial Bank of Ceylon PLC Annual Report 2021 227
  229. z Financial guarantee contracts : the expected payments to reimburse the holder less any amounts that the Group expects to recover. Financial assets that are not creditimpaired at the reporting date As described above, the Group calculates 12m ECL allowance based on the expectation of a default occurring in the 12 months following the reporting date. These expected 12-month default probabilities are applied to EAD and multiplied by the economic factor adjustment, expected LGD and discounted by an approximation to the original EIR. When the loan has shown a SICR since origination, the Group records an allowance for LTECLs based on PDs estimated over the lifetime of the instrument. Financial assets that are credit-impaired at the reporting date Impairment allowance on credit-impaired financial assets assessed on individual basis is computed as the difference between the asset’s gross carrying amount and the present value of estimated future cash flows. The expected future cash flows are based on the estimates made by credit risk officers' as at the reporting date, reflecting reasonable and supportable assumptions and projections of future recoveries and expected future receipts of interest. The Group regularly reviews the assumptions for projecting future cash flows. Further, the loans and advances identified as credit impaired in Note 7.1.12.3 will be assessed for impairment with 100% PD. be assessed using modelled outcomes. As a result, the cumulative impairment provision under management overlays as of December 31, 2021 is Rs. 13.260 Bn. (Rs. 5.189 Bn. as at December 31, 2020). Accordingly, the additional impact to the Income Statement for the year ended December 31, 2021, as a result of the aforementioned management overlays is Rs. 8.071 Bn. Collateral valuation The Bank seeks to use collateral, where possible, to mitigate its risks on financial assets. The collateral comes in various forms such as cash, gold, Government Securities, Letters of Credit/Guarantees, real estate, receivables, inventories, other non-financial assets and credit enhancements such as netting agreements, etc. Scenario probability weighting (Bank) 2021 % 2020 % Best case 15.00 15.00 Base case 40.00 40.00 Worst case 45.00 45.00 As at December 31, Write-off of financial assets Loans and debt securities are written off (either partially or in full) when there is no realistic prospect of recovery. This is generally the case when the Bank determines that the borrower does not have assets or sources of income that could generate sufficient cash flows to repay the amounts subject to the write-off. However, financial assets that are written off could still be subject to enforcement activities in order to comply with the Bank’s procedures for recovery of amounts due. Further, the Group is of the view that there was no significant impact of COVID-19 on the value of assets pledged as collateral and therefore no additional adjustment made to ECL in this regard. Refer Note 2.12.5 on page 202 for detailed explanation on significant assumptions and estimates used with the objective of capturing the impact of COVID-19 to ECL provisions . Due to the high level of economic uncertainty that prevailed throughout the year, the Bank used management overlays, such as additional provisions on loans in risk elevated industries and loans subject to moratoriums, and additional provisions by stressing PDs and LGDs, to capture unforeseeable events that cannot GROUP 2021 Rs. ’000 2020 Rs. ’000 2021 Rs. ’000 2020 Rs. ’000 14,947,268 18,124,673 14,553,362 17,865,214 10,190,997 3,291,313 10,137,320 3,287,083 25,138,265 21,415,986 24,690,682 21,152,297 For the year ended December 31, Note Page No. 34.2 (a) & 34.2 (b) 248 Loans and advances to other customers Other financial assets and off-balance sheet credit exposures Total impairment charges Investments in subsidiaries 18.1 & 18.2 229 37.1 255 – Direct write-offs Total Commercial Bank of Ceylon PLC Annual Report 2021 – – 327,855 1,661 3,546 1,661 3,546 25,139,926 21,419,532 24,692,343 21,483,698 18 228 BANK > Notes to the Financial Statements
  230. 18 .1 Impairment charge to the Income Statement – Group 2021 For the year ended December 31, Note Page No. Stage 1 Rs. ’000 Stage 2 Rs. ’000 2020 Stage 3 Rs. ’000 Total Rs. ’000 Stage 1 Rs. ’000 Stage 2 Rs. ’000 Stage 3 Rs. ’000 Total Rs. ’000 Cash and cash equivalents 28.1 240 4,371 – – 4,371 (2,526) – – (2,526) Placements with banks 30.1 242 34,148 – – 34,148 (5,633) – – (5,633) Financial assets at amortised cost – Loans and advances to banks 33.1 246 – – (85) (26) – – (26) Financial assets at amortised cost – Loans and advances to other customers (*) 34.2 (a) 248 3,607,700 4,572,554 14,947,268 3,863,356 Financial assets at amortised cost – Debt and other financial instruments 35.1 (a) 250 3,576,138 – – 3,576,138 1,685,968 – – 1,685,968 Financial assets measured at fair value through other comprehensive income 36.2 252 3,333,815 – – 3,333,815 814,141 – – 814,141 Contingent liabilities and commitments 58.3 (a) 296 Total (85) 6,767,014 551,897 570,466 11,107,984 7,337,480 2,120,247 3,242,610 767,211 6,692,801 25,138,265 7,122,491 3,901,554 10,359,763 18,124,673 57,245 (25,067) 799,389 3,958,799 10,334,696 21,415,986 (*) During the year 2021, the Bank re-evaluated stage assessment criteria for individually impaired facilities and made the necessary changes to reflect the actual risk associated with customers subjected to individual impairment. 18.2 Impairment charge to the Income Statement – Bank 2021 For the year ended December 31, Stage 1 Rs. ’000 Stage 2 Rs. ’000 2020 Stage 3 Rs. ’000 Total Rs. ’000 Stage 1 Rs. ’000 Stage 2 Rs. ’000 Stage 3 Rs. ’000 Total Rs. ’000 Note Page No. Cash and cash equivalents 28.1 240 4,313 – – 4,313 (2,526) – – (2,526) Placements with banks 30.1 242 2,823 – – 2,823 (5,651) – – (5,651) Financial assets at amortised cost – Loans and advances to banks 33.1 246 – – (26) – – (26) Financial assets at amortised cost – Loans and advances to other customers (*) 34.2 (b) 248 3,552,303 Financial assets at amortised cost – Debt and other financial instruments 35.1 (b) 250 3,558,879 – – 3,558,879 1,681,829 – – 1,681,829 Financial assets measured at fair value through other comprehensive income 36.2 252 3,333,815 – – 3,333,815 814,141 – – 814,141 Contingent liabilities and commitments 58.3 (b) 296 546,862 570,466 3,237,575 767,138 10,998,910 7,299,615 6,392,157 24,690,682 7,110,912 Total (85) 6,729,149 (85) 4,271,910 14,553,362 2,120,247 3,856,007 3,925,463 10,083,744 17,865,214 57,245 (25,067) 799,316 3,982,708 10,058,677 21,152,297 (*) During the year 2021, the Bank re-evaluated stage assessment criteria for individually impaired facilities and made the necessary changes to reflect the actual risk associated with customers subjected to individual impairment. 18 > Notes to the Financial Statements Commercial Bank of Ceylon PLC Annual Report 2021 229
  231. 19 . Personnel expenses ACCOUNTING POLICY See Note 7.8 on pages 216 to 218. GROUP 2021 Rs. ’000 2020 Rs. ’000 2021 Rs. ’000 2020 Rs. ’000 230 13,162,309 11,522,602 12,772,557 11,174,423 230 1,952,582 1,937,810 1,906,726 1,884,067 1,870,673 1,702,824 1,834,810 1,673,272 81,909 234,986 71,916 210,795 For the year ended December 31, Note Page No. Salary and bonus 19.1 Pension costs 19.1 Contributions to defined contribution/benefit plans – Funded schemes Contributions to defined benefit plans – Unfunded schemes BANK 49.2 (c) & 49.3 (c) 278 & 279 Equity-settled share-based payment expense 19.2 & 56.5 230 & 294 Other expenses 19.3 230 Total 41,972 112,203 41,972 112,203 1,642,349 1,420,133 1,600,062 1,393,306 16,799,212 14,992,748 16,321,317 14,563,999 19.1 Salary, bonus, and pension costs 19.2 Share-based payment 19.3 Other expenses Salary, bonus, and contributions to defined contribution/benefit plans, reported above also include amounts paid to and contributions made on behalf of Executive Directors. The Bank has an equity-settled share-based compensation plans, the details of which are given in Note 53 on pages 288 to 291. This includes expenses such as overtime payments, leave encashment benefits, medical and hospitalisation charges, expenses incurred on staff training/ recruitment and staff welfare activities, etc. 20. Depreciation and amortisation ACCOUNTING POLICY Depreciation Depreciation is calculated to write-off the cost of items of property, plant and equipment less their estimated residual values using the straight-line method over their estimated useful lives and is recognised in the Income Statement. Freehold land is not depreciated. Right-ofuse assets are depreciated over the useful lives of the assets. However, if there is no reasonable certainty that the Group will obtain the ownership by the end of the lease term, the assets are depreciated over the shorter of the estimated useful lives and the lease terms. The estimated useful lives of the property, plant and equipment of the Bank as at December 31, 2021 are as follows: Class of asset Depreciation percentage per annum Period (years) 2.5 40 20 5 20 5 Freehold and leasehold buildings Motor vehicles Computer equipment Office equipment, furniture, and fixtures 19 20 230 Commercial Bank of Ceylon PLC Office equipment Office interior work Furniture and fittings 20 5 20 5 10 10 The above rates are compatible with the rates used by all Group entities, and these rates have not been changed during the year. The depreciation rates are determined separately for each significant part of an item of property, plant and equipment and depreciation commences when it is available for use, i.e., when it is in the location and condition necessary for it to be capable of operating in the manner intended by the Management. Depreciation of an asset ceases at the earlier of the date that the asset is classified as held for sale or the date that the asset is derecognised. All classes of property, plant and equipment together with the reconciliation of carrying amounts and accumulated depreciation at the beginning and at the end of the year together with other relevant information are given in Note 39 on pages 257 to 268. Depreciation methods, useful lives, and residual values are reassessed at each Annual Report 2021 > Notes to the Financial Statements reporting date and adjusted, if required. Amortisation of intangible assets Intangible assets are amortised using the straight-line method to write down the cost over its estimated useful economic lives from the date on which it is available for use, at the rates specified below: Amortisation percentage per annum Period (years) Computer software 20 5 Trademarks 20 5 Class of asset The above rates are compatible with the rates used by all Group entities, and these rates have not been changed during the year. The unamortised balances of intangible assets with finite lives are reviewed for impairment whenever there is an indication for impairment and recognised in the Income Statement to the extent that they are no longer probable of being recovered from the expected future benefits. Amortisation method, useful lives, and residual values are reviewed at each reporting date and adjusted, if required.
  232. GROUP 2021 Rs . ’000 2020 Rs. ’000 2021 Rs. ’000 2020 Rs. ’000 39.1 – 39.4 258 – 261 1,661,967 1,592,636 1,528,123 1,459,513 39.1 – 39.4 258 – 261 1,241,441 1,199,104 1,381,543 1,271,927 316,658 310,946 268,962 257,591 For the year ended December 31, Note Depreciation of property, plant and equipment Depreciation of right-of-use assets Amortisation of computer software Amortisation of trademarks Total BANK 41.1 Page No. 271 – 3,220,066 – 9 3,102,695 3,178,628 – 2,989,031 21. Other operating expenses ACCOUNTING POLICY These expenses are recognised in the Income Statement on the basis of a direct association between the cost incurred and the earning of specific items of income. All expenses incurred in running the business and in maintaining the property, plant and equipment in a state of efficiency are charged to the Income Statement. GROUP Page No. 2021 Rs. ’000 2020 Rs. ’000 2021 Rs. ’000 2020 Rs. ’000 231 86,178 81,117 54,243 53,249 41,784 34,298 24,724 23,530 24,649 20,140 12,516 11,500 8,562 7,725 8,562 7,600 For the year ended December 31, Note Directors’ emoluments 21.1 Auditors’ remuneration Audit fees and expenses Audit-related fees and expenses Non-audit fees and expenses Professional and legal expenses Deposit insurance premium paid to the Central Banks Donations including contribution made to the CSR Trust Fund Establishment expenses Maintenance of property, plant, and equipment Loss on fair valuation of investment properties 40 Loss on revaluation of land & buildings 39.1 – 39.4 BANK 269 258 – 261 Office administration expenses Total 8,573 6,433 3,646 4,430 1,060,863 834,415 1,464,852 1,197,049 1,216,151 977,846 1,207,906 975,824 133,158 96,925 133,158 96,855 1,930,171 1,644,397 1,761,259 1,482,800 2,237,536 1,797,222 2,288,815 1,814,939 – – – 12,096 – 39,872 – 39,872 2,932,620 2,648,982 2,456,853 2,202,818 9,638,461 8,167,170 9,391,810 7,886,936 21.1 Directors’ emoluments Directors' emoluments represent the fees paid to both Executive and Non-Executive Directors of the Group and the Bank. 22. Value Added Tax on financial services ACCOUNTING POLICY Refer Notes 9.4 on page 220. GROUP For the year ended December 31, Value Added Tax (*) Total Note Page No. 9.4 220 BANK 2021 Rs. ’000 2020 Rs. ’000 2021 Rs. ’000 2020 Rs. ’000 5,845,230 4,531,381 5,809,224 4,505,322 5,845,230 4,531,381 5,809,224 4,505,322 20 21 22 (*) As per provisions of the Government Bill issued on January 07, 2022 (to be passed in parliament for enactment) it has been proposed to increase the VAT financial services payable by 3% and will be effective from January 01, 2022. > Notes to the Financial Statements Commercial Bank of Ceylon PLC Annual Report 2021 231
  233. 23 . Income tax expense ACCOUNTING POLICY Income tax expense comprises of current and deferred tax expenses. Income tax expense is recognised in the Income Statement, except to the extent it relates to items recognised directly in Equity or in OCI. the effective tax rates and a reconciliation between the profit before tax and tax expense, is computed as required by the Sri Lanka Accounting Standard – LKAS 12 on “Income Taxes”. Current tax “Current tax” comprises the best estimate of expected tax payable to or recoverable from taxation authorities for the year and any adjustment to the tax payable or recoverable in respect of previous years. It is measured using tax rates enacted or substantively enacted, as at the reporting date in countries where the group operates. “Current tax” also include any tax expense arising from dividend income. Deferred tax Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax liability is not recognised for: Accordingly, provision for taxation is made on the basis of the accounting profit for the year, as adjusted for taxation purposes, in accordance with the relevant statutes of tax jurisdictions in countries where the group operates. Major components of tax expense, z temporary differences on the initial recognition of goodwill, assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss; z temporary differences related to investments in subsidiaries to the extent that it is probable that they will not reverse in the foreseeable future. Deferred tax assets are recognised for unused tax losses, unused tax credits and deductible temporary differences to the extent that it is probable that future taxable profits will be available, against which they can be used. Deferred tax assets are reassessed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Deferred tax asset or liability is measured at the tax rates that are expected to be applied to temporary differences when they reverse, using tax rates enacted or substantively enacted as at the reporting date. The measurement of deferred tax reflects the tax consequences to the Group as at the reporting date in relation to difference in carrying amount of its assets and liabilities recorded in the Statement of Financial Position and the tax base. Entity-wise breakup of income tax expense in the Income Statement is as follows: Applicable tax rate For the year ended December 31, Note Page No. 2021 % 2020 % Current year tax expense 2021 Rs. ’000 2020 Rs. ’000 2021 Rs. ’000 2020 Rs. ’000 12,998,493 10,178,040 12,661,181 9,866,955 6,547,171 24 28 9,690,464 6,547,171 9,690,464 Income tax expense of Off-shore Banking Centre 24 28 265,884 899,668 265,884 899,668 Income tax expense of Bangladesh operation 40 40 2,424,292 2,144,365 2,424,292 2,144,365 Profit remittance tax of Bangladesh operation 20 20 280,541 275,751 280,541 275,751 Income tax expense of Commercial Development Company PLC 24 28 82,943 56,035 – – Income tax expense of CBC Tech Solutions Limited 24 28 4,787 38,155 – – Income tax expense of CBC Finance Limited 24 28 82,737 83,977 – – Income tax expense of Commercial Bank of Maldives Private Limited 25 25 160,549 109,076 – – Income tax expense of Commex Sri Lanka S.R.L. – Italy 24 24 – – – – Income tax expense of CBC Myanmar Micro Finance Company Limited 25 25 – 6,714 – – 24 28 Under/(Over) provision 48 276 Effect of change in tax rates 6,296 (1,477,813) (1,122,059) In respect of prior years Deferred tax reversal 42.1 272 Effect of change in tax rates 17,128 (121,298) – – (1,419,755) (1,063,834) – (113,565) – (355,754) (121,298) (355,921) (113,565) (2,853,644) (2,623,679) (2,846,274) (2,615,567) 760,752 Origination and reversal of temporary differences – 733,699 – (3,614,396) (2,623,679) (3,579,973) (2,615,567) 8,667,036 7,433,063 8,395,152 7,137,823 Effective tax rate (including deferred tax) (%) 26.30 30.31 26.23 30.36 Effective tax rate (excluding deferred tax) (%) 34.96 41.01 35.13 41.48 Total 232 BANK Income tax expense of Domestic Banking Unit Income tax expense of Commercial Insurance Brokers Private Limited 23 GROUP Commercial Bank of Ceylon PLC Annual Report 2021 > Notes to the Financial Statements
  234. 23 .1 Reconciliation of the accounting profit to income tax expense A reconciliation between taxable income and the accounting profit multiplied by the statutory tax rates is given below: GROUP For the year ended December 31, Note Page No. Accounting profit before tax from operations BANK 2021 2020 2021 2020 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 32,957,324 24,519,860 32,001,203 23,511,312 Tax effect at the statutory income tax rate 9,326,948 7,591,619 9,003,255 7,300,199 Domestic banking operation of the Bank 6,122,792 4,780,070 6,122,792 4,780,070 257,336 209,320 257,336 209,320 2,623,127 2,310,809 2,623,127 2,310,809 Off-shore banking operation of the Bank Bangladesh operation of the Bank Subsidiaries 323,693 – 291,420 – Tax effect of exempt income (2,213,112) (1,528,341) (2,159,029) (1,528,341) Tax effect of non-deductible expenses 10,697,039 10,912,337 10,476,419 10,683,266 Tax effect of deductible expenses (5,092,923) (7,070,526) (4,940,005) (6,861,120) Qualifying payments – Profit remittance tax of Bangladesh operation – (2,800) 280,541 280,541 275,751 (2,800) 275,751 Under/(over) provision of taxes in respect of prior years 48 276 (1,477,813) (121,298) (1,419,755) (113,565) Deferred tax reversal 42.1 272 (2,853,644) (2,623,679) (2,846,274) (2,615,567) 8,667,036 7,433,063 8,395,152 7,137,823 Income tax expense reported in the Income Statement at the effective income tax rate 24. Earnings Per Share (EPS) ACCOUNTING POLICY The Group computes basic and diluted EPS for its ordinary shares. Basic EPS is calculated by dividing the profit or loss that is attributable to ordinary shareholders of the Group by the weighted average number of ordinary shares outstanding during the period. Diluted EPS is calculated by dividing the profit or loss that is attributable to ordinary shareholders of the Group by the weighted average number of ordinary shares outstanding, adjusted for the effects of all potentially dilutive ordinary shares, which comprise share options granted to employees under Employee Share Option Plans (ESOP). Details of Basic and Diluted EPS are given below: 24.1 Basic and diluted earnings per ordinary share GROUP Note Page No. BANK 2021 2020 2021 2020 24,062,469 16,939,950 23,606,051 16,373,489 Amount used as the numerator: Profit for the year attributable to equity holders of the Bank (Rs. ’000) Number of ordinary shares used as the denominator: Weighted average number of ordinary shares for Basic EPS 24.2 234 1,194,132,787 1,105,618,050 1,194,132,787 1,105,618,050 Weighted average number of ordinary shares for diluted EPS 24.2 234 1,194,132,787 1,105,618,050 1,194,132,787 1,105,618,050 Basic earnings per ordinary share (Rs.) 20.15 15.32 19.77 14.81 Diluted earnings per ordinary share (Rs.) 20.15 15.32 19.77 14.81 23 24 > Notes to the Financial Statements Commercial Bank of Ceylon PLC Annual Report 2021 233
  235. 24 .2 Weighted average number of ordinary shares for basic and diluted earnings per share Outstanding number of shares Note Number of shares in issue as at January 1, Add: Number of shares satisfied in the form of issue and allotment of new shares from final dividend for 2019 52.1 288 Add : Number of shares satisfied in the form of issue and allotment of new shares from first & final dividend for 2020 52.1 288 Add: Number of shares issued to IFC parties (Private placement) 52.1 288 2020 2021 2020 1,166,905,638 1,027,506,586 1,166,905,638 1,027,506,586 – 52.1 288 Add: Number of shares issued under ESOP-2019 52.1 288 Weighted average number of ordinary shares for basic earnings per ordinary share calculation - 24,201,866 26,841,407 – 1,166,905,638 – 1,194,221,299 – 27,068,191 1,105,618,050 – – 385,742 – 1,166,905,638 26,841,407 1,193,747,045 – 474,254 24,201,866 26,841,407 – 115,197,186 1,193,747,045 Add: Number of shares issued under ESOP-2015 Weighted average number of shares 2021 Page No. – 1,194,132,787 1,105,618,050 Add: Bonus element on number of outstanding options under ESOP 2015 as at the year end – – – – Add: Bonus element on number of outstanding options under ESOP 2019 as at the year end – – – – Weighted average number of ordinary shares for diluted earnings per ordinary share calculation (*) 1,194,221,299 1,166,905,638 1,194,132,787 1,105,618,050 (*) The weighted average number of ordinary shares for Basic EPS and for diluted EPS are equal, due to the market price of the ordinary voting share being below the offer price of the ESOPs as at December 31, 2021 and December 31, 2020. 25. Dividends on ordinary shares ACCOUNTING POLICY Refer Note 7.7 on page 216. GROUP AND BANK Cash dividend 2021 Rs. ’000 Note Page No. Second interim dividend 25.1 234 – Final dividend 25.1 234 – 25.2 234 Scrip dividend 2020 Rs. ’000 2021 Rs. ’000 Total 2020 Rs. ’000 2021 Rs. ’000 2020 Rs. ’000 Dividends for 2019 (Paid in 2020) 3,082,520 – – – – 2,055,014 – 3,082,520 – 2,055,014 Dividends for 2020 (Paid in 2021) First and Final dividend 5,253,070 Total amount paid during the year 234 25.1 Dividends for 2019 (Paid in 2020) 25.2 Dividends for 2020 (Paid in 2021) The Board of Directors of the Bank declared a second interim dividend of Rs. 3.00 per share in cash on January 31, 2020, for both voting and non-voting ordinary shareholders of the Bank for the year ended December 31, 2019, and this dividend was paid on February 24, 2020. It is pertinent to mention that although the Bank has been declaring and paying interim dividends in the form of cash dividends in the past, the Bank did not declare cash dividends during the year 2020 (for the year ended December 31, 2020), in conformity with the restrictions imposed by the Central Bank of Sri Lanka on payment of interim cash dividends for the financial year 2020, as per instructions issued via the Banking Act Direction No 03 of 2020, dated May 13, 2020, on “Restrictions on Discretionary Payments of Licensed Banks”. Commercial Bank of Ceylon PLC 2,334,698 – 7,587,768 7,587,768 Further, the Board of Directors of the Bank recommended and paid a final dividend of Rs. 2.00 per share which was satisfied in the form of issue and allotment of new shares for both voting and non-voting ordinary shareholders' of the Bank for the year ended December 31, 2019, and these new shares were listed on July 06, 2020. 24 25 – Annual Report 2021 > Notes to the Financial Statements – 5,137,534 The Board of Directors of the Bank recommended and paid a first and final dividend of Rs. 6.50 per share which was satisfied in the form of Rs. 4.50 in cash (Paid on April 5, 2021 and April 9, 2021) and Rs. 2.00 per share in the form of issue and allotment of new shares for both voting and non-voting ordinary shares of the Bank for the year ended December 31, 2020, and these new shares were listed on April 9, 2021. This dividend was recommended and paid after the Financial Statements for the year 2020 were finalised and audited by the
  236. Bank 's external auditors and the payment is in compliance with the instructions given in the Banking Act Direction No 01 of 2021, dated January 19, 2021, on “Restrictions on Discretionary Payments of Licensed Banks”. 25.3 Dividends for 2021 (To be paid in 2022) The Bank did not declare cash dividends during the year 2021 (for the year ended December 31, 2021), in conformity with the restrictions imposed by the Central Bank of Sri Lanka on payment of cash dividends for the financial year 2021, as per instructions given in the Banking Act Direction No 11 of 2021, dated July 13, 2021, on “Restrictions on Discretionary Payments of Licensed Banks”. Since the Financial Statements for the year 2021 are finalised and audited by the Bank's external auditors, the Board of Directors of the Bank has now recommended the payment of a first and final dividend of Rs. 7.50 per share to be paid and satisfied in the form of Rs. 4.50 per share in cash and Rs. 3.00 per share in the form of issue and allotment of new shares for both voting and non-voting ordinary shareholders' of the Bank for the year ended December 31, 2021. The above first and final dividend recommended by the Board of Directors is to be approved at the forthcoming Annual General Meeting to be held on March 30, 2022. 26. Classification of financial assets and financial liabilities The tables below provide a reconciliation between line items in the Statement of Financial Position and categories of financial assets and financial liabilities of the Group and the Bank: 26.1 Classification of financial assets and financial liabilities – Group As at December 31, 2021 Financial instruments recognised through profit or loss (FVTPL) Note Page No. Rs. ’000 Financial instruments at amortised cost (AC) Rs. ’000 Financial instruments at fair value through other comprehensive income (FVOCI) Rs. ’000 As at December 31, 2020 Total Financial instruments recognised through profit or loss (FVTPL) Rs. ’000 Rs. ’000 Total Financial Financial instruments instruments at fair value at amortised cost (AC) through other comprehensive income (FVOCI) Rs. ’000 Rs. ’000 Rs. ’000 Financial assets Cash and cash equivalents 28 240 – 69,335,379 – 69,335,379 – 51,255,030 – 51,255,030 Balances with Central Banks 29 241 – 56,777,465 – 56,777,465 – 115,358,732 – 115,358,732 Placements with banks 30 241 – 12,498,709 – 12,498,709 – 16,421,867 – 16,421,867 – 3,000,490 – 3,000,490 – Securities purchased under resale agreements – – – Derivative financial assets 31 242 3,245,120 – – 3,245,120 2,636,717 – – 2,636,717 Financial assets recognised through profit or loss – Measured at fair value 32 242 23,436,123 – – 23,436,123 35,189,471 – – 35,189,471 Financial assets at amortised cost – Loans and advances to banks – – 33 245 – Financial assets at amortised cost – Loans and advances to other 34 customers 246 – 1,029,584,075 – Financial assets at amortised cost – Debt and other financial instruments 35 250 – 385,390,598 – Financial assets measured at fair value through other comprehensive income 36 251 Total financial assets – – 26,681,243 1,556,586,716 335,953,802 – – 779,705 – 779,705 1,029,584,075 – 909,829,172 – 909,829,172 385,390,598 – 302,059,529 – 302,059,529 335,953,802 335,953,802 1,919,221,761 – 37,826,188 278,716,794 278,716,794 1,395,704,035 278,716,794 – 1,712,247,017 Financial liabilities Due to banks 44 274 Derivative financial liabilities 45 275 Securities sold under repurchase agreements – – 73,801,195 – 2,092,198 – 1,501,262 88,248,056 – – 88,248,056 – 1,501,262 151,424,854 – 151,424,854 – 91,411,522 – 91,411,522 275 – 1,472,640,456 – 1,472,640,456 – 1,286,616,399 – 1,286,616,399 47 276 – 32,587,051 – 32,587,051 – 54,555,933 – 54,555,933 51 286 – 38,303,466 – 38,303,466 2,092,198 1,768,757,022 – 1,770,849,220 46 Financial liabilities at amortised cost – Other borrowings Subordinated liabilities > Notes to the Financial Statements 2,092,198 73,801,195 – Financial liabilities at amortised cost – Due to depositors Total financial liabilities – – 1,501,262 38,247,138 – 38,247,138 1,559,079,048 – 1,560,580,310 Commercial Bank of Ceylon PLC Annual Report 2021 25 26 235
  237. 26 .2 Classification of financial assets and financial liabilities – Bank As at December 31, 2021 Financial instruments at amortised cost (AC) Financial instruments recognised through profit or loss (FVTPL) Rs. ’000 Note Page No. Rs. ’000 Financial instruments at fair value through other comprehensive income (FVOCI) Rs. ’000 As at December 31, 2020 Total Financial instruments recognised through profit or loss (FVTPL) Financial instruments at amortised cost (AC) Financial instruments at fair value through other comprehensive income (FVOCI) Total Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Financial assets Cash and cash equivalents 28 240 – 68,078,076 – 68,078,076 – 50,250,627 – 50,250,627 Balances with Central Banks 29 241 – 52,897,908 – 52,897,908 – 110,971,105 – 110,971,105 Placements with banks 30 241 – 11,584,952 – 11,584,952 – 15,938,982 – 15,938,982 – 3,000,490 – 3,000,490 – – 31 242 3,245,120 – – 3,245,120 2,636,717 – – 2,636,717 Financial assets recognised through profit or loss – 32 Measured at fair value 242 23,436,123 – – 23,436,123 35,189,471 – – 35,189,471 Financial assets at amortised cost – Loans and 33 advances to banks 245 – – – Financial assets at amortised cost – Loans and advances to other customers Securities purchased under resale agreements Derivative financial assets – – – – 779,705 – 779,705 34 246 – 1,014,618,580 – 1,014,618,580 – 896,845,453 – 896,845,453 Financial assets at amortised cost – Debt and other financial instruments 35 250 – 369,417,889 – 369,417,889 – 292,727,566 – 292,727,566 Financial assets measured at fair value through other 36 comprehensive income 251 – Total financial assets 26,681,243 – 1,519,597,895 335,463,338 335,463,338 335,463,338 1,881,742,476 – 37,826,188 – 1,367,513,438 278,461,369 278,461,369 278,461,369 1,683,800,995 Financial liabilities Due to banks 44 274 Derivative financial liabilities 45 275 – 73,777,420 2,092,198 Securities sold under repurchase agreements – – 73,777,420 – 2,092,198 – 1,501,262 87,451,306 – – 87,451,306 – 1,501,262 – 151,911,842 – 151,911,842 – 91,437,612 – 91,437,612 275 – 1,443,093,453 – 1,443,093,453 – 1,265,965,918 – 1,265,965,918 47 276 – 32,587,051 – 32,587,051 – 54,555,933 – 54,555,933 51 286 – 38,303,466 – 38,303,466 – 38,247,138 – 38,247,138 1,739,673,232 – 1,741,765,430 1,537,657,907 – 1,539,159,169 Financial liabilities at amortised cost – Due to depositors 46 Financial liabilities at amortised cost – Other borrowings Subordinated liabilities Total financial liabilities 2,092,198 1,501,262 27. Fair value measurement ACCOUNTING POLICY The Group measures the fair value using the following fair value hierarchy, which reflects the significance of the inputs used in making the measurement. An analysis of fair value measurement of financial and nonfinancial assets and liabilities is provided below: 26 27 Level 1 Inputs that are quoted market prices (unadjusted) in an active market for identical instruments. When available, the Group measures 236 Commercial Bank of Ceylon PLC the fair value of an instrument using active quoted prices or dealer price quotations (assets and long positions are measured at a bid price; liabilities and short positions are measured at an ask price), without any deduction for transaction costs. A market is regarded as active if transactions for asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. Level 2 Inputs other than quoted prices included Annual Report 2021 > Notes to the Financial Statements within Level 1 that are observable either directly (i.e., as prices) or indirectly (i.e., derived from prices). This category includes instruments valued using; (a) quoted prices in active markets for similar instruments, (b) quoted prices for identical or similar instruments in markets that are considered to be less active, or (c) other valuation techniques in which almost all significant inputs are directly or indirectly observable from market data.
  238. Level 3 Inputs that are unobservable . This category includes all instruments for which the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument’s valuation. This category includes instruments that are valued based on quoted prices of similar instruments for which significant unobservable adjustments or assumptions are required to reflect difference between the instruments. Valuation techniques include net present value and discounted cash flow models, comparison with similar instruments for which observable market prices exist. Assumptions and inputs used in valuation techniques include risk-free and benchmark interest rates, risk premiums in estimating discount rates, bond and equity prices, foreign exchange rates, expected price volatilities and corrections. Observable prices or model inputs such as market interest rates are usually available in the market for listed equity securities and Government Securities such as Treasury Bills and Treasury Bonds. Availability of observable prices and model inputs reduces the need for Management judgement and estimation while reducing uncertainty associated in determining the fair values. Models are adjusted to reflect the spread for bid and ask prices to reflect costs to close out positions, credit and debit valuation adjustments, liquidity spread and limitations in the models. Also, profit or loss calculated when such financial instruments are first recorded (“Day 1” profit or loss) is deferred and recognised only when the inputs become observable or on derecognition of the instrument. 27.1 Assets and liabilities measured at fair value and fair value hierarchy The following table provides an analysis of assets and liabilities measured at fair value as at the reporting date, by the level in the fair value hierarchy into which the fair value measurement is categorised. These amounts were based on the values recognised in the Statement of Financial Position: GROUP As at December 31, 2021 Level 1 Rs. ’000 Level 2 Rs. ’000 BANK Level 3 Rs. ’000 Total Rs. ’000 Level 1 Rs. ’000 Level 2 Rs. ’000 15,805,471 15,805,471 – – Note Page No. 39 257 – – 40 269 – – 72,400 72,400 – – – – 15,877,871 15,877,871 – – Level 3 Rs. ’000 Total Rs. ’000 15,008,982 15,008,982 Non-financial assets Property, plant and equipment Land and buildings Investment properties Total non-financial assets at fair value – 15,008,982 – 15,008,982 Financial assets Derivative financial assets 31 242 Currency swaps – 2,672,049 – 2,672,049 – 2,672,049 – 2,672,049 Forward contracts – 572,517 – 572,517 – 572,517 – 572,517 Spot contracts – 170 – 170 – 170 – 170 Currency options – 384 – 384 – 384 – 384 Financial assets recognised through profit or loss – measured at fair value 32 242 Government Securities Equity shares Financial assets measured at fair value through other comprehensive income 36 21,839,251 – – 21,839,251 21,839,251 – – 21,839,251 1,596,872 – – 1,596,872 1,596,872 – – 1,596,872 – 340,513,595 – 340,023,255 251 279,331,825 61,181,770 Government Securities 396,346 Equity securities – 53,510 449,856 Total financial assets at fair value 303,164,294 64,426,890 53,510 367,644,694 Total assets at fair value 303,164,294 64,426,890 15,931,381 383,522,565 278,841,485 61,181,770 396,346 – 302,673,954 64,426,890 53,386 449,732 53,386 367,154,230 302,673,954 64,426,890 15,062,368 382,163,212 Financial liabilities Derivative financial liabilities 45 275 Currency swaps – 1,698,238 – 1,698,238 – 1,698,238 – 1,698,238 Interest rate swaps – 129,315 – 129,315 – 129,315 – 129,315 Forward contracts – 258,788 – 258,788 – 258,788 – 258,788 Spot contracts – 5,473 – 5,473 – 5,473 – 5,473 Currency options – 384 – 384 – 384 – 384 – 2,092,198 – 2,092,198 – 2,092,198 – 2,092,198 Total liabilities at fair value > Notes to the Financial Statements Commercial Bank of Ceylon PLC Annual Report 2021 27 237
  239. GROUP Level 1 Rs . ’000 As at December 31, 2020 Level 2 Rs. ’000 BANK Level 3 Rs. ’000 Total Rs. ’000 15,417,319 15,417,319 Level 1 Rs. ’000 Level 2 Rs. ’000 Note Page No. 39 257 – – 40 269 – – 67,116 67,116 – – – – 15,484,435 15,484,435 – – Level 3 Rs. ’000 Total Rs. ’000 14,616,368 14,616,368 Non-financial assets Property, plant and equipment Land and buildings Investment properties Total non-financial assets at fair value – – – 14,616,368 – 14,616,368 Financial assets Derivative financial assets 31 242 Currency swaps – 1,880,510 – 1,880,510 – 1,880,510 – 1,880,510 Forward contracts – 741,521 – 741,521 – 741,521 – 741,521 Spot contracts – 9,872 – 9,872 – 9,872 – 9,872 Currency options – 4,814 – 4,814 – 4,814 – 4,814 Financial assets recognised through profit or loss – measured at fair value 32 242 Government Securities Equity shares Financial assets measured at fair value through other comprehensive income 36 33,867,593 – – 33,867,593 33,867,593 – – 33,867,593 1,321,878 – – 1,321,878 1,321,878 – – 1,321,878 – – 279,845,258 251 Government Securities 223,589,375 Equity securities 239,773 56,511,184 – 280,100,559 223,334,074 52,296 292,069 239,773 56,511,184 – 52,172 291,945 Total financial assets at fair value 259,018,619 59,147,901 52,296 318,218,816 258,763,318 59,147,901 52,172 317,963,391 Total assets at fair value 259,018,619 59,147,901 15,536,731 333,703,251 258,763,318 59,147,901 14,668,540 332,579,759 Financial liabilities Derivative financial liabilities 45 275 Currency swaps – 1,132,513 – 1,132,513 – 1,132,513 – 1,132,513 Interest rate swaps – 142,376 – 142,376 – 142,376 – 142,376 Forward contracts – 216,709 – 216,709 – 216,709 – 216,709 Spot contracts – 5,016 – 5,016 – 5,016 – 5,016 Currency options – 4,648 – 4,648 – 4,648 – 4,648 – 1,501,262 – 1,501,262 – 1,501,262 – 1,501,262 Total liabilities at fair value 27.2 Level 3 fair value measurement Property, plant and equipment (PPE) Reconciliation from the beginning balance to the ending balance for the land and buildings in the Level 3 of the fair value hierarchy is given in Notes 39.1 to 39.4 on pages 258 to 261. Reconciliation of Revaluation Reserve pertaining to land and buildings categorised as Level 3 in the fair value hierarchy is given in the Statement of Changes in Equity on pages 190 to 197. Note 39.5 (b) on page 263 provides information on significant unobservable inputs used as at December 31, 2020 in measuring fair value of land and buildings categorised as Level 3 in the fair value hierarchy. 27 Note 39.5 (c) on page 267 provides 238 Commercial Bank of Ceylon PLC details of valuation techniques used and sensitivity of fair value measurement to changes in significant unobservable inputs. Investment properties Reconciliation from the beginning balance to the ending balance for the investment properties in the Level 3 of the fair value hierarchy is available in Note 40 on page 269. Note 40.1 (b) on page 269 provides information on significant unobservable inputs used as at December 31, 2021 in measuring fair value of investment properties categorised as level 3 in the fair value hierarchy. Note 40.1 (c) on page 270 provides details of valuation techniques used and the sensitivity of fair value measurement to changes in significant unobservable inputs. Annual Report 2021 > Notes to the Financial Statements 27.3 Financial instruments not measured at fair value and fair value hierarchy Methodologies and assumptions used to determine fair value of financial instruments which are not already recorded at fair value in the Statement of Financial Position are as follows: Fixed rate financial instruments The fair value of fixed rate financial assets and