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Commercial Bank of Ceylon PLC - Annual Report 2017

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Commercial Bank of Ceylon PLC - Annual Report 2017

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

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  1. Banking on the Future Commercial Bank of Ceylon PLC Annual Report 2017
  2. Banking on the future The future will be defined by the choices we make today . But as we said last year, there are hints and signs that grow ever stronger to indicate the sort of world that lies ahead for the banking industry. It is fairly certain that the age unfolding will have at its centre – the customer...without whom we will cease to be, the power of evolving technology, the eclecticism of the innovative mind and an empathetic heart keeping us always on point. Your Bank is fully focussed on such a horizon...in fact you could say we’re banking on it!
  3. TRANSCENDING THE MEDIUM This Report is available in four mediums to cater to the different needs of our various readers . A limited number of printed annual reports have been produced to be despatched to those who have requested for the same. Readers who prefer the ease of accessing this Annual Report online through either a computer or mobile device can access our Online Annual Report. Snapshot A soft copy (PDF) version of the report is also available in CD (compact disk) format for those who would like to maintain an easily-portable digital version of the Report. The Annual Snapshot contains a concise summary of the Bank’s performance during the year under review. Brief Overview PDF Version on CD Reference to other pages within the report Narrative Reference to further reading online Reference to specific GRI Standard indicators on each page 004 006 008 010 012 CONTENTS Introduction to the 49th Annual Report About the Bank Our Journey Highlights – Financial and Non-Financial Performance Highlights 015 Strategic Report 016 020 024 028 030 032 036 038 040 042 044 047 2 HTML and Mobile Versions Chairman’s Statement Managing Director’s Review Board of Directors and Profiles Our Value Creation Process – Business Model Connecting with Stakeholders Materiality Matters Risk Review Managing Financial Capital Funding and Liquidity Management Strategic Priorities and Responses Outlook for 2018 and Beyond What makes the Bank Sustainable 049Management Discussion and Analysis 051 Operating Environment 054 Capital Management 054 Financial Capital 073 Manufactured Capital 078 Social & Network Capital 090 Intellectual Capital 094 Human Capital 102 Natural Capital 105 Governance and Risk Management 106 118 120 124 136 146 148 150 151 How We Govern Corporate Management and Profiles Senior Management Board Subcommittee Reports Annual Report of the Board of Directors Statement of Directors’ Responsibility Directors’ Statement on Internal Control Assurance Report on Internal Control Managing Director’s and Chief Financial Officer’s Statement of Responsibility 152 Directors’ Interest in Contracts with the Bank 154 Managing Risk: An Overview Commercial Bank of Ceylon PLC Annual Report 2017 159 Financial Reports 161 162 163 164 165 166 167 168 170 172 173 Financial Calendar – 2017 Independent Auditors’ Report Financial Statements Highlights – Bank Financial Statements – Table of Content 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 333Annexes 334 Annex 1: Investor Relations 349 Annex 2: Governance 349 Annex 2.1: Compliance with Banking Act Direction 362 Annex 2.2: Compliance with Code of Best Practice on Corporate Governance 367 Annex 2.3: Other Disclosure Requirements as required by the CBSL 372 Annex 3: Risk Management Report 418 Annex 4: GRI Content Index 421 Annex 5: Materiality Mapping 422 Annex 6: Independent Assurance Reports
  4. Our Vision To be the most technologically advanced , innovative and customer-friendly financial services organisation in Sri Lanka, poised for further expansion in South Asia. Our Mission Providing reliable, innovative, customer-friendly financial services, utilising cutting-edge technology and focusing continuously on productivity improvement whilst developing our staff and acquiring necessary expertise to expand locally and regionally. Report structure 427Supplementary Information 428 430 434 435 436 438 439 442 443 444 446 449 450 Our Sustainability Footprint Decade at a Glance Income Statement (US Dollars) Statement of Financial Position (US Dollars) Correspondent Banks and Agent Network Group Structure Glossary of Financial and Banking Terms Acronyms & Abbreviations Alphabetical Index Notice of Meeting – 49th Annual General Meeting Circular to the Shareholders on the Final Dividend for 2017 Notice of Meeting – Extraordinary General Meeting Circular to Shareholders on Proposed Debenture Issue Form of Proxy (Voting Shareholders) Annual General Meeting – Enclosed Form of Proxy (Non-Voting Shareholders) Annual General Meeting – Enclosed Form of Proxy (Voting Shareholders) Extraordinary General Meeting – Enclosed Form of Proxy (Non-Voting Shareholders) Extraordinary General Meeting – Enclosed The structure of this Annual Report comprises six parts that, together, give the astute reader a comprehensive picture of the Bank and its performance in 2017. These six sections are as depicted below: Strategic Report A helicopter view of our strategy, as explained through the five strategic imperatives we deployed to deliver value to stakeholders 015 159 049 Management Discussion and Analysis A concise but thorough analysis of the year's operations against the operating environment and how we delivered value to and derived value from stakeholders across all capitals Annexes Additional information on the Management Discussion and Analysis, Governance, and Risk and Capital Management Reports for reference 333 105 Governance and Risk Management An overview of how we balance stakeholder interests while conducting the affairs of the Bank, including the meticulous management of risks Financial Reports Primary Financial Statements together with supplementary notes prepared and presented in accordance with the applicable standards and regulations and the Auditor’s opinion thereon 427 Supplementary Information Further additional information on sustainability, our growth over the past decade, global connectivity etc. for convenience of the reader Stakeholder Feedback Form – Enclosed Corporate Information – Inner Back Cover Commercial Bank of Ceylon PLC Annual Report 2017 3
  5. GRI 102-50 , 102-51, 102-52, 102-53, 102-54 INTRODUCTION TO THE 49TH ANNUAL REPORT This Integrated Report is the 49th Annual Report of Commercial Bank of Ceylon PLC and covers the 12-month period from January 1, to December 31, 2017. It is consistent with our usual annual reporting cycle for financial and sustainability reporting. How to read this Report Taking into account investors’ as well as regulators’ calls for more clarity and concision in corporate reporting, we have employed a unique approach for this Report to meet the varying information needs of our stakeholders. Each main section begins with a brief overview, which then expands to include further details in a comprehensive narrative format. The “three-minute reader” may wish to turn to pages 15, 49, 105, 159, 333, and 427 for a quick overview of the Bank’s performance in key areas. Readers in search of a more detailed narrative are welcome to read the Annual Report from cover to cover or pick and choose the clearly identified sections of their choice to obtain a more comprehensive understanding of the Bank’s progress during the year and the future potential. Readers would also note that reading pages 4 – 158) and reference material ( pages 159 – 454) have been material ( clearly segregated to make the Report more reader-friendly. Strategic orientation 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. This structure highlights the plotted course of action that will propel the Bank forward and perpetuate the value creation process. It provides the reader with a clearer understanding of future direction in the wake of unfolding mega trends. Irrespective of the method, information is central to effective investor engagement. This Annual Report provides investors with insights into the Bank’s growth potential and the strategies by which the growth will be achieved. Integrated thinking We started integrated reporting in line with the IIRC Framework elements with our Annual Report for 2012. This has 4 strengthened and reinforced integrated thinking across the Bank, leading to 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: non-financial resources such as human, natural, intellectual, and social and network capitals, in addition to financial capital. We do so in a credible and consistent manner facilitating clarity and comparability. 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. yy Business model to business opportunities in the market Qualitative criteria taken into account include: yy Strategy with the evolving business environment yy Completeness: We have included material impacts within and under the direct control of the Bank, impacts outside which are indirectly influenced through our engagement with stakeholders and broader sustainability initiatives undertaken through the Bank’s own CSR Trust. yy The organisation from a functional and team based one to an integrated one yy Service standards across all the channels leading to an integrated customer experience yy The Bank’s key messages across all communication channels for greater clarity yy Software systems used to make them agile and speed up processes yy Information available across channels and products yy Comparability: We have included performance of current period and previous reporting periods together with industry benchmarks where relevant and available. yy Accuracy and Consistency: We have inbuilt internal controls to facilitate traceability and verifiability of information. yy The Bank with other service providers such as telecoms and fintech firms yy Clarity: We have used visual elements to facilitate understanding of the reader and to maintain brevity of the Report. Non-financial information It is now widely believed that non-financial information accounts for a substantial portion of the value of a corporate, as reflected in Price to Book Values higher than 1 time. 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 interested in the future potential of the Bank than its past performance and non-financial information is becoming more and more relevant for ascertaining the future potential. Accordingly, the Bank has enhanced its disclosures of non-financial information in this Annual Report which will provide clarity on the Bank’s path into the future. yy Balance: We have taken every possible effort to present a balanced review of relevant material 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 Commercial Bank of Ceylon PLC Annual Report 2017 yy Credibility and Reliability: We have obtained external assurance on both financial and sustainability information from reputed assurance service providers. Basis of preparation For the past eight years information in the Bank’s Annual Reports have been presented in line with the GRI Guidelines. This year the Bank decided to early adopt GRI Standards which will become effective from July 2018. In preparing this Report, we drew mainly on the concepts, principles and guidelines from the following sources: yy Global Reporting Initiative Sustainability Reporting Guidelines – GRI Standards www.globalreporting.org) ( yy International Integrated Reporting www.theiirc.org) Framework ( yy “A Preparer’s Guide to Integrated Corporate Reporting”, published by The Institute of Chartered Accountants of Sri Lanka (ICASL)
  6. Introduction to the 49th Annual Report The Annual Report 2017 follows our most recent Report for the year ended December 31 , 2016 for which you will find comparatives within this Report. This Report has been prepared in accordance with the GRI Standards: Core option. Report boundary The Financial Statements depict the consolidated performance of the entire Group, including the six subsidiaries: Commercial Development Company PLC, ONEzero Company Ltd., Serendib Finance Ltd., Commex Sri Lanka S.R.L. Italy, Commercial Bank of Maldives Private Limited, and CBC Myanmar Microfinance Company Limited and the two associates: Equity Investments Lanka Ltd., and Commercial Insurance Brokers (Pvt) Ltd. Reporting on the Bank’s social and environmental impact within the Management Discussion and Analysis, however, generally excludes these entities, focusing instead on Commercial Bank of Ceylon PLC, the parent entity of the Group, which accounts for over 98% of the Group's revenue, assets, borrowings and employees. Where the contributions of other Group entities are mentioned they are referred to as Group or Consolidated. 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 the stakeholders and engages them in a myriad of 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. No significant changes in the organisation type, structure, ownership, supply chain, material topics, or topic boundaries have taken place during the year. GRI 102-10, 102-45, 102-46 Figure – 01 The 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. Financial Reporting yy Sri Lanka Accounting Standards yy Companies Act No. 07 of 2007 No restatements were done of previously reported financial, social or environmental information. Narrative Reporting External assurance External Auditors, Messrs KPMG have assured the Group’s Financial Statements. As required by the regulators, these Auditors are rotated every five years to ensure their independence and objectivity. KPMG was however given an additional year to conduct the audit for the year ended December 31, 2017 in order to ensure completion of the work relating to SLFRS 9 implementation, with the audit partner being rotated in the sixth year. The Bank’s social and environmental processes have been assured by Messrs DNV GL Business Assurance Lanka (Pvt) Ltd. who represents DNV GL and performance indicators by Messrs KPMG. Aside from their engagement as Independent Assurance Services providers of the Group, Commercial Bank of Ceylon PLC, the Board of Directors and the Management have no other relationship with Messrs KPMG, DNV GL Business Assurance Lanka (Pvt) Ltd., or DNV GL. The Bank’s Managing Director, who is an Executive Director of the Board and members of the Corporate Management of the Bank are responsible for sustainability practices and disclosures made in this Report. They worked with the external assurance providers on the report content. Contact We welcome your comments or questions on this Report and invite you to contact: K D N Buddhipala Chief Financial Officer Commercial Bank of Ceylon PLC “Commercial House” 21, Sir Razik Fareed Mawatha Colombo 1 Sri Lanka yy Integrated Reporting Framework Sustainability Reporting yy G RI Standards: Core option yy U NGC Principles and UN Sustainable Development Goals Corporate Governance yy Banking Act Direction No. 11 of 2007 yy Listing Rules of the Colombo Stock Exchange yy Code of Best Practice on Corporate Governance issued by the ICASL Assurance yy Sri Lanka Auditing Standards yy Sri Lanka Standard on Assurance Engagements SLSAE 3000; Assurance Engagements other than Audits or Review of Historical Financial Information yy AccountAbility’s AA1000 Assurance Standard 2008 yy D NV GL’s assurance methodology VeriSustain™ This Annual Report is published within three months of the date of the Statement of Financial Position. The web version is also published online on the same date as the date of issue of this Annual Report at www.combank17.annualreports.lk Commercial Bank of Ceylon PLC Annual Report 2017 5
  7. GRI 102-1 , 102-4, 102-6, 102-7, 102-48, 102-49 ABOUT THE BANK Largest private sector commercial bank Commercial Bank of Ceylon PLC is the largest private sector commercial bank and third-largest bank in Sri Lanka in terms of total assets. With a total asset base of Rs. 1.143 Tn. (USD 7.444 Bn.), accounting for 11% of sector assets, it is a Systemically Important Bank in the country. With a legacy of approximately 100 years and a history of 49 years in its present name, the Bank serves over three million customers with a staff strength of 4,982 employees both in Sri Lanka and in Bangladesh where the Bank has 19 branches. The Bank has a wide local and an international reach through a network of branches and ATMs, subsidiaries, a representative office, agency arrangements, Business Promotion Officers, and correspondent banking relationships. International expansion of the Bank commenced with the acquisition of the Bangladesh operations of Crédit Agricole Indosuez in 2003 and continued since then with the Bank establishing subsidiaries in Italy, the Maldives, a representative office and a subsidiary in Myanmar and establishing agency arrangements and stationing its own Business Promotion Officers in several Middle Eastern countries for money remittance business. Risk profile With a risk profile that reflects a moderate risk appetite, a strong funding base, a comfortable level of liquidity, a solid domestic franchise, and a consistently solid performance, the Bank has been rated AA(lka), the highest rating for a local private sector bank by Fitch Ratings Lanka Ltd. with a stable outlook. The Bank is well diversified across its four main business segments of personal banking, corporate banking, treasury and international operations. International operations in Bangladesh, Maldives, Italy, and Myanmar now account for 11% of total assets and 17.5% of profit before taxes. Demonstrating its strong domestic franchise, 74.35% of the total assets is funded by customer deposits. Vibrant financial intermediation Loans and receivables and deposits grew by over Rs. 100 Bn. for the third and second consecutive years respectively. Loans and receivables to deposits ratio at 86.95% on average for the past five years with both credit and deposits growing in a commensurate manner, reflects the vibrancy of the Bank’s financial intermediation and illustrates the optimum deployment of funding resources in the pursuit of productive assets. Current and savings accounts (CASA) make up 39.23% of the total deposits, the highest among the peer banks. Asset quality is one of the best among the industry. Well capitalised The Bank is well capitalised with a CET 1 ratio of 12.11% as at December 31, 2017 as against the regulatory minimum of 6.25% denoting capital strength and resilience. Successful rights issue of ordinary shares in June 2017 that raised Rs. 10.144 Bn. towards CET 1 capital and profits retained for the year of Rs. 10.104 Bn. helped boost the capital. The Bank had the highest market capitalisation of Rs. 133.274 Bn. (USD 868 Mn.), ranking fourth among all listed entities and also had the highest Price to Book Value of 1.26 times of its shares in the Banking and Finance Sector of the Colombo Stock Exchange as at December 31, 2017. About the Group The Bank has six subsidiaries, including a small non-bank financial institution and two associate companies ( refer page 438 for Group Structure). The banking operations account for by far the largest share of Group assets and profits. As demonstrated in this Report, the Bank clearly understands the evolving banking scenario and emerging risks associated with it and has a clear focus and strategy for its future growth. There are approximately 9,800 ordinary voting shareholders of the Bank of whom DFCC Bank PLC (13.62%), entities related to the State including Employees Provident Fund, Employees Trust Fund Board, and Sri Lanka Insurance Corporation (20.62%), Mr Y S H I Silva (7.59%), and International Finance Corporation (4.45%) are the major shareholders. Our regional presence and global connectivity Figure – 02 11 16 Italy Bangladesh Myanmar 24 2 16 Sri Lanka The Maldives Branches Subsidiaries Representative office Business Promotion Officers 4 Correspondent banks Not to scale 6 Commercial Bank of Ceylon PLC Annual Report 2017
  8. About the Bank GRI 102-7 A snapshot of the Bank ’s profile Figure – 03 Rs. 16.581 Bn. Over 3 Mn. Rs. 17.26 4,982 PAT Rs. 107.54 NAV Rs. 6.50 DPS Rs. 133 Bn. Customers Employees EPS 1.54% ROA 280 Branches 17.88% ROE 775 ATMs Market capitalisation AA(lka) Rating from Fitch Ratings Lanka Limited 55 Correspondent banks 1.26 times PBV 6 Subsidiaries 2 Associates 12.11% CET 1 ratio 15.75% Total capital ratio 5.83 times 23.52% Leverage ratio Second largest foreign currency deposit base among local banks, and accounts for 23.52% of total deposits 79.49% 1.88% Rs. 850 Bn. Gross NPL ratio Customer deposits 0.92% Rs. 755 Bn. Net NPL ratio 51.05% Provision cover 7.60% Open credit exposure ratio Foreign currency loans to foreign currency deposits stood at 79.49% 27.64% Gross loans and advances Liquid assets ratio Rs. 1.143 Tn. 209.17% Total assets Liquidity coverage ratio 17.44% 127.87% 5-year CAGR in total assets Net stable funding ratio Commercial Bank of Ceylon PLC Annual Report 2017 7
  9. OUR JOURNEY Eastern Bank Limited (EBL) opens a branch in Chatham Street Increased shareholding in CDC to 94.5% through a share swap Reached milestone 400th ATM at the Ruwanwella branch EBL was acquired by Chartered Bank Standard Chartered Bank sold its 40% stake in the Bank yy Commenced “Sharia” compliant Islamic Banking yy Opened 200th branch in Kataragama Commercial Bank of Ceylon Limited was incorporated with EBL holding a 40% stake Business of EBL integrated with Chartered Bank yy First 365-day branch opened in Colombo 7 yy All branches linked to ICBS except Jaffna Banking and supermarketing were combined by opening the first “MiniCom” First two branches opened in Galewela and Matale Launched Internet Banking Acquired Galle, Jaffna and Kandy branches of Mercantile Bank Limited Opened the 100th branch at Kaduruwela and the Gold Trading Unit at the Foreign Branch Offshore banking centre formed Commercial Development Company (CDC) formed to construct the Head Office building with 40% equity participation Head office moved to new premises at No. 21, Sir Razik Fareed Mawatha, (formerly Bristol Street), Colombo 1 EBL changed its name to Standard Chartered (UK) Holdings Limit Introduced ATM facilities to customers Introduced core banking softwareInternational Comprehensive Banking System (ICBS) Acquired operations of Crédit Agricole Indosuez in Bangladesh Raised USD 65 Mn. syndicated loan, becoming the 1st non-sovereign corporate in Sri Lanka to source external funding yy Issued USD 10 Mn. bond, becoming the first indigenous bank to do so yy Opened 150th branch at Mahiyanganaya First Sri Lankan bank to be ranked among the top 1,000 banks in the world First Sri Lankan Bank to be certified CMMi yy Opened an exclusive “Elite” Branch at Colombo 7 for high net worth customers yy ATM network expanded to 500 yy Became the first Sri Lankan Bank to Link it’s ATMs to China UnionPay yy Raised USD 65 Mn., from the International Finance Corporation (IFC) yy Launched an exclusive savings account for women named “Anagi” yy Launched sophisticated Internet Banking service (On-line Banking) in Bangladesh yy Raised a 10-year subordinated debt of USD 75 Mn. from IFC yy Opened “24-hour automated Banking Centre’ at Ward Place yy Bank’s first “Forex ATM” installed at Crescat Boulevard yy Commissioned 600th ATM at the new Colombo Gold Centre yy Bank acquired the 100% stake of Indra Finance Limited yy Became the first Sri Lankan Bank to be granted a license by the Central Bank of Myanmar to operate a Representative Office yy Launched paperless green banking facility yy Launched new generation of automated cash deposit terminals eliminating the use of paper yy Indra Finance, a fully-owned subsidiary of Commercial Bank, renamed Serendib Finance Limited yy Bank branches go green with the installation of solar power systems at four branches 8 Commercial Bank of Ceylon PLC Annual Report 2017 yy Only Sri Lankan bank to be ranked among the “Top 1,000 banks in the world” for the 7th time, the 6th consecutive year yy Launched Sri Lanka’s first Remittance Card yy Commenced Commercial operations of Commex Sri Lanka S.R.L. Italy, our fully owned subsidiary yy Opened Commercial Bank of Maldives Private Limited, 2nd foreign subsidiary with a 55% stake yy The Bank became a Trillion-Rupee Asset company yy Became the first ATM network to be fully EMV compliant in Sri Lanka yy Introduced Mastercard Debit Cards with Chip and PIN technology for the first time in Sri Lanka yy Introduced mobile banking in the literal sense with the launch of “Bank on Wheels” – a modified and branded vehicle designed to provide basic overthe-counter banking facilities to customers living outside city limits yy “World Finance” the prestigious London-based magazine declares COMBANK the best in Sri Lanka for digital and mobile banking yy Commercial Bank of Maldives opens its second branch in Hulhumalé yy COMBANK tops private banks in Interbrand’s inaugural ranking of country’s best brands yy Commercial Bank’s Annual Report 2016 wins overall award for best annual report at the ICASL Annual Report Awards yy The Bank was named among the “Top Companies in Asia” and the “Top Green Companies in Asia” at the 2017 Asia Corporate Excellence and Sustainability (ACES) awards yy Established 100% owned CBC Myanmar Microfinance Company Limited, 3rd foreign subsidiary
  10. 2017 Highlights and impacts Figure – 04 Progress in 2017 on Strategic Imperatives Loans and receivables and deposits grew by over Rs. 100 Bn. for the 3rd and 2nd consecutive years, respectively Procured a digital banking solution from FISERV, a leading software vendor from the USA A total of 21 international banking and other awards Our 3rd foreign subsidiary was incorporated in The only Sri Lankan Bank amongst the Top 1000 banks in the world for the 7th successive year Myanmar Over 800,000 online banking customers Adjudged the highest ranked private sector bank with a value of Rs. 20.33 Bn. at the “Best Sri Lankan Brands in 2017” ranking by Interbrand Augmented regulatory capital by Rs. 10.144 Bn. through a rights issue Strengthened the independent element of the Board by appointing two Non-Executive Independent Directors OPEN Impact on our Key Stakeholders Largest lender to SMEs Highest market capitalisation in the in Sri Lanka Bank, Insurance and Finance Sector Market share in imports and exports volumes grew to 10.56% and 18.58% Paid Rs. 11.5 Bn. or 41% of profits in taxes to the Governments and collected over Rs. 2 Bn. in taxes on their behalf Largest private sector bank with a wide reach of 1,055 customer touch points Bank’s CSR Trust contributed Rs. 43.4 Mn. towards the well-being of the community Commercial Bank of Ceylon PLC Annual Report 2017 9
  11. HIGHLIGHTS – FINANCIAL AND NON-FINANCIAL Financial highlights Table – 01 GROUP 2017 Results for the year (Rs. Bn.) Gross income Profit before Financial VAT and Taxation Profit before taxation (PBT) Income tax expenses Profit after taxation (PAT) Revenue to the Government Gross dividends Position at the year end (Rs. Bn.) Shareholders’ funds (Stated capital and reserves) Deposits from customers Gross loans and advances Total Assets BANK  2016 Change % 2017 2016 116.842 93.726 24.66 115.594 93.143 24.10 28.173 23.824 18.25 28.064 23.755 18.14 23.280 20.115 15.73 23.183 20.051 15.62 6.654 5.648 17.81 6.602 5.539 19.19 16.627 14.466 14.94 16.581 14.513 14.25 11.617 9.436 23.11 11.516 9.385 22.71 6.477 5.800 11.16 6.477 5.800 11.16 107.995 78.992 36.72 107.099 78.354 36.69 857.270 743.311 15.33 850.128 739.563 14.95 760.454 637.983 19.20 754.708 633.391 19.15 1,155.821 1,020.984 13.21 1,143.374 1,012.201 12.96 17.28 15.80 9.37 17.26 15.81 9.17 17.27 15.77 9.51 17.24 15.77 9.26 – 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 (%) Return on average assets (%) Price earnings (times) – Ordinary voting shares Price earnings (times) – Ordinary non-voting shares Year-on-year growth in earnings (%) Dividend yield (%) – Ordinary voting shares Dividend yield (%) – Ordinary non-voting shares Dividend cover on Ordinary shares (times) Statutory ratios: Liquid assets (%) Capital adequacy Ratios: (Under Basel II) Tier 1 ratio (%) – Minimum requirement 5% Total capital ratio (%) – Minimum requirement 10% Capital Adequacy Ratios (Under Basel III) Common Equity Tier 1 Capital Ratio (%) – Minimum requirement 6.25% Tier 1 ratio (%) – Minimum requirement 7.75% Total capital ratio (%) – Minimum requirement 11.75% – – – 4.50 4.50 – – – 2.00 2.00 107.54 87.97 Financial indicator Return on average assets (ROA) (%) Return on average shareholders’ funds (%) Growth in income (%) Growth in profit for the year (%) Growth in total assets (%) Dividend per share (DPS) (Rs.) Capital Adequacy Ratios Common Equity Tier 1 Capital Ratio (%) – Minimum requirement as per Basel III – 6.25% Tier 1 Capital Ratio (%) – Minimum requirement as per Basel III – 7.75% Tier 1 Capital Ratio (%) – Minimum requirement as per Basel II – 5% Total Capital Ratio (%) – Minimum requirement as per Basel III – 11.75% Total Capital Ratio (%) – Minimum requirement as per Basel II – 10% Commercial Bank of Ceylon PLC Annual Report 2017 – 108.44 88.68 N/A N/A – 135.80 140.20 (3.14) N/A N/A – 105.00 123.00 (14.63) 17.78 19.29 (1.51) 17.88 19.52 (1.64) 1.53 1.52 0.01 1.54 1.53 0.01 N/A N/A 8.16 8.61 (5.23) N/A N/A 14.93 21.98 N/A 22.28 22.25 6.31 7.55 (16.42) 14.25 21.92 (7.67) N/A 4.79 4.64 0.15 N/A N/A 6.19 5.28 0.91 N/A N/A 2.56 2.50 2.40 N/A N/A – 27.64 27.41 0.23 – 10.47 – – 10.37 – – 14.91 – – 14.87 – (7.05) 12.12 – – 12.11 – – 12.12 – – 12.11 – – 15.70 – – 15.75 – – Financial Goals and Achievements – Bank 10 Change % Table – 02 Goal Achievement 2017 2016 2015 2014 Over 2 1.54 1.53 1.42 1.60 1.87 Over 20 17.88 19.52 16.90 17.01 18.40 Over 20 24.10 19.62 7.03 0.96 15.40 Over 20 14.25 21.92 6.47 7.03 3.44 Over 20 12.96 15.05 10.58 31.29 18.54 6.50 6.50 6.50 6.50 6.50 Over 10 12.11 N/A N/A N/A N/A Over 10 12.11 N/A N/A N/A N/A Over 10 – 11.56 11.60 12.93 13.27 Over 15 15.75 N/A N/A N/A N/A Over 14 N/A 15.89 14.26 15.97 16.91 Over Rs. 5.00 2013
  12. Highlights – Financial and Non-Financial Non-financial highlights Table – 03 BANK GRI Disclosure Financial and Manufactured Capital 201-1 Direct economic value: Generated Distributed to: – Depositors – Employees – Business Partners – Government – Shareholders – Community Retained Social and Network Capital 413-1 Funds disbursed to SMEs, Agri businesses, Micro financing Financial literacy and Capacity building programmes – No. of programmes – No. of participants Penetration rate outside principle province 205-1 Coverage and frequency of audits – Onsite audits – Online audits 205-3 Number of alerts reported to FIU of the CBSL 204-1 Payments to suppliers Proportion of spending on local suppliers Spending on CSR activities 308-1,412-1,414-1 Percentage of new suppliers screened for social and environmental impacts 2017 2016 Unit of Measure 115,594 102,268 64,011 11,268 8,775 11,654 6,477 83 13,326 115,594 93,143 81,712 47,915 10,794 7,772 9,368 5,765 62 11,431 93,143 Rs. Mn. Rs. Mn. Rs. Mn. Rs. Mn. Rs. Mn. Rs. Mn. Rs. Mn. Rs. Mn. Rs. Mn. Rs. Mn. 131,881 272,914 Rs. Mn. 79 8 1,195 12 7 873 12 Nos. Nos. % 79 79 92 335 243 14 8,775 92.18 43 100 271 223 15 7,772 90.75 65 100 Nos. Nos. Nos. Rs. Mn. % Rs. Mn. % 81 82 82 84 82 20,330 57,852 24,027 56,043 Rs. Mn. Years 90 93 4,982 4.88 4.86 94.64 4,987 5.43 4.61 95.38 Nos. % % % 94 95 97 98 99 25.47 17.04 12,937 100 24.79 19.74 14,650 100 Hours Hours Hours % 1:0.75 1:0.90 1:0.92 1:0.97 1:1.05 1:0.95 1:1.10 1:1.08 1:1.01 1:1.01 X:Y X:Y X:Y X:Y X:Y 54,820 56,359 Gj 9,500 151,885 163,708 98,155 Kg Kg – 100 302 39 – 495 428 126 – Rs. Mn. Rs. Mn. Rs. Mn. Page Reference Intellectual Capital Brand Value Cumulative service period of employees Human Capital 102-8 401-1 401-3 404-1 404-2 404-3 405-1 Natural Capital 302-1 306-2 Total employees New employee hires Attrition rate Return to work after maternity leave Average training hours – Male – Female Skill development programmes Percentage of employees receiving performance evaluations Remuneration ratio women to men – Corporate and Senior Management – Executive Officers – Junior Executive Assistants and Allied Grades – Banking and executive Trainees – Office Assistants and Other Energy Consumption Waste Disposal – e-waste (CO2 emission offset) – Paper Loan disbursements for renewable energy projects – Wind – Solar – Hydro – Bio-mass 99 98 99 103 104 88 Commercial Bank of Ceylon PLC Annual Report 2017 11
  13. PERFORMANCE HIGHLIGHTS Value Created for the Shareholders Total operating income , profit before tax and dividend paid Value Created for the Customers Graph – 01 Interest paid to depositors Graph – 04 Rs. Bn. Operating income Profit before tax Personnel expenses and number of employees Personnel expenses Dividend 60 7.5 60 12,500 48 6.0 48 10,000 36 4.5 36 7,500 24 3.0 24 5,000 12 1.5 12 2,500 0 0 0 2013 2014 2015 2016 Market capitalisation Graph – 02 Rank Rs. Bn. Shareholders’ funds Bank’s market capitalisation 2017 Graph – 07 Rs. Mn./Nos. Rs. Bn. Rs. Bn. Value Created for the Employees 2013 2014 2015 2016 Loans disbursed 0 2017 Graph – 05 Rs. Bn. Number of employees 2013 2014 2015 2016 Training hours and investment in training Graph – 08 Hours (’000) Bank’s market capitalisation ranking Training hours – Male 2017 Rs. Mn. Training hours – Female Investment 150 1 750 175 150 120 2 600 140 120 90 3 450 105 90 60 4 300 70 60 30 5 150 35 30 6 0 0 2013 2014 2015 2016 NAV/MPS/EPS/DPS Graph – 03 Rs. Rs. Net asset value per share Market value of a share 2017 Earnings per share Dividend per share 2013 2014 2015 2016 Customer touch points 2017 Graph – 06 Nos. Branches ATMs 0 2013 2014 2015 2016 Employee promotions/ absorptions 2017 Graph – 09 Nos. CDMs and CRMs Corporate and senior management Executive officers Banking and executive trainees Office assistants and others 300 20 1,250 240 16 1,000 180 12 750 250 120 8 500 200 60 4 250 0 0 0 Junior executive assistants and allied grades 300 150 100 2013 2014 2015 2016 2017 2013 2014 2015 2016 2017 50 10 5 0 12 Commercial Bank of Ceylon PLC Annual Report 2017 0 2013 2014 2015 2016 2017
  14. Performance Highlights Value Created for the Governments Government taxes paid and collected on behalf Value Created for the Community Graph – 10 Borne by the BankVAT Graph – 13 Rs. Bn. Rs. Bn. Borne by the Bankincome tax Disbursement to SME sector Value Created for the Business Partners Borne by the Bankother taxes Collected on behalf of the Government Commercial Bank Payments to business partners Rs. Bn. Total disbursement of commercial and development banks 15 750 7.5 12 600 6.0 9 450 4.5 6 300 3.0 3 150 1.5 0 2013 2014 2015 Total investment in Government securities 0 2017 2016 Graph – 11 2013 2014 2015 CSR Trust Fund – contribution and utilisation Healthcare Community Others Contribution 48 80 180 36 60 120 24 40 60 12 20 2016 Capital adequacy, liquid assets and liquidity coverage ratio 0 2017 Graph – 12 % % CAR – Tier 1 CAR – Total SLAR CAR – CAR – Tier 1 (R) Total (R) LCR 2013 2014 2015 Deposits distribution 2016 2017 0 Graph – 15 3% 3% Rs. 500,000-1 Mn. Above Rs. 1 Mn. LCR (R) Total consumption SLAR (R) 2017 57,500 225 56,000 210 54,500 195 53,000 180 51,500 165 50,000 32 240 Rs.100,000500,000 24 180 3% 16 120 57% 8 60 Below Rs. 5,000 0 0 2014 2015 2016 2017 2014 2015 2016 Loans disbursed for renewable energy projects Wind 11% 2013 2013 2017 150 Rs. 5,000100,000 3% Above Rs. 1 Mn. 2016 Rs.100,000500,000 Solar Hydro Bio-mass 29% Rs. 500,000-1 Mn. 10% Graph – 18 Rs. Mn. 300 Capital adequacy ratio Statutory liquid assets ratio Liquidity coverage ratio Regulatory minimum requirement Consumption per branch 54% Below Rs. 5,000 40 CAR SLAR LCR (R) 2017 Graph – 17 Gigajoules Gigajoules 240 2015 2016 Electricity consumption 100 2014 2015 Utilisation 60 2013 2014 Value Created for the Environment Rs. Mn. Education 300 0 2013 Graph – 14 Rs. Mn. Rs. Bn. 0 2017 2016 Graph – 16 3,000 2,400 1,800 1,200 27% Rs. 5,000100,000 600 0 2013 2014 2015 2016 2017 Commercial Bank of Ceylon PLC Annual Report 2017 13
  15. Imagination expands in scope The coming era promises to lend wings to imagination . What we consider unimaginable today will be tomorrow’s reality 14 Commercial Bank of Ceylon PLC Annual Report 2017
  16. Strategic Report The Bank ’s business model revolves around five strategic imperatives through which operations were directed during the year. These imperatives were founded to ensure that we are geared to make the most of future opportunities. Supported by a robust governance framework and an organisational structure with clearly defined roles and responsibilities, these imperatives are: ∞ Prudent growth: Focusing on expanding market presence and improving economic performance while embracing principles of inclusive and responsible banking ∞ Customer centricity: Putting the customer at the heart of all we do and ensuring that all products and services are in compliance with regulations ∞ Digital leadership: Investing in innovation so that we are future-ready both in terms of technology and the readiness of our people and customers to embrace new opportunities ∞ Operational excellence: Ensuring that systems and processes are streamlined and that our people have every opportunity and resource to perform at an optimum ∞ Risk management: Prioritising risks to minimise the impact of unfortunate events and maximise the realisation of opportunities to prevent corruption and ensure compliance at all times With digital technology developing at a breakneck pace it is imperative that the Bank develops and implements a strategy that is fit for the future. Our stakeholders depend on us to be at the cutting edge of the latest technological developments in banking and customer service. To this end we have expanded our business in terms of network both within Sri Lanka and overseas – our operations in Bangladesh, the Maldives, and Italy continue to be profitable. We have improved our product and service offering, reach, and responsiveness in answer to feedback from customers. During the year we also invested heavily in a digital banking solutions platform from one of the world’s leading suppliers to provide customers with the top-notch service they expect from the country’s biggest private-sector bank. Initiatives such as the integration of our call centres, process automation, the more efficient use of branch space, and the training and development of our people have increased our operational performance during the year. 016 Chairman’s Statement 020 Managing Director’s Review 028 Our Value Creation Process – Business Model 030 Connecting with Stakeholders 032 Materiality Matters 036 Risk Review 038 Managing Financial Capital 040 Funding and Liquidity Management 042 Strategic Priorities and Responses 044 Outlook for 2018 and Beyond 047 What makes the Bank Sustainable Commercial Bank of Ceylon PLC Annual Report 2017 15
  17. Strategic Report GRI 102-14 CHAIRMAN ’S STATEMENT The Bank recorded an enhanced overall performance across all business lines and geographies, enabling us to report growth in excess of the industry averages in most of the indicators. This is all the more significant when viewed in the context of the conservative risk profile and prudent growth pursued by the Bank. Having established ourselves as the leading private sector bank in Sri Lanka, overseas expansion is now one of our foremost strategies which will help us geographically diversify our risk profile. 16 Commercial Bank of Ceylon PLC Annual Report 2017
  18. Strategic Report Chairman ’s Statement Dear Friends, A hallmark of Commercial Bank is its consistent and steady growth over the years. Year 2017 was no exception. The Bank recorded an enhanced overall performance across all business lines and geographies, enabling us to report growth in excess of the industry averages in most of the indicators. This is all the more significant when viewed in the context of the conservative risk profile and prudent growth pursued by the Bank. Prudent growth Total assets grew by 12.96% to Rs. 1.143 Tn. as at end 2017 with core business activities of loans and receivables and deposits growing at 19.71% and 14.95% respectively, which augurs well for the Bank’s commitment to long term value creation. Five-year compounded annual growth rate in excess of industry growth enabled us to grow our market share in total assets to 11.1% from 10.04% in 2012, further strengthening our leadership position. In August 2017, Fitch Ratings Lanka Ltd. reaffirmed the Bank’s rating at AA (lka) with a stable outlook while Credit Rating Information and Services Limited reaffirmed Bangladesh Operations’ at AAA in June 2017. Profit before tax grew by 15.62% to Rs. 23.183 Bn. while profit after tax grew by 14.25% to Rs. 16.581 Bn. for the year. The Board of Directors recommended a final dividend of Rs. 2.00 per share for approval by the shareholders at the forthcoming AGM, to be fulfilled by way of a scrip issue of shares, which together with the two interim dividends already paid in cash, add to a total dividend for the year of Rs. 6.50 per share. Taking into account the challenging context in which these robust results were achieved during 2017, I wish to begin this review by extending my warm appreciation and congratulations to the Board and the dedicated team led by our dynamic Managing Director. Before reviewing our performance further, let me first set the context. Impacted by events in global and domestic markets, 2017 presented a challenging environment for the industry. Challenging times Globally, economic activity certainly strengthened when compared to the preceding year, recording a projected growth of 3.7%. While the baseline outlook for 2018 is strengthening, growth remains weak in many countries, with a large number of advanced economies recording inflation that is below the target. Importers of commodities such as fuel, were affected as they adjusted to an increase in prices. While the short-term risks appear to be balancing out, mediumterm risks still list downward. In Sri Lanka, the economy recorded lower than projected growth during the year, primarily due to weather taking a toll on the agricultural sector. Core inflation remained in check, thanks to the Central Bank’s tight monetary policy stance, but headline inflation was high. Interest rates were high at the beginning of the year, but gradually declined towards the latter part of the year due to deceleration of credit to the private sector, higher liquidity levels, moderate inflation and lower levels of borrowings by the Government consequent to enhanced revenue collection. Restoration of GSP+ helped boost exports. Credit to the private sector by commercial banks, which grew at a higher rate in 2016 and up to mid 2017, decelerated in the second half of 2017. Asset quality in terms of gross NPL ratio, however, improved marginally from 2.6% at end 2016 to 2.5% at end 2017. Import expenditure increased during the year and Sri Lanka’s trade deficit widened, offsetting the positive impact of improving export earnings. Net inflows to the Government securities market and the Colombo Stock Exchange somewhat eased pressures on external accounts. Depreciation of the Sri Lankan rupee against the US dollar was 2.57% during the year and the Central Bank was able to maintain a flexible exchange rate regime under the enhanced monetary policy framework. Fiscal consolidation is expected to continue in the medium term and therefore we can look forward to experiencing macroeconomic stability in the future. Gross Domestic Product (GDP) too is projected to grow between 5.0%–5.5% in 2018. Overall, we remain positive about the medium term prospects of the Sri Lankan economy. Within this challenging local and global backdrop we forged ahead, adopting new strategies and exploring new areas of business. More details on the Bank’s performance are given in the Managing Director’s Review and the Financial Review. Our SME focus We are heavily SME (small and mediumsized enterprises) focussed. As I mentioned in my Review last year, we believe that the SME sector is the backbone of the economy and this is reflected in our lending portfolio. Over 12% of our lending is to SMEs. With its potential to make a high contribution to the GDP, employment creation, export revenue, poverty alleviation, and regional development, a strong SME sector spells good health and prosperity for the entire economy. We have taken a number of initiatives during the year to improve the lives and livelihoods of those in this important sector. For instance, the Bank launched Commercial Bank Biz Club allowing SMEs a forum to network and share ideas about their refer page 62 for businesses (please more details of our focus on this sector). Regional expansion Having established ourselves as the leading private sector bank, overseas expansion is now one of our foremost strategies which will help us geographically diversify our risk profile. I am happy to note that within a relatively short period of time, the Bank has established itself as a premier regional foreign bank in Bangladesh and the Maldives. Now completing its fourteenth year in the country, our Bangladesh operations accounted for 11% of our assets and 12% of our profit before tax in 2017. With the gradual expansion of the branch network in this country, the Bank is now ready to gradually attract SME and retail clientele, allowing us to mobilise low cost deposits and improve profitability. Commex Sri Lanka S.R.L. – Italy, our fully owned subsidiary, which was issued with an Authorised Payments Institute License by the Bank of Italy in 2016, has strengthened our remittance business and is already making a positive contribution. This license opens up many avenues for us to make further inroads into Europe and, naturally, we are already making plans to make full use of this opportunity. Commercial Bank of Ceylon PLC Annual Report 2017 17
  19. Strategic Report Chairman ’s Statement The Board also continued to ensure the highest standards of corporate governance and adherence to the Bank’s Code of Ethics. Besides ensuring compliance with the applicable rules and regulations true to both the spirit and the letter of the law, the Board keenly monitored progress of implementation of Basel III regulations and SLFRS 9 standard, two developments that promise to strengthen the financial soundness of banks, but will have significant impact on the profitability of banks. Commercial Bank of Maldives Private Limited was established in 2016 and is a fullyfledged Tier 1 bank under license issued by the Maldives Monetary Authority. This subsidiary too, I am proud to say, is already contributing to the Bank’s profits. Our recent microfinance license in Myanmar is another exciting development that will, in due time, contribute to the Bank’s profits and geographical diversification. Digital leadership As the only Sri Lankan bank to have an extensive reach beyond our shores, we are conscious of the need to stay abreast of global trends in banking and customer service. For us, 2017 was a year in which we intensified our focus on exploring methods that will further increase efficiency and productivity through the use of state-of-theart technology. Our efforts encompassed digital banking and automated banking centres, two areas that are fast gaining popularity in Sri Lanka and abroad. We also looked at innovations that would better streamline systems and processes, integrate workflows, and centralise operations. For the customer, these implementations mean greater convenience and uniform service standards no matter where they come into contact with the Bank. We continue to monitor the many different cases of cyber security breaches around the world with an ever-vigilant eye. They highlight, now more than ever, the importance for caution and agility. It is to safeguard customer wealth and data, as well as our own intellectual capital, that we invested in a top-of-the-line digital banking platform from a world-renowned financial services technology solutions provider during the year. Indeed, customer centricity and digital leadership are two of five strategic imperatives by which the Bank’s operations were steered in 2017. Together with prudent growth, operational excellence, and risk management, these strategic imperatives were supported by a robust governance framework, and adhered to across the Bank at every level with able support from the Board. 18 Commercial Bank of Ceylon PLC Annual Report 2017 Customer centricity Customer centricity is built into the culture of the Bank. The Bank is embracing new technology in order to meet the demands for enhanced user experience by customers, millennials in particular, while achieving operational excellence. During the year, the Bank partnered with FISERV, a leading software vendor from the USA for procuring a digital banking solution which is expected to go live by mid 2018. This solution would enable omnichannel presence and provide a true contextual banking experience to customers across web, mobile phones, tablets and wearables. The Bank is looking towards establishing partnerships with global IT players such as Microsoft and IBM in order to provide a better customer experience. Our Social and Environmental Management System (SEMS) Demonstrating our commitment as a responsible corporate citizen to the worldwide efforts in protecting society and the environment, we have developed a SEMS incorporating a set of rules and objectives which guide the Bank in its assessment and management of social and environmental risks associated with our operations, lending activities in particular. During the year, we revamped the SEMS with technical input from the International Finance Corporation and strengthened it further by recruiting experts and impanelling consultants from the market. SEMS, as part of the Loan Origination System, now plays a key role in managing the risk profile and making lending and investment activities responsible. The Bank also worked with an IFC advisory to train staff so that they are able to identify and focus more on green lending opportunities. These are related to alternative energy generation from windmills, solar power and mini hydropower and other environment friendly initiatives such as the implementation of carbon emission reduction programmes, and the installation of more efficient lighting systems in office buildings etc. During the year, the Bank disbursed Rs. 13 Bn. in green loan facilities that will help reduce the environmental footprint of borrowers.
  20. Strategic Report Chairman ’s Statement Governance and Board oversight Ever mindful of its statutory, fiduciary, and regulatory responsibilities, the Board continued to strengthen its oversight responsibilities on the affairs of the Bank. During the year, the Board welcomed two new independent non-executive Directors namely, Justice K Sripavan and Mr T L B Hurulle to fill casual vacancies. They bring with them a wealth of experience from their respective fields, widening the collective knowledge and expertise of the Board. The people behind our operational excellence Adherence to standards and regulations requires the engagement and dedication of our people. This year was no different with employees rising to the occasion and proving their loyalty and commitment. They continued discharging their duties and preparing themselves to make the most of upcoming opportunities, as the Bank put in place the necessary systems and processes to support their work. The Board also continued to ensure the highest standards of corporate governance and adherence to the Bank’s Code of Ethics. Besides ensuring compliance with the applicable rules and regulations true to both the spirit and the letter of the law, the Board keenly monitored progress of implementation of Basel III regulations and SLFRS 9 standard, two developments that promise to strengthen the financial soundness of banks, but will have significant impact on the profitability of banks. The Board reviewed the composition and terms of reference of Board and Management committees taking into account developments in the industry and best practice and took measures to strengthen their performance. The composition of Board Related Party Transactions Review Committee was reconstituted to comprise only Non-Executive Directors from January 2018 in line with the requirements of ICASL Code of Best Practice on Corporate Governance. Strategic decisions were made based on the outcomes of reviews of ICAAP (Internal Capital Adequacy Assessment Process), risk profile and risk mitigation measures, and business continuity and disaster recovery plans. In preparation for enhanced capital requirements of the Bank as a Domestic Systemically Important Bank under Basel III, the Bank raised Rs. 10 Bn. through a rights issue. It gives me great pleasure to report the finalisation of the new collective agreement which was completed on time and with the concurrence of all parties. Cordial relations continue between our branch of the Ceylon Bank Employees’ Union, the Executives’ Association of the Bank and the Management. This is an ideal opportunity to thank their collective efforts and great contribution to the progress and success of the Bank. I take this opportunity to state that, as at the date of publishing, we had complied with all the applicable regulatory requirements and best practices to maintain our position as one of the most compliant financial institutions in Sri Lanka. At the end of another impressive year I would like to give all credit to the entire Commercial Bank team. That they succeeded in winning for the Bank an unparalleled haul of awards – justifying our claim of being the “Most Awarded Bank” – was simply the by-product of an engaged group of hard-working individuals inspiring each other to achieve common goals amidst the challenges of the times. To each one I extend my heartiest thanks as we forge ahead into the future – onwards and upwards! Dharma Dheerasinghe Chairman Colombo February 23, 2018 Commercial Bank of Ceylon PLC Annual Report 2017 19
  21. Strategic Report MANAGING DIRECTOR ’S REVIEW Our customers find safe haven in us because we remain true to our original ideals of being a banker first and foremost. Where once our arena was limited to our shores it now encompasses the whole world. And yet the whole world now fits in the palm of a hand – often in the form of a mobile phone. Meeting the needs of our customers means competing with the latest technological innovations by smart start-ups and also the biggest brands in the consumer space. Are we prepared for this challenge? We certainly are. 20 Commercial Bank of Ceylon PLC Annual Report 2017
  22. Strategic Report Managing Director ’s Review Through all the storms (both literal and figurative) that affected the region during the year under review, Commercial Bank remained a steadfast beacon in a volatile environment. Our customers find safe haven in us because we remain true to our original ideals of being a banker first and foremost. Adhering to our core business values resulted in substantial core business growth, high levels of stakeholder satisfaction and the ability to attract and retain a loyal base of customers with whom our ideals resonate. Banking to the core. We are one of the few banks that remain true to our original values, focusing totally on pure banking. Our products are sound, uncomplicated, and straightforward, giving customers the confidence that from Commercial Bank they will always receive the attention they need for their banking requirements. As verified by an independent brand health study conducted during the year, Commercial Bank trended upwards, ahead of the industry, in areas such as banking service levels, speed and attentiveness, and employee competency in serving customers. Our customers appreciate that our conservative ethos, prudence, and integrity provide them with greater security and stability – qualities they now value even more a decade or so after the global financial crisis which, despite having a low impact on Sri Lanka at the time, sent shock waves through the entire industry. Our customers trust us to continue being who we are as we move swiftly into a fast-evolving future. At end 2017, we recorded Rs. 16.581 Bn. in profit after tax, a growth of 14.25%. Our deposits grew by 14.95% to Rs. 850.128 Bn., an average monthly growth of over Rs. 9.0 Bn., as we continued to maintain our leadership position in deposit growth within the industry. Our loans grew by 19.71%, an average monthly growth of over Rs. 10.0 Bn., supporting net interest income (NII) growth of 18.89%. The growth of deposits and credit, reflects the Bank’s strong capacity for financial intermediation and illustrates a deployment of funding resources that is most conducive to the pursuit of productive assets. The main contributor to operating profit, NII, accounts for 78% of total operating income. Net fee and commission income grew by 22.62% thanks to a stellar performance in trade finance, credit cards, and remittances. Operating costs increased by 6.49% primarily because we invested heavily in the digital technology that is vital for solid growth. With total operating income growing at a higher rate, the cost to income ratio marginally decreased to 49.82%. We continued to strengthen our risk management framework and recovery efforts during the year. This led to further improvement in asset quality with both Gross and Net NPL (non-performing loans) ratios decreasing to 1.88% and 0.92% respectively as at December 31, 2017 from 2.18% and 1.09% respectively a year ago, in turn boosting profitability. The Personal Banking Division recorded a strong performance, increasing its contribution to profit before tax by 57%, with 16% of asset growth, and 14.6% of liability growth. Likewise, the Corporate Banking Division too grew solidly this year as well, growing its assets base by 23% and liabilities by 10%, thereby increasing its contribution to profit before tax by 25%. Our Treasury Division continued to focus on funding and liquidity, accounting for 24% of assets and 7% of liabilities. During the year, we borrowed USD 100 Mn. from the International Finance Corporation (IFC) to fund business growth. This came at a relatively lower cost and also eased pressure on securing funding from other sources. Further information pertaining to our financial performance is elaborated under “Financial pages 54 to 72. Capital” on Banking through headwinds. While economic stability and business confidence are improving in Sri Lanka, taxation pressures bring with them an element of instability. This especially impacts the banking industry which is perhaps subject to the most stringent regulatory requirements, on capital in particular. A long term view by regulators and the general public is imperative if the country is to benefit from an improving economic scenario. It goes without saying that banks, by necessity, require capital. Investors who contribute to capital expect reasonable returns for the risks assumed. On one hand, increasing regulatory as well as economic capital requirements in the wake of minimum capital, Basel III, and higher provisioning requirements arising from SLFRS 9 make it necessary to increase profit retention. Yet, on the other hand additional tax burdens imposed on banks limit the internal generation of capital. Both affect the return to shareholders. Naturally this impact on capital affects Sri Lankan banks with aspirations to expand overseas and bring long-term benefits to the country. Commercial Bank is a listed company with a track record for transparency, efficiency, and productivity. It has the capacity to further financial inclusion within Sri Lanka and grow beyond our shores, putting Sri Lanka firmly on the map – both regionally and internationally. During the year, we contributed approximately 41% of our profits to the Governments through taxes. This was in addition to over Rs. 2.0 Bn. in taxes we have collected from customers on behalf of the Government. Looking to the future, regulators need to work together and take a longer-term view to ensure that while the necessary checks and balances are in place, banks are not stymied from achieving their full potential. Given our predilection for prudence and forward planning, we began preparing for SLFRS 9 (which is equivalent to the International Financial Reporting Standard on Financial Instruments) two years ago, bolstering our capital and ensuring our loans and advances were recognised in the books in line with the Standard. We are now fully equipped to implement SLFRS 9 which became effective from January 1, 2018. With stability as our cornerstone, we are wellprepared for Basel III – the internationally agreed set of measures developed in response to the financial crisis of 2007-09 – both with regard to capital and liquidity. We are comfortably above the minimum requirements prescribed by the regulator in respect of both. The new Foreign Exchange Act, which replaced Sri Lanka’s existing Exchange Control Act takes a more liberalised approach to the transaction of foreign exchange – focusing on management rather than control. While the new Act proved to be a sharp learning curve for banks, there has been reasonable clarity and we believe the Act will have a positive impact in the long term. Banking on the future. Where once our arena was limited to our shores it now encompasses the whole world. And yet the whole world now fits in the palm of a hand – often in the form of a mobile phone. Meeting the needs of our customers means competing with the latest technological Commercial Bank of Ceylon PLC Annual Report 2017 21
  23. Strategic Report Managing Director ’s Review Commercial Bank is a listed company with a track record for transparency, efficiency, and productivity. It has the capacity to further financial inclusion within Sri Lanka and grow beyond our shores, putting Sri Lanka firmly on the map – both regionally and internationally. innovations by smart start-ups and also the biggest brands in the consumer space. Are we prepared for this challenge? We certainly are. During the year under review, we invested in a digital solution that will cover the entire spectrum from online and mobile banking services to internal systems and processes. To enhance customer service with an optimum level of security, this is a top-ofthe-line product from Fiserv, a global leader in financial services technology solutions. The new software solution will allow us to bring the convenience of online and mobile banking to the masses, ensuring that the communities within which we operate are future-ready. Subject to regulatory approvals, our goal is to provide customers with a completely digital banking experience. Our new mobile banking offering, for example, will sit completely within the customer’s phone, allowing them to do anything and everything related to banking wherever they are, whenever they want, without ever visiting any of our outlets at any stage. In the meantime, with customer enthusiasm for automation growing ever stronger, we will continue to set up automated banking centres (ABCs), and assisted ABCs. All new and newly refurbished branches will feature automated banking divisions to meet growing customer demand. The ABCs are a win-win solution for the Bank and our customers – a cost-efficient way to provide access to banking services around the clock. Such keenness for digital solutions among 22 the general public bodes well for Sri Lanka’s future. Feel free to turn to the section titled pages ‘Outlook for 2018 and Beyond’ (on 44 to 46) to learn more about our plans for the future. Banking beyond our shores. We continued to expand our business overseas in pursuit of growth and as a strategy to diversify risk exposures. Reflecting our stability and potential, International Operations contributed 17.5% of the profit before tax and accounted for 11% of total assets. Our ventures overseas began in Bangladesh with the acquisition of Crédit Agricole Indosuez in 2003. With an ever increasing range of customer touch points there, including Internet banking, we continue to make a name for ourselves as a leading regional bank. Our business in the Maldives has broken even in just over a year of operations and is now making a positive contribution to the Bank’s profitability. During the year, we also opened a second branch on the island of Hulhumalé, which is connected by road to the airport island of Hulhulé. In Myanmar, where we established a Representative Office in June 2015, we received a microfinance license in 2017. In 2018, we will concentrate on building and growing our operations in the country – ensuring that the groundwork for information technology systems, and Human Resources and other processes is well laid out. Besides our office in Rome, we are now present in eight other cities in Italy. Our license to operate in this country is a European Union license which allows us the opportunity to expand our business across the EU. Naturally, we are actively pursuing opportunities to grow in Europe. Having revamped our Social and Environmental Management System (SEMS) with technical input from the IFC, we will extend its application to our business in Bangladesh and the Maldives. This means that a greater part of the lending conducted through our International Operations will be evaluated through SEMS. We also worked with an IFC advisory to train our people to be able to identify and focus more on green lending opportunities, adding further value to the communities within which we operate. Commercial Bank of Ceylon PLC Annual Report 2017 Thanking our stakeholders. I am very thankful to all our stakeholders for their support – especially our shareholders for the capital that they have entrusted to us – our rights issue in June 2017 was fully subscribed. I am also grateful to our customers whose loyalty is our strength and whose banking needs inspire us to reach new heights in innovative banking every year. Our success has always pivoted on our winning team and the year under review was no different. With the wisdom and guidance of the Board, for which I am ever grateful, our people continue to build on their reputation for dedication and commitment. Yet again, they have pulled together to produce another strong set of results. The unmatchable haul of awards we have received year after year are testament to their engagement and drive, and have made us the Most Awarded Bank in Sri Lanka. These accolades include Best Bank in Sri Lanka (Global Finance Magazine, USA) for the 18th year and our position as the only Sri Lankan bank to be within the Top 1,000 Banks in the World (The Banker Magazine, UK) for the seventh consecutive year. To all our customers – I thank you for your loyalty and patronage. We will always endeavour to be worthy of it. To the Board whose guidance and visionary leadership I greatly value – I extend my warm appreciation. I am also grateful to the banking and financial services regulatory authorities of Sri Lanka, Bangladesh, Italy, the Maldives and Myanmar for their cooperation. Last, but by no means least, to every single member of staff – my heartfelt thanks for your invaluable contribution. At Commercial Bank, we take pride in the role we play in furthering financial inclusion in Sri Lanka and our commitment to the community remains as strong as ever. We are aware of and fully prepared to shoulder the hopes and dreams of our stakeholders as we continue banking on the future. Jegan Durairatnam Managing Director/CEO Colombo February 23, 2018
  24. Security is paramount The world is constantly seeking better ways of ‘securing the cloud’....or more accurately, the millions of bytes of data it stores...security is and always will be paramount Commercial Bank of Ceylon PLC Annual Report 2017 23
  25. Strategic Report GRI 102-23 BOARD OF DIRECTORS AND PROFILES Mr G S Jadeja Director Mr S Swarnajothi Director Mr L D Niyangoda Director Prof A K W Jayawardane Director Justice K Sripavan Director Mr K Dharmasiri Director Mr T L B Hurulle Director Mr M P Jayawardena Deputy Chairman Mrs J R Gamage Company Secretary 24 Ms N T M S Cooray Director Mr S Renganathan Chief Operating Officer Mr K G D D Dheerasinghe Chairman Commercial Bank of Ceylon PLC Annual Report 2017 Mr J Durairatnam Managing Director /CEO
  26. Strategic Report Board of Directors and Profiles Profiles of Board Members Mr K G D D Dheerasinghe Chairman Mr M P Jayawardena Deputy Chairman Chairman of the Board since July 2014 Deputy Chairman since July 2014 Chairman of the Board Human Resources and Remuneration Committee (BHRRC), Board Nomination Committee (BNC), Board Credit Committee (BCC), Board Investment Committee (BIC), and Board Related Party Transactions Review Committee (BRPTRC) Chairman of the Board Integrated Risk Management Committee (BIRMC) Independent Non-Executive Director since December 2011 Mr J Durairatnam Managing Director/ Chief Executive Officer Managing Director/ Chief Executive Officer since July 2014 Executive Director since April 2012 and former Chief Operating Officer Skills and experience Skills and experience Substantial professional experience A senior finance professional with wide in Banking, covering all aspects experience in the corporate sector, of International Trade, Off Shore Independent Non-Executive Director both in Sri Lanka and overseas. Banking, Credit, Operations, since December 2011 and Information Technology. He Fellow member of The Institute of Chartered Accountants of Sri Lanka. has served the Bank in several Skills and experience management positions, including, An eminent Economist with a Chief Operating Officer, Deputy Member of Sri Lanka Institute of distinguished career of over 41 years General Manager, Assistant General Directors since March 2000. in the banking industry. Published Manager – International Division widely and presented papers on and Head of Imports counting nine Other current appointments many aspects of economics years as a member of Corporate Chairman, Sri Lanka Institute of including debt capital markets and Management. Directors. Group Director, CIC financial globalisation in Sri Lanka Holdings PLC. Chairman, Commercial Holds a Bachelor’s Degree from the and overseas. Insurance Brokers (Pvt) Limited. University of Peradeniya. Holds a B.Phil. (Econ.) and B.Com. Group Consultant to Chemanex PLC Member of Sri Lanka Institute of with first class honours from the and Chairman of a few subsidiaries Directors since December 2013. University of Colombo and MA thereof. Serves on the Boards of (Econ.) from the University of many other private companies. Other current appointments Leeds, UK. Honorary Fellow of the Managing Director, Commercial Institute of Bankers of Sri Lanka and Previous appointments Development Company PLC (the Honorary ACI Diploma holder. Head of Treasury, Zambia above company is a subsidiary of Consolidated Copper Mines. Member of Sri Lanka Institute of the Bank), Director, Lanka Financial Directors since December 2015. Services Bureau Limited, Sri Lanka Shareholding of Bank Banks’ Association (Guarantee) Nil Other current appointments Limited, The Financial Ombudsman Chairman, Commex Sri Lanka S.R.L. Sri Lanka (Guarantee) Limited. Italy, Chairman, Serendib Finance Limited (the above companies are Previous appointments subsidiaries of the Bank). None Previous appointments Senior Deputy Governor of the CBSL. Chairman of the Monetary Policy Committee and the Sovereign Ratings Committee. Secretary to the Monetary Board. Alternate Executive Director for Bangladesh, Bhutan, India, and Sri Lanka at the International Monetary Fund. Chairman, Bartleet Finance PLC. Mr S Swarnajothi Appointed as an Independent Non-Executive Director in August 2012 Chairman of the Board Audit Committee (BAC) Skills and experience A senior finance professional with experience in both private and public sectors. Fellow member of The Institute of Chartered Accountants of Sri Lanka and CMA Sri Lanka, a member of CMA Australia. Holds a BSc. Degree in Management from the University of Sri Jayewardenepura and a MSc in Project Management from the University of Moratuwa. Member of Sri Lanka Institute of Directors since December 2015. Other current appointments Member of the Tax Appeals Commission, which position he had held since May 2014. Member of the National Salaries and Cadre Commission – March 2016. Member of the Governing Council of Moratuwa University – from August 2016. Previous appointments Auditor General of Sri Lanka from January 2008 to August 2010. Shareholding of Bank Holds 10,762 non-voting shares Shareholding of Bank Holds 616,800 voting shares Shareholding of Bank Holds 23,567 voting shares Commercial Bank of Ceylon PLC Annual Report 2017 25
  27. Strategic Report Mr S Renganathan Board of Directors and Profiles Prof A K W Jayawardane Appointed as an Executive Appointed as an Independent Director and Chief Non-Executive Director Operating Officer in in April 2015 July 2014 Chairman of the Board Technology Committee (BTC) Skills and experience A senior banker counting Skills and experience over 35 years, he led the Vice Chancellor of the University Bank’s acquisition of the of Moratuwa until November 27, Bangladesh operations of 2017 and a Senior Professor in Crédit Agricole Indosuez Civil Engineering. An academic (CAI), Commercial Bank’s of high repute, he brings first ever acquisition of considerable knowledge and a banking operation, experience of IT to the Board. subsequently building up the same as Country Holds a PhD in Construction Manager. He has also held Management and a Master of several other key positions Science Degree in Construction at the Bank including from the Loughborough Deputy General Manager – University of Technology, Personal Banking and the UK and a BSc. Eng. in Civil first Chief Risk Officer of Engineering Degree with the Bank. first class honours from the University of Moratuwa. Fellow of the Chartered Institute of Management Also a Corporate Member, a Accountants, UK (FCMA), Fellow and an International CGMA. Fellow of the IFS Professional Engineer of the School of Finance, UK Institution of Engineers, Sri (Fifs) and a Fellow of the Lanka (IESL), CEng, FIE(SL), Institute of Bankers of IntPE(SL), Fellow of the Sri Lanka (FIB). National Academy of Sciences of Sri Lanka, FNAS (SL), Member of Sri Lanka Founder Member of the Society Institute of Directors since of Structural Engineers December 2013. Sri Lanka MSSE (SL). Fellow of the Institute of Project Other current Managers, Sri Lanka, appointments FIPM (SL). Director of Commercial Bank of Maldives Private Member of Sri Lanka Institute Limited, Director of of Directors since December International Chamber of 2015. Commerce Sri Lanka. Other current appointments Previous appointments Director of Sierra Cables PLC, Member of the General Chairman of ONEzero Company Council of the Institute of Limited and a member of the Bankers of Bangladesh, Board of the Management of Founder President several other institutions. Bangladesh Chamber of Previous appointments Commerce and Industry, Dean, Faculty of Engineering Executive Member, Foreign Investor Chamber for six years. First NDB of Commerce and Industry, Bank Endowed Professor in Entrepreneurship at the Bangladesh. University of Moratuwa. President of the Institution of Shareholding of Bank Holds 319,792 voting and Engineers, Sri Lanka (IESL). 11,718 non-voting shares Shareholding of Bank Nil 26 Commercial Bank of Ceylon PLC Annual Report 2017 Mr K Dharmasiri Mr L D Niyangoda Ms N T M S Cooray Appointed as an Independent Appointed as an Independent Appointed as an Independent Non-Executive Director in Non-Executive Director in Non-Executive Director in August 2016 September 2016 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. Skills and experience He has a proven track record of over 30 years in the corporate environment and is qualified in various management fields both locally as well as internationally. Skills and experience A senior finance professional with wide experience in the private sector. Holds a Master’s of Business Administration from the University of Colombo, Fellow Member of the Chartered Holds a B.Phil. (Econ.) Consultant Business and Institute of Management and B.Com. with first class Administration experience for Accountants – UK (FCMA). honours from the University a period of 35 years. Member of Sri Lanka of Colombo. Also an Holds a Bachelor’s Degree Institute of Directors since Associate Member of the from the University of July 2006. Institute of Bankers of Peradeniya. Sri Lanka. Other current appointments Member of numerous Member of Sri Lanka Managing Director of professional bodies, including Institute of Directors since Jetwing Travels (Pvt) Limited, the Council for Agricultural December 2015. Advisory Council for Tourism Research Policy of Sri Lanka, and a member of the Board Standing Committee of Other current appointments of the Management of Agriculture and Veterinary None. several other institutions. Studies, University Grants Commission and Faculty of Previous appointments Previous appointments Agriculture, University of Non-Executive Nominee Former Chairperson of Peradeniya. Director on the Boards the Sri Lanka Institute of of Janashakthi Insurance Directors. Director – Finance Member of Sri Lanka Limited, Sabaragamuwa and Administration on the Institute of Directors since Development Bank, Merchant March 2000. Board of J Walter Thompson, Bank of Sri Lanka PLC, Non-Executive Director BOC Travels (Pvt) Limited, Other current appointments on the Boards of Capital BOC Property Development Managing Director/Chief Alliance Finance PLC, Trade & Management (Pvt) Finance and Investments Executive Officer of A Limited, Ceybank Holiday PLC and serves on the Baur & Co. (Pvt) Limited, Homes (Pvt) Limited, Hotels Director of Baur Asia (Pte) Boards of many other private Colombo (1963) Limited, and public companies. Limited, Singapore. Serves Ceybank Asset Management on the Boards of many other Limited, Lanka Securities Shareholding of Bank Companies. (Pvt) Limited, Institute of Holds 49,731 non-voting Bankers of Sri Lanka, Lanka Previous appointments shares Financial Services Bureau Chief Operating Officer – Limited, LankaClear (Pvt) A Baur & Company (Pvt) Limited, Bank of Ceylon Limited. (UK) Limited and Credit Information Bureau of Shareholding of Bank Sri Lanka. Nil Shareholding of Bank Nil
  28. Strategic Report Board of Directors and Profiles Mr G S Jadeja Mr T L B Hurulle Justice K Sripavan Mrs J R Gamage Company Secretary Appointed as an Independent Appointed as an Independent Non-Executive Director in April 2017 Non-Executive Director in April 2017 Appointed as Company Secretary in May 2014 Skills and experience Skills and experience Skills and experience Holds a Diploma in Refrigeration and Appointed as the Chief Justice of the Skills and experience A senior finance professional with An Attorney-at-Law who counts wide experience in the private sector . Air Conditioning (Dip.R), Southbank Democratic Socialist Republic of over19 years experience at the Bank. University, London SE1, UK and Sri Lanka on January 30, 2015 and Holds an MBA in Finance from She holds a Diploma in Company Engineering Apprentices I and II held office until March 1, 2017. Baruch College CUNY, a Master’s Secretarial Practice from the Institute Programme, University of Moratuwa. Degree in Hotel Management from Functioned as the Chairman of the of Chartered Corporate Secretaries Oberoi School of Hotel Management Member of Sri Lanka Institute of Judicial Services Commission of of Sri Lanka and a Post Attorney Directors since August 2017. (A Cornell University Affiliate Sri Lanka, Chairman of the Diploma in Banking and Insurance Programme) and B.A. (Honours) Incorporated Council of Legal Laws from the Incorporated Council Other current appointments from St. Stephen’s College, Education, Chairman of the Sri Lanka of Legal Education of Sri Lanka. None University of Delhi. Judges’ Institute and Chairman of She has received extensive training the Superior Court Complex, Board on Secretarial and Legal fields at a Previous appointments Other current appointments of Management. leading Law Firm prior to joining Senior Manager/Engineer, Global Head, Financial Innovation the Bank. Enrolled as an Attorney-at-Law of Tudawe Trading Co. (Pvt) Limited, at the International Finance the Supreme Court of Sri Lanka Member of Sri Lanka Institute of Director – General, Corporation. in 1977. He obtained a Diploma in Directors since October 2017. Telecommunications Regulatory Industrial Law from the University Commission of Sri Lanka, Previous appointments of Colombo in 1992 and Master of Other current appointments Designs and Applications Held several key positions as Laws from the University of London None Engineer, Metropolitan Air Con and Regional Industry Head – Asia, in 1994. Refrigeration Limited, London, UK, Senior Manager– Latin America Previous appointments Senior Engineer, Walker Sons & Co. Member of Sri Lanka Institute of and the Caribbean Region, Mexico/ None Limited, Divisional Manager/Chief Bogota, Manager – East Asia Directors since August 2017. Engineer, Walker Sons & Co. Limited, and The Pacific Region, Hong Shareholding of Bank Manager, Worldview Global Learning Other current appointments Kong, Senior/Principal Investment 76,564 voting shares Officer – Financial Markets Division, and Manager – Administration, None Washington D.C. at The International Foundation for Co-Existence. Finance Corporation. Previous appointments He was a Corporate Member Head of the Court of Appeal Unit in (M. Inst.R), of the Institute of Also served as a Director the Attorney General’s Department Acquisition/Integration and Business Refrigeration, Surrey, United and handled a large volume of work Development, New York, NY, Director Kingdom (1977-1978). both in the Court of Appeal and Finance and Assistant to the CFO, He was awarded the INFOTEL in the Supreme Court including Manager/Senior Manager – Finance “92 Pioneering” Award at the Bills and Fundamental Rights at American Express Travel Related inauguration of INFOTEL 2017 ICT Applications. Prior to the elevation Services Inc. Exhibition and was a member of the to the Court of Appeal Bench he Public Representations Committee functioned as a Legal Consultant for Shareholding of Bank on Constitutional Reform the National Savings Bank for Nil (PRC – CR) 2016/2017. two years. Appointed as a Non-Executive Director in September 2016 Shareholding of Bank Nil 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. Shareholding of Bank Nil Commercial Bank of Ceylon PLC Annual Report 2017 27
  29. Strategic Report OUR VALUE CREATION PROCESS As a conventional commercial bank , the Commercial Bank’s business model is primarily centred around financial intermediation and maturity transformation. Financial intermediation and maturity transformation Financial intermediation entails the Bank acting as an intermediary between various stakeholders – depositors and borrowers, importers and exporters, those who remit money and beneficiaries, entrepreneurs and investors, to name a few. Maturity transformation on the other hand, is borrowing funds on short-term maturities and lending such funds for longer tenures. Financial intermediation and maturity transformation are two activities that are central to the economic development of the country. These two activities enable the Bank to earn two broader categories of income – net interest income from fund based operations and fee and commission income from fee based operations. Fund based operations involve the process of borrowing from those who save money incurring interest expenses and lending such funds to those who need money for investments and consumption earning interest income. The difference between the lending rate and the borrowing rate, which is the interest margin, compensates the Bank for credit risk, funding risk and the interest rate risk. All other services provided by the Bank not involving funds are fee based operations. Reflecting efficient financial intermediation, the Bank generated 78.02% of its total operating income by way of net interest income (74.43% in 2016) and the balance from fee based sources, exchange profit, trading gains and recoveries of loans written off/provisions reversals for the year 2017. 28 Gearing Financial intermediation and maturity transformation cause the business model of banks to substantially differ from other business organisations. Principal difference is the substantially lower Return on Assets (ROA) that tends to be as low as 2% in general in stark contrast to between 10% – 20% earned by corporates in other sectors. Hence, the banks resort to the process of gearing in order to make the 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 banks 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 cornerstone of our business model, which enables us to operate at around 10 times higher business volumes compared to the shareholders’ equity. Our license to mobilise deposits from the public has made it possible. However, we are well aware that gearing exposes the Bank to a multitude of internal as well as external risks. In addition, certain emerging global developments are now threatening to disrupt the conventional business models of banks. As you would read later in this 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 the table below, Commercial Bank has been able to improve its profitability over the years while 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. Subject to adjustments for scrip shares and the rights issue, the market price of a ordinary voting share grew from Rs. 120.40 to Rs. 135.80 over the past five years with a Price to Book Value of 1.26 times as at December 31, 2017, the highest among the corporates in the Bank, Finance and Insurance Sector of the Colombo Stock Exchange. While growing organically and in the domestic market, the Bank has taken steps to leverage the 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. Gearing and Profitability Table – 04 2017 2016 2015 2014 2013 1.54 1.53 1.42 1.60 1.87 Gearing (Times) 11.61 12.76 11.90 10.63 9.84 ROE (%) 17.88 19.52 16.90 17.01 18.40 ROA (%) Commercial Bank of Ceylon PLC Annual Report 2017
  30. Strategic Report Our Value Creation Process Our business model Figure – 05 Bank Vision Sources of inputs Financial capital Over 14,000 investors in shares/ debentures Over 50 other lenders Process ∞ ∞ ∞ ∞ ∞ ∞ ∞ ∞ Data analytics Customer deposits Services and supplies Relationships Collaborations and alliances Survey findings Assurance services Utilities Outputs Delivery channels Core activities Financial intermediation Maturity transformation (Our Value Creation Process on page 28.) Products and services Natural capital Land Water Energy Air Internal processes Shareholders’ funds Borrowed funds Financial covenants Property, plant and equipment Information and Communication Technology ∞ Institutionalised knowledge ∞ Best practices ∞ Social and Environmental Management System ∞ ∞ ∞ ∞ ∞ Service standards Social and network capital Over 2 Mn. deposit customers Over 600 suppliers 55 correspondent banks Investors Dividends, Interest, and capital gains Higher Price to Book Value A loyal investor base with a long-term view Lending portfolio ∞ Investment portfolio ∞ Advisory services ∞ Growth ∞ Profits ∞ Taxes ∞ Liquidity ∞ Optimum risk-return trade-off ∞ Enhanced productivity ∞ Compliance ∞ Funding and liquidity management Inputs Capital management Human capital 4,982 employees with a cumulative service of 57,852 years Mission Governance Framework Manufactured capital Procured by investing over Rs. 15 Bn. of financial capital Intellectual capital Institutionalised knowledge in terms of systems, processes, procedures and competencies Beneficiaries and outcomes Customers Realised growth opportunities Safety and security for savings Financial inclusion Unparalleled convenience and unprecedented choice A satisfied and growing customer base Employees Remuneration and benefits Career development Job satisfaction Great Place to Work Benchmarked service standards ∞ Range of products and services ∞ Streamlined internal processes ∞ Widest reach ∞ Responsiveness ∞ Suppliers and business partners Creativity ∞ An integrated supplier chain Innovativeness ∞ Supplier success and growth CSR activities ∞ Long-term relationships New connections ∞ Green processes and facilities ∞ Government Revenue and tax collection facilities Economic growth Financial sector stability Economic opportunities Compliance Strategic imperatives Prudent growth Customer centricity Digital leadership Operational excellence Risk management Community Responsible banking Financial inclusion Community development Social “Licence” to operate Sustainability Development Goals Operating environment (KPIs relating to above outcomes are given in Highlights on pages 10 and 12) Commercial Bank of Ceylon PLC Annual Report 2017 29
  31. Strategic Report Our business model GRI 102-42 CONNECTING WITH STAKEHOLDERS The diagram overleaf depicts the inputs used and the processes deployed for financial intermediation and maturity transformation , the two primary activities of the Bank. It also illustrates the consequent outputs generated by the Bank and the outcomes experienced by the stakeholders in 2017. Our stakeholder engagement process Figure – 06 Identification yy Identify and prioritise issues yy Identify stakeholder group Planning yy Establish objectives, scope, and timelines A stakeholder can be an individual or a group that is significantly impacted by an organisation’s actions, products and services. In our case their perceptions and behaviour can also have a powerful effect on the Bank’s ability to carry on its activities and meet its strategic goals. Given the significant impact stakeholders have on an organisation and vice versa it is vital for the Bank to identify them and communicate effectively. Connecting with our stakeholders helps us to understand and address their concerns (Figure 06) while balancing the distribution of value created. yy Identify specific stakeholders yy Prioritise stakeholders yy Determine engagement mode Our stakeholders are: yy Allocating necessary resources Feedback Feedback on performance negative/positive Engagement yy Customers yy Shareholders and investors yy Employees and employee associations yy Government institutions and regulators yy Conduct engagement yy Suppliers and business partners Evaluation yy Community and environment yy Evaluate results We maintain formal mechanisms to engage with each group of stakeholders page 31). Responsibility (Figure 07 on for such engagement is shared across the organisation at every stakeholder touch point. yy Evaluate effectiveness of the process yy Determine the need for further engagement Prioritisation We value stakeholder engagement as it gears us for the future, highlighting business model improvements, driving innovation, and providing invaluable insights for the strategic planning process. yy Prioritise findings for further action Designing yy Identify methods/modes of addressing the issue yy Formulate necessary policies and procedures yy Pre-implementation testing, if required Implementation Monitor Measure the effectiveness, monitor lapses/ shortcomings yy Communicate policies, procedures, and timelines of implementation yy Implementation Reporting yy Report to stakeholders 30 Commercial Bank of Ceylon PLC Annual Report 2017
  32. Strategic Report Connecting with Stakeholders GRI 102-40 , 102-43, 102-44 Mode and frequency Stakeholder aspirations Mode and frequency Stakeholder aspirations How we connect with stakeholder groups Figure – 07 Shareholders and investors Employees and employee associations Customers yy yy yy yy yy yy yy yy yy yy yy yy yy yy yy yy yy yy yy Financial performance Governance Transparency and disclosure Business expansion plans Risk management Sustainable growth Performance and reward management Training and development Career advancement opportunities Work-life balance Retirement benefit plans Value driven corporate culture Diversity and inclusion Perception of a prosperous future for the Bank Customer service Customer security and privacy Service quality Financial inclusion Affordability of services and convenience yy Grievance handling mechanism yy Financial education and literacy Engagement activity Frequency Engagement activity Frequency Engagement activity Frequency Annual Reports and AGMs Annually Manager’s Conference Annually Customer visits As required Extraordinary General Meetings As required Town hall meeting Annually Complaints received As required Interim financial statements Quarterly Regional review meetings Quarterly Investor presentations As required As required Continuous Branch marketing meeting Monthly Complaints resolution officer, relationship managers Press conferences and releases As required Training programmes As required ComBank Biz Club Announcements to CSE As required Intranet Continuous Branch network and call centre Continuous One-to-one discussions As required Special staff events Annually Media advertisements As required Corporate website Continuous Trade union discussions As required Corporate website Continuous Employee satisfaction survey As required Customer workshops As required Government institutions and regulators Suppliers and business partners Community and environment yy Compliance with directives and codes yy Local and overseas expansion yy Microfinance and SME development yy Consolidation of the financial sector yy yy yy yy yy yy yy yy yy yy yy yy yy Contractual performance Future business opportunities Maintaining healthy relationships Timely settlement of dues Ease of working Growth potential Engagement activity Frequency Engagement activity Frequency On-site surveillance Annually Directives and circulars As required Supplier relationship management As required Meetings and consultations As required On-site visits and meetings As required Press releases As required Periodic returns As specified Submissions to policymakers As required Responses to consultation papers on Directions and other regulations As specified Responsible financing Commitment to community Financial inclusion, recruitment Microfinance and SME Ethics and business conduct Environmental performance Employment opportunities Engagement activity Frequency Delivery channels Continuous Press releases, conferences and media briefings As required Informal briefings and communications As required Public events As required Corporate website Continuous Commercial Bank of Ceylon PLC Annual Report 2017 31
  33. Strategic Report GRI 102-19 , 102-46, 102-4 MATERIALITY MATTERS The definition of a material topic is one that significantly affects the Bank’s ability to create value over the short, medium and long-term. A topic’s materiality is determined by its relevance and the magnitude of impact as well as the probability of occurrence. The Bank’s value creation process, corporate planning exercise and findings of the stakeholder engagements are bases upon which the materiality assessment is conducted keeping in mind the new opportunities and emerging major local and global social trends. The results revealed that stakeholder concerns remain largely unchanged from the previous year. Based on principles of sustainable growth, our strategy focuses on understanding stakeholder needs and delivering value in a responsible manner that ensures we remain relevant for the future. Material issues identified were framed in terminology relevant to the Bank and mapped to the topics of the GRI Standards and the UNGC Principles (Figure 09 on page 34). Following this reconciliation, issues that were not specifically included in the GRI Standards were also included as material topics. We then mapped the material topics to the Bank’s strategic imperatives: prudent growth, customer centricity, digital leadership, operational excellence, and risk management which rest on a foundation of sound corporate governance (Figure 09 on page 34). GRI Content Index and the boundaries for material topics are given in Annex 4 and 5 on pages 418 to 421. Due to the impracticality of addressing all issues that are material to the Bank and its stakeholders here, this section only covers aspects that are high in importance. Please refer Annex 5 on page 421 for the complete list of material aspects. Management approach The Bank manages its material topics through its strategic planning process by assigning responsibility to the heads of the relevant divisions of the Bank, allocating necessary resources based on the significance of each material topic towards achieving the aforesaid strategic imperatives. Goals and targets, where relevant are embedded into the KPIs of the Key Management Personnel to ensure that the Organisation achieve its objectives with regard to its material topics and are reviewed at regular intervals. Many policies are in place guiding its people to conduct activities in a responsible, transparent, and ethical manner in managing the material topics. These policies are duly adopted by the Board of Directors and are reviewed at predetermined intervals to stay current with the changing environment. Where relevant grievance mechanisms are in place with assigned responsibility to the relevant divisional heads to manage, address and resolve grievances. Screening is carried out into the social and environmental aspects of the Bank’s lending to its customers and dealings with its business partners. Internal and external auditing and verifications are carried out to ensure that the internal controls, policies and procedures laid down to achieve the objectives of material topics are adhered to. Findings are reported to the Board of Directors and/or to the Management Committees on a regular basis for corrective action where necessary. Materiality matrix Figure – 08 201, 202, 205, 401, 402, 404, 405, 406, 407, 408, 409, 410, 412, 417, 418, 419, A, B 204, 403, 413, C, D 302 Moderate 306 Non-GRI topics 301, 308 A – Risk management and business continuity B – Digitalisation and channel migration C – Bank’s CSR activities D – Financial literacy 414 Low Significance to the Stakeholder High 203 Low Moderate Significance to the Bank 32 Commercial Bank of Ceylon PLC Annual Report 2017 High For the list of GRI Topics and other relevant details refer page 421. thereon, please
  34. Strategic Report Materiality Matters External ratings , awards and accolades bear testimony to the success of the Bank’s approach in managing its affairs. In this respect, the Bank’s efforts during the year were directed in line with the following strategic imperatives. yy Prudent growth: Embracing principles of inclusive and responsible banking the Bank focused on expanding its market presence and improving its economic performance as detailed in the section on Financial Capital pages 54 to 72). ( yy Customer centricity: Putting the customer at the heart of all we do, the Bank ensures that all products and services are in compliance with all regulations, and accurately labelled and described to enable customers to make informed decisions. The Bank’s marketing communication policy ensures that ethics are a priority in all customer interactions. Stringent systems and processes are in place to ensure that customer privacy is maintained at all times. Balancing the needs of our diverse customer base, the Bank is striving to deliver convenience through tailoring technological solutions whilst keeping at heart the need for human touch. Freeing up staff from back office chores has helped increase the service standards with more attention given to customers and guide them to use digital channels. This also provides career development opportunities for the staff. yy Digital leadership: In today’s context, gearing itself to be future ready means focusing and investing in innovation. Finding new ways to extend our reach and increase financial inclusion through digital channels has enabled us to achieve digital leadership and to provide contextual banking to customers by being where they are and when they want, enabling faster and secure transactions. yy Operational excellence: In a service organisation operational excellence depends on the competency of its employees and the efficiency of its processes. It is a winning team that drives the excellence of a service organisation. The Bank has taken many measures, including training and education, to ensure that its employee cadre remains efficient and well informed, (for more details please refer the pages 94 section on Human Capital on to 101). Automation of processes, streamlining and re-engineering of processes are steps taken to speed up the delivery of service enhancing the value delivered to the customers and enhancing value for shareholders. yy Risk management: The prioritisation of risks to minimise the impact of unforeseen and unfortunate events and maximise the realisation of opportunities include systems and processes that ensure the continuity of business, prevent corruption and ensure compliance at all times. While the Bank’s Internal Audit Department continues to conduct surprise checks, its recent restructure sees this function taking on the role of trusted advisor, helping business and service units remain compliant (for more details please refer the section on Governance and Risk Management on pages 105 to 158). The above strategic imperatives are underpinned by: yy Corporate governance: The Bank has a robust governance framework in place and an organisational structure with clearly defined roles and responsibilities that is described in detail in the section pages titled “How we govern” (on 106 to 117). Historically conservative, the Bank continues to uphold values such as prudence, vigilance, directness, and simplicity in the way it conducts its business and designs products and services. These qualities underpin best practices that have been devised over nearly half a century and which are diligently put into practice on a daily basis. They are what differentiate the Bank from its peers. With the Bank’s leadership committed towards openness, honesty, integrity, and ethical behaviour the tone at the top drives employee culture, attitudes and behaviour. The Bank’s Code of Ethics outlines the Organisation’s ethos and its expectations of employees at every level. Commercial Bank of Ceylon PLC Annual Report 2017 33
  35. Strategic Report Materiality Matters Material topics for 2017 Figure – 09 Population growth Urbanisation Wealth Mapping material topics to GRI Disclosure and UNGC Principles Material topics GRI Disclosure UNGC principles Prudent growth Venturing into new markets Inclusive banking Responsible lending Responsible investments Earnings growth 201, 202 413 307, 408, 409, 412, 419 Principles 1, 4, 5, 7, 8, 9 201 Customer centricity Customer convenience Customer satisfaction Responsible marketing 417 Channel migration Automation Innovation Food security Material resource scarcity Digital leadership Operational excellence Winning team Employee productivity Quality consciousness Process automation 401, 402, 403, 404, 405, 406, 407, 408, 409, 412 Principles 1-6 Risk management Conduct and business ethics Community engagement Capital management Funding and liquidity management Responsible sourcing Environmental concerns Business continuity Information security Compliance 205 413, 419 201 201 204, 308, 414 302, 305, 306, 308 418 Strong governance and organisation culture Tech revolution 34 Commercial Bank of Ceylon PLC Annual Report 2017 Principles 7, 9 Principle 10 Climate change Fuel and energy
  36. Strategic Report Managing Director ’s Review Disruption is the norm What serves us well today could be obsolete tomorrow... a disruption of status quo is not always a bad thing! Commercial Bank of Ceylon PLC Annual Report 2017 35
  37. Strategic Report RISK REVIEW The Bank is operating in a highly competitive and dynamic environment . From a risk management perspective, year 2017 was characterised by changes in regulatory frameworks and reporting guidelines with the phased in implementation of Basel III Framework and SLFRS 9, worldwide spread of ransom ware to unprecedented levels targeting financial institutions in particular, significant investments for enhancing system and process capabilities arising from the above, and ripple effects of natural disasters throughout the year. Banks were seen approaching shareholders by way of rights issue of shares and capital markets by way of Basel III compliant debentures for augmenting increased levels of capital requirements. Further, competition for stable funding intensified with the implementation of new liquidity regulations in terms of Basel III and aggressive pricing for deposits is expected in the near future. Credit growth continued at an accelerated phase in the first half of the year, but tightening of the monetary policy saw it slow down during the second half of the year. Despite a growth in non-performing loans and receivables by Rs. 19 Bn. during the year, banking sector asset quality remained more or less at the same levels of those reported at end 2016. Liquidity too remained at levels above optimum throughout the year. Interest margins continued to be under pressure. Nevertheless, as evident from the risk
profile (refer Table 05 below) and the operating results posted for the year, the rigorous risk management framework in place enabled the Bank to successfully manage its risk exposures, strengthen its stability and enhance profitability during the year. Overall risk profile did not undergo any significant changes during the year. Progress in 2017 Key initiatives during the year in this regard include: yy Obtaining validation of the VaR model from an external consultant. yy Setting up and applying limits in VaR model to control market risk related portfolios. yy Significantly strengthened the Bank’s Social and Environmental Management System (SEMS) by recruiting experts on the subject and impanelling consultants from the market thereby enhancing the level of its acceptance within the Bank. yy Successful rights issue of shares during the year strengthened the Common Equity Tier 1 and total Tier 1 capital by Rs. 10 Bn. yy Continued overseas expansion by incorporating a fully owned subsidiary for microfinance lending in Myanmar which will help geographical diversification of risk further. yy The Bank continued to evaluate options available for implementing an Enterprise Risk Management system. Risk profile compared to risk appetite Risk category and parameter Description Table – 05 Policy parameter Actual position 31.12.2017 31.12.2016 2.18% Credit risk Quality of lending portfolio Concentration Gross NPA Ratio 4% – 5% 1.88% Net NPA Ratio 2.5% – 3.5% 0.92% 1.09% Provision Cover 30% – 40% 51.02% 50.11% Weighted Average Rating Score of the overall lending portfolios to be above 35% – 40% 57.63% 56.84% 40.39% Loans and Advances by Product – Highest exposure to be maintained as a percentage of the total loan portfolio 30% – 40% 21.46 0.015 – 0.025 0.016 0.0158 Exposures exceeding 5% of the Eligible Capital (using HHI) 0.05 – 0.10 0.0071 0.0061 Exposures exceeding 15% of the Eligible Capital (using HHI) 0.10 – 0.20 0.0095 0.0075 4% – 5% 4.04% 3.97% 20% – 30% 24.71% 20.55% AA AAA AAA Advances by Economic sub-sector (using HHI) Exposure to any sub-sector to be maintained at Aggregate of exposures exceeding 15% of the Eligible Capital Cross border exposure 36 Rating of the highest exposure of the portfolio on S&P Investment Grade – AAA to BBB- Commercial Bank of Ceylon PLC Annual Report 2017
  38. Strategic Report Risk Review Risk category and parameter Description Policy parameter Actual position 31 .12.2017 31.12.2016 Market risk Interest rate risk Interest Rate Shock: (Impact to NII as a result of 100bps parallel rate shock for LKR and 25bps for FCY) Maximum of Rs. 1,300 Mn. Re-pricing Gaps (RSA/RSL in each maturity bucket – upto one year period) <1.5 Times (Exemption < 2.5 times for 1 Month bucket) Rs. 1,243.61 Mn. Rs. 670.86 Mn. 0.89 Times (2.34 times for 1 Month bucket) 0.96 Times (2.03 times for 1 Month bucket) Strategic risk Capital Adequacy Ratio CET1 Over 10% 12.11% 10.37% Total Capital Over 14% 15.75% 14.87% Over 20% 17.88% 19.52% ROE Creditworthiness – Fitch Rating Besides the conventional risks the Bank
is faced with, it paid attention to several emerging risks and uncertainties with potential to disrupt banking business models in the future, arising from certain global developments and deliberated on the strategic responses thereto. A detailed review of these risks and mitigation measures is given in the Section on “Managing Risk: An Overview” on page 154 to 158. Other developments and outcomes in relation to the risk profile and risk management initiatives during the year included: yy Increased foreign currency borrowings after a careful analysis of cost of funds and maturity profile of assets and liabilities. yy Stress tested the assets portfolio for Credit, Market and Operational risk under different stress scenarios which revealed that the risks associated therewith were well within the risk tolerance levels even under severe stress levels. AA (lka) yy Gearing in terms of on balance sheet assets as well as risk weighted assets improved from 12.92 (times) and 6.72 (times) in 2016 to 10.68 (times) and 6.35 (times) respectively in 2017. yy Both gross and net NPL ratios improved to 1.88% and 0.92% in 2017 from 2.18% and 1.09% respectively in 2016 yy Both Provision Cover and Open Credit Exposure ratios improved to 51.05% and 7.60% in 2017 from 50.11% and 9.53% respectively in 2016. Plans for 2018 and beyond The Bank will continue to strengthen the Risk Management Framework further by taking into account the evolving regulatory requirements and conventional as well as emerging risks and uncertainties. Specific initiatives in this regard will include: yy Having the rating systems externally validated with the critical mass of information now in place, AA (lka) AA (lka) yy Implementing a new Assets and Liabilities Management System with an embedded risk based Funds Transfer Pricing mechanism and risk adjusted return calculations, enabling the Bank to better align the cost of capital to the risk profile of the borrowers. yy Gradual shifting of the maturity profile of assets from long term to medium term to improve maturity profile of assets and liabilities yy Furthering the success experienced in Bangladesh, Maldives, and Italy, continuing to explore opportunities for regional expansion to other geographies which will diversify the risk profile yy Maintaining a persistent focus on emerging risks and continuing to invest in improving protection against cyber security capabilities. yy Further integrating systems for effective risk management yy Intensifying the mobilization of stable funding Commercial Bank of Ceylon PLC Annual Report 2017 37
  39. Strategic Report MANAGING FINANCIAL CAPITAL Capital plays multiple roles in a bank . It helps a bank to acquire property, plant and equipment to establish and perpetuate business, protect uninsured depositors, act as a buffer to absorb unanticipated losses and also serves as a regulatory restraint on unjustified asset expansion. It is perhaps the last two roles that prompted regulators to prescribe higher capital, both in terms of quality and quantity, depending on the level of sophistication of a bank’s operations. As a result, banking has become a capital intensive business and capital is becoming the “limiting factor” inhibiting the growth of the banking industry in the face of tightening regulatory requirements and reporting standards. Both Basel III and SLFRS 9 promise to have a profound impact on the emerging banking landscape. Banks will require more capital and liquidity in future and would be forced to take less risk, all leading to higher costs and lower returns. In the circumstances, the Bank accords the highest importance to pro-actively managing the capital at its disposal to remain solvent. Through the Internal Capital Adequacy Assessment Process (ICAAP) as well as the annual strategic planning and budgeting exercise, the Bank assesses its capital requirements. The Bank deploys tools such as prudent capital allocation, balancing risk-weighted assets, timely pricing, dividend policy, products and services portfolio and capital instruments for managing capital which has become a scarce resource. Capital management objectives Objectives of the Bank’s Capital Management efforts include; yy Compliance with the regulatory requirements yy Maintaining internal capital targets which are more stringent than the regulatory requirements yy Optimum capital usage for maximum profitability thereby meeting the expectations of investors yy Supporting future business expansion yy Supporting desired credit rating 38 yy Satisfying Basel III capital requirements while bearing the impact of SLFRS 9 due to additional provisions under expected credit loss model which requires provisions on off balance sheets exposures too in additions to current provisions made on balance sheet exposures. Factors affecting capital Restrictive capital definitions, difficulty in raising fresh capital given the poor market conditions, higher risk-weighted assets, additional capital buffers and higher capital adequacy ratios required under Basel III regulations are already in place pressuring capital requirements of banks. In addition, higher impairment provisioning anticipated based on the expected credit loss model under SLFRS 9 as opposed to the current incurred loss model under LKAS 39 which will make the provisions better aligned with the higher revenues from riskier loans, too will have implications on capital. In addition, the Debt Repayment Levy proposed in the Government budget 2018 which is to be borne by the financial institutions and the removal of most of the tax concessions currently available which will increase the tax payments are also expected to have a significant impact on the amount of capital that banks can internally generate. During the year risk-free interest rates averaged over 9.5% and as a result, shareholders expect a risk premium in the return on their investments given the risks associated with investments in shares in the Bank. Raising Common Equity Tier 1 (CET 1) capital is relatively expensive compared to Basel III compliant Tier 2 capital due to the perpetual nature of such funds. Tier 2 capital with convertible options to be compliant with Basel III are saddled with additional risk premium but is tax friendly with the interest expense being tax deductible and whereas the cost of CET 1 capital is not. Increase in CET 1 capital results in a higher dividend payout resulting in less profit being ploughed back to the Bank. In order to address this issue, the Bank is currently evaluating the optimum mix of CET 1 and Tier 2 capital. Commercial Bank of Ceylon PLC Annual Report 2017 Progress in 2017 Despite the above pressures, by properly aligning capital planning with the corporate strategy, the Bank was able to successfully manage its capital which remained at comfortable levels throughout the year and as at the year end, leaving sufficient leeway for future business expansion. The primary contributors were the rights issue of shares in June 2017 infusing Rs. 10 Bn. and the relatively low levels of gearing that the Bank is currently operating at both in terms of on balance sheet gearing [10.68 times] as well as gearing in terms of risk-weighted assets [6.35 times]. The Bank also maintained a substantial portfolio of assets in Government securities which required no capital allocation. However, these too will attract a capital charge going forward. During the year, the Bank assessed its capital requirements under the ICAAP using standardised approach for credit and market risk and basic indicator approach for operational risk, taking into account a broader range of risks and the Bank’s risk and capital management capabilities. It revealed the need for a capital infusion to support the growth trajectory of the Bank for next two years, prompting the Bank to venture in to a rights issue. The ICAAP also assisted the Bank in realigning business processes to optimise capital utilisation. In addition, the Bank reviewed its Risk Control Self Assessment processes twice during the year to ensure the adequacy of processes to identify, record and assess potential risks and related risk management controls and implemented necessary actions to fill identified gaps. The Bank also focused on generating tradeable loan assets to be able to dispose of such assets as and when required to reallocate funds for more capital efficient projects which also helped the Bank to increase its fee based income.
  40. Strategic Report Managing Financial Capital Capital Adequacy ratios and profitability ratios over the past 5 years are given on page 10 under Financial goals and achievements . In line with the regulatory roadmap for additional capital requirement under Basel III guidelines the Bank also aligned its strategies to optimize the level of capital. Total RWA for Credit Risk and Market Risk have increased to Rs. 725.5 Bn. and Rs. 6.3 Bn. respectively during 2017 from Rs. 602.9 Bn. and Rs. 3.6 Bn. during 2016. The RWA for Operation Risk meanwhile has increased to Rs. 57.9 Bn. during 2017 compared to Rs. 51.3 Bn. in 2016. The overall increase in RWA during 2017 was Rs. 131.8 Bn. which has been mainly contributed by the growth in loan book. Having identified the need for expanding the capital base and after a careful analysis of the prevailing market conditions, the Bank has decided to issue 50 Mn. listed, rated, redeemable, subordinated Basel III compliant debentures with a non-viability conversion feature to raise Rs. 5.0 Bn., with the option of going upto Rs.10.0 Bn. to improve the Tier 2 capital requirements. The CET 1 Capital stood at 12.11% as against the regulatory requirement of minimum 6.25%. The total capital ratio had improved to 15.75% in 2017 compared to 14.87% in 2016 which was well above the regulatory requirement of 11.75% Basel Work Group of the Bank met on a halfyearly basis to assess the capital adequacy and other capital related issues and to formulate and escalate its suggestions for implementation by way of strategies. The Bank has sought approval from the Regulator to adopt Alternative Standardized Approach (ASA) in computation of risk weighted amount for operational risk as against the Basic Indicator Approach (BIA) which too is expected to give a substantial improvement in CAR. While the Bank has been historically generating significant amounts of capital through retained earnings, as evident from the issues of equity and debt instruments in the past, the Bank has a loyal shareholder base who takes a long-term view of their investment in the Bank and is ever willing to support the Bank at favourable terms whenever additional capital is required for business expansion. 2018 and beyond Implementation of SLFRS 9 and Basel III would demand key changes in the way banks govern and report the asset side of their balance sheets, and could have a material impact on regulatory capital requirements. The capital planning therefore has become a critical exercise for all banks. The implementation of the SLFRS 9 impairment model puts extra pressure on the already dwindling NIM of banks and eventually the ability to plough back profits as capital for future expansion purposes, with the shift to the expected credit loss model. This has over emphasized, the need to move for rating based calculation on expected loss compared to the days past due (DPD) method. During 2018 the Bank will be undertaking a validation of its rating models by an independent party, which is a pre-requisite for relying on the rating based expected loss calculation as it can provide much improved loan loss provision figures thus easing the pressure on the scarce capital. In addition, a number of initiatives are in progress with regard to automation of certain back office functions which will bring about cost advantages to the Bank leading to improvement of profits that could end up as capital through retention. Selection of sources of funding while having an understanding of regulatory controls in place as well as business requirements to grow in a sustainable manner, the Bank will rebalance its portfolios not only from a liquidity perspective but also from a profitability perspective to create better shareholder value. Applying risk based pricing too is likely to be a universal approach to be adopted by all contenders in the banking environment in order to improve the NIM and will be pursued vigorously by the Bank as well. The bank feels that the need to adopt more robust risk based pricing techniques will be adopted across the industry in line with some of the developments facilitating a level playing field for such adoption. Revisiting the attractiveness of certain products in terms of utilization levels especially, the revolving limits to reduce the impact on provision requirement on the unutilised committed credit lines with the adoption of SLFRS 9 will push all banks in this direction. Meanwhile the Bank will upgrade risk profile of its asset portfolio by continuously striving to maintain a high quality asset book through careful and strict risk assessments at the time of on-boarding new counterparties. While the borrowings in the past have primarily been from a funding and liquidity perspective, going forward the Bank will explore borrowings from a capital perspective by going for convertible structures. The Bank will explore options available to adopt a scientific approach to capital allocation as well. The current Funds Transfer Pricing (FTP) system is mostly based on duration rather than risk associated with the loans granted. The Bank is currently evaluating a FTP mechanism which will also capture the cost of capital through a revised yield curve, so that the cost of additional capital to be consumed will be recovered from the end user. Commercial Bank of Ceylon PLC Annual Report 2017 39
  41. Strategic Report FUNDING AND LIQUIDITY MANAGEMENT Funding and liquidity is an important criteria for the resilience of the financial services industry . Circumstances that led to the financial crisis in 2007 and events that followed reinforced the fact that funding and liquidity is as important, if not more, as capital. Yet, unlike for capital, there were no internationally harmonised standards with regard to liquidity. As a result, Basel III included provisions to strengthen the funding and liquidity risk management of banks with a view to promote the short-term and long-term resilience of a bank’s liquidity risk profile through the introduction of the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR) respectively. In addition to the Statutory Liquid Assets Ratio, the LCR came into effect in 2015 while the NSFR will come into effect from April 1, 2018, both promising to penalise banks for excessive reliance on short-term, wholesale funding to support long-term assets. Accordingly, to make it viable as well as for maintaining public trust in the Bank and the financial services system, the Bank accords as much importance to funding and liquidity as for capital, for ensuring that the Bank has sustainable sources of funding and maintains adequate levels of liquidity at all times. The Bank never compromises on its liquidity in its drive to generate returns for investors. The Assets and Liabilities Committee (ALCO) of the Bank which meets fortnightly actively monitored the funding and liquidity requirements and pricing of assets and liabilities, taking into account liquidity constraints and pricing challenges. The Bank took measures to encourage the use of electronic cash and cards in order to reduce cash holdings. The Bank has established credit lines with strong overseas counterparties, enabling it to access foreign currency funds at attractive prices. The Bank has wider access to retail deposits through its branch network and relies on that stable funding source as the primary source of funds for onward lending. However, the Bank is not averse to avail low cost foreign currency borrowing opportunities available in the market, provided the interest and swap cost attached to such borrowing is cheaper as compared to the cost of wholesale deposits. 40 The Bank deploys tools such as compliance with reserve requirements, liquid assets ratio, Liquidity Coverage Ratio, Net Stable Funding Ratio, loans to deposits ratio, interest rates, Government securities, money market instruments, debt instruments and SWAPs etc. and debenture interest, maturity profile of assets and liabilities, sensitivity analysis and contingency funding arrangements for managing its funding and liquidity profile. Funding diversification by products 10% Graph – 19 6% Other borrowings Due to banks 6% Current account balance 2017 27% 51% Savings deposits Term deposits 11% 8% Other borrowings Due to banks 6% Current account balance 2016 47% Term deposits 28% Savings deposits Objectives Objectives of the Bank’s funding and liquidity management efforts included; yy Honouring customer deposit maturities/ withdrawals and other cash commitments efficiently under both normal as well as stressed operating conditions yy Compliance with the regulatory requirements yy Maintaining internal funding and liquidity targets which are more stringent than the regulatory requirements yy Optimum usage of liquid assets for maximum profitability thereby meeting the expectations of investors Commercial Bank of Ceylon PLC Annual Report 2017 yy Funding future business expansion at optimum cost yy Supporting desired credit rating yy Ensuring smooth transition to Basel III funding and liquidity requirements Factors affecting funding and liquidity Interest rates – both current and perceived, changes in money supply, money market developments, demand for Government securities, Treasury Bills/Bonds holding of the Central Bank of Sri Lanka, developments in the capital markets, level of imports and exports, loan growth, market liquidity, national savings ratio, regulatory developments, Government tax regulations etc. affect the funding and liquidity levels of banks. Relative to the wholesale funding sources, retail customer deposits tend to be more stable since a core component therein is likely to remain with the Bank for the medium to long-term. During the year, foreign inflows to the Government securities and the capital markets as well as the reduction of the CBSL’s holding of Treasury Bills and Bonds contributed to the higher market liquidity and to limit currency depreciation. Higher loan growth in the initial months of the year resulted in negative mismatches in assets and liabilities which were financed through new foreign currency borrowings. Increase in M2b money supply by 16.70% (source: CBSL) during the year was also a contributory factor for the market liquidity. Progress in 2017 With due regard to the factors affecting it and as guided by the ALCO, the Bank maintained optimum levels of funding and liquidity, under normal as well as stressed conditions, throughout the year as evident from the indicators given in graphs on page 41, enabling the Bank to earn higher net interest income. Both the Bank’s assets and liabilities are well diversified without any significant concentrations. Diversifying its funding sources, the Bank borrowed USD 100 Mn. from IFC during the year. Suitable standby arrangements are also in place to meet contingency funding and liquidity requirements in the event of any stressed conditions.
  42. Strategic Report Funding and Liquidity Management 74 .35% of the Bank’s assets are funded by customer deposits and customer deposits made up 82.04% of the liabilities as at December 31, 2017. The funding portfolio was sufficiently diversified by type as well as maturity and represented a stable source of funding. As at December 31, 2017, the LCR at 209.17% (for all currencies) was well above the minimum requirement of 100%. The NSFR which will become a prudential requirement in 2018 was at 127.87% as at December 31, 2017. Movement of liquidity ratios over the last four years are given in graph 20 below:. Liquidity ratios The Bank had an available-for-sale securities portfolio of Rs. 154.87 Bn. as at December 31, 2017 (Rs. 160.02 Bn. as at December 31, 2016) that can be used to meet any funding requirements if the need arises in the normal course of business or due to market stress. Movement of the liquidity coverage ratio and net stable funding ratio are given in graph 21 below. Liquidity coverage ratio (LCR) and Net Stable Funding Ratio (NSFR) Graph – 21 % LCR – LKR LCR – All currencies NSFR Graph – 20 % 500 Loans to customer deposits Purchased funds to total assets Net loans to total assets Liquid assets to short-term liabilities (Large liabilities – temporary investments) to (earning assets – temporary investments Commitments to total loans 400 300 200 100 100 0 2016 Jan. to Dec. 2017 Jan. to Dec. 80 The Bank tested its ability to withstand stressed liquidity conditions using several metrics. In December 2017, the Bank re-evaluated and updated its liquidity stress testing framework in December 2017. 60 40 20 0 The Bank observed that stress testing results at varying degrees of risk thresholds could result in strain on the day-to-day operations. However, even during a severe stress scenario, it was noted that the strain can be withstood with the resources at disposal and contingency plans are in place in the Bank. 2018 and beyond In the wake of the LCR and the NSFR and also in preparation for any potential liquidity tightness in the region, the Bank will continue to move its current shortterm reliance for funding more towards medium to long-term tenors. The Bank anticipates a certain amount of money to flow out of the region due to the extremely good performance in the US economy and satisfactory performance in Europe as well as geopolitical tensions. The Bank is also exploring the possibility of gradually reducing its dependence on deposits of low liquidity value such as interest sensitive wholesale funding. In order to improve its funding profile further, the Bank is currently evaluating broad-basing its funding sources to other multilateral lending institutions and also to other currencies by borrowing in currencies other than United States Dollars. Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec 14 15 15 15 15 16 16 16 16 17 17 17 17 Commercial Bank of Ceylon PLC Annual Report 2017 41
  43. Strategic Report STRATEGIC PRIORITIES AND RESPONSES The future of the Bank will be defined by the strategic choices it makes today . Emerging operating environment Banks are operating in a highly competitive and dynamic environment. Certain developments relating to technology, stakeholder preferences and expectations, new forms of competition, sustainability, regulations etc., some of which are emerging risks have made the future of banking even more challenging. All these developments call for strategic responses on the part of banks for long term growth. Strategic imperatives Given that things are changing so fast today, the Bank understands that it needs to be in a constant state of adaptation to respond to these developments if it is to continue to be a sustained value creator. Accordingly, the Bank has identified prudent growth, customer centricity, digital leadership, operational excellence, and risk management as five broad strategic imperatives for “banking on the future”. Historically, the Bank has always championed disciplined growth. Strengthening the Bank’s leadership in Sri Lanka and expanding its regional presence, the Bank has been able to grow at compounded annual growth rates in excess of 16% in total assets, loans and receivables, customer deposits and over 10% in profit before taxation over the past five years. Strategies have been devised to ensure that the Bank will continue to grow Prudent growth – growth in business volumes and revenue with accompanying improvements in profitability and asset quality 1 5 Customer centricity – perfectly understanding the customer expectations and aligning the value proposition therewith 4 Digital leadership – 42 Commercial Bank of Ceylon PLC Annual Report 2017 Operational excellence – streamlining back office operations to speed up and achieve execution excellence Corporate governance 2 leveraging digital and mobile platforms to offer products and services to the customer at a healthy pace. In this regard, the Bank is cognisant of the need to have a perfect understanding of the evolving customer demands and expectations and based on the insights drawn from this understanding, align its value proposition to match their expectations. Offering products and services through digital and mobile channels will be a pre-requisite in this respect. Similarly, achieving operational excellence by investing in best-in-class technology and integrating and modernising legacy systems to ensure smooth operations while achieving cost efficiencies is also a priority. The Bank will devise strategies for confronting these imperatives while managing the underlying risks within the Bank’s desired risk profiles as expressed in terms of risk appetite and risk tolerance limits (refer table 38 on page 372). 3 Risk management – executing strategies to address other strategic imperatives within the risk thresholds
  44. Strategic Report Strategic Priorities and Responses Strategic responses While these are closely interconnected and mutually inclusive , the Bank has also developed appropriate strategic responses for each of these imperatives for execution by the business units and support service functions in the Strategic Plan 2018-22 through the corporate planning and budgeting exercise, a process that has been fine-tuned over a decade. Strategic responses have been developed on a number of aspects under each of the five strategic imperatives as given below: Table – 06 Prudent growth Customer centricity Digital leadership Operational excellence Managing risk Strengthen leadership in Sri Lanka Products and services Digitalisation Employee value proposition Risk appetite Expand regional presence Channels and networks Online offering Service standards Optimising risk return trade-off Diversification Customer relationships Digital channels Internal processes Emerging risks Asset quality Integrating service standards Channel migration Embracing new technologies Governance/Compliance Brand building Customer education Innovation and experiments Partnerships/collaboration Diversification New Product development Customer onboarding Big data and data analytics Operational efficiency/ cost containment Funding and liquidity Pricing and profitability Data security/ customer privacy Systems integration Performance evaluation Cyber security Cross-selling Customer expectations Systems upgrades Network optimisation Disruptive innovations Capital and stability Customer satisfaction Digital natives Centralisation New laws, rules and regulations Inclusive banking Convenience Payment services Supply chain Environmental stewardship Sales orientation Customer engagement Processing speeds Fraud monitoring Respective strategic responses have been referred to under the business units and support functions in the Management pages 49 to Discussion and Analysis on 104 and the reports on risk management on pages 154 to 158 to the extent they can be disclosed. The corporate plan and the budget were adequately deliberated by the Board and the approval for the budgeted targets for 2018 was obtained in December 2017. This enabled the Bank to timely communicate the targets to all business units. Strategy execution Planning and execution being two sides of the same coin, execution is equally important. Hence, these strategic responses were communicated to all those who are responsible for their execution at the beginning of the year, defining the path the Bank is planning to take into the future and making it clearer for them as to how the Bank is planning to compete. Commercial Bank of Ceylon PLC Annual Report 2017 43
  45. Strategic Report OUTLOOK FOR 2018 AND BEYOND Throughout this Annual Report , particularly in the section on Financial Capital section page 54 to 72) we discuss the strengths ( and achievements of the Bank in the context of the operating environment that prevailed. They are good indicators of the Bank’s prowess in the financial services arena and reflect healthy growth and financial stability. Yet, given the unprecedented pace of change in the operating environment and the potential challenges the conventional banking business models face, the Bank is cognisant that historical performance does not necessarily provide an assurance about the Bank’s future potential and prospects. Hence, this section summarises the Bank’s plans to deliver value to stakeholders in 2018 and beyond, in the context of the forecast operating environment, based on publicly available information. Naturally, its extremely volatile nature makes the future hard to predict. As the statements below are forward looking, we urge you to keep in mind that all opinions, forecasts and plans given here are subject to change based on how the future unfolds. Such changes will in turn impact the risks and rewards outlined here. Global economy As we move into 2018, global growth is set to continue with some momentum, reaching a projected 3.9%, compared to 3.6% growth in 2017, led by India and other emerging market and developing economies. A unified domestic market and other structural reforms are expected to improve economic growth in India to 7.4% in 2018 up from a projected 6.7% for 2017. China is expected to experience a growth of 6.8% in 2017. Investment, trade, and industrial production are expected to maintain good growth, with rising confidence from businesses and consumers boosting recovery. Advanced economies are expected to grow by 2.3% in 2018, thereby maintaining the growth of 2.3% estimated for 2017. The United Kingdom’s outlook for 2018 appears uncertain as it attempts to redefine its economic relationship with the EU in relation to Brexit, with growth projected to fall to 1.5% from 1.7%. South Asia growth decelerated but remained strong in 2017, at an estimated 6.5% – mainly due to temporary disruptions in India with the new goods and services tax. Growth is expected to pick up to 6.9% in 2018 44 and stabilise around 7.2% on average, in 2019-20, as consumption remains strong, exports recover, and investment revives with ongoing policy reforms and infrastructure improvements. Main risks to the outlook include setbacks in reviving investment, fiscal slippages, and disruptions to activity resulting from natural disasters. Bangladesh is projected to grow at an average of 6.7% a year over the next three years, benefiting from strong domestic demand and strengthening exports, low interest rate and improved infrastructure. Remittances are expected to rebound as the growth firms in Gulf Cooperation Council (GCC) countries. Sri Lankan economy Reflecting strong private consumption and investment growth for the most part, Sri Lanka’s economic growth is projected to average 5.1% a year over 2018-2020 with exports supported by the reinstatement of the GSP+ with the European Union. Reducing Government debt to a sustainable level is a priority with plans in place to reduce the budget deficit to 3.5% of GDP by 2020. For the first time since 1987, a surplus in the current account is expected in 2018. In its “Vision 2025 – A Country Enriched”, the Government outlines plans to transform Sri Lanka into an Indian Ocean Hub, with a knowledge-based, highly competitive, social-market economy. Development of the Colombo International Financial Centre (CIFC) within the Colombo Port City Development has already begun. Its completion along with the proposed National Logistics Policy for Shipping and Air Transportation, and the Telecommunication Connectivity Policy is expected to propel the CIFC as a financial hub strategically located between Dubai and Singapore. Buoyed by World Bank and IMF programmes, Sri Lanka’s economic reform agenda is projected to boost macroeconomic stability in the medium term. Widening regulatory provisions for the trading of derivatives and commodities, and introducing investment products to a larger customer base are also part of the Government’s plan for 2018 and beyond. On the socio-political front, local government elections held in February of 2018 has caused some political instability, adversely Commercial Bank of Ceylon PLC Annual Report 2017 affecting economic activities, perhaps leading investors to take a wait and see approach as they did in 2015. Adverse weather conditions have affected the agriculture sector in the recent past and there is good reason to believe that climate change will continue to impact this sector. The ripples caused by such events are likely to have a knock-on effect on the economy in the near future as well. Central Bank’s Road Map 2018 details a range of planned measures to sustain the theme of “Building on Stability” and strengthen Sri Lanka’s long-term economic performance which include: yy A Flexible Inflation Targeting framework by 2020 to help ensure that monetary policy is conducted in a proactive manner, targeting an inflation range of 4-6%. yy A revenue-based fiscal consolidation programme to reduce budget deficits and debt levels. yy The Fiscal Management (Responsibility) Act to include effective sanctions for breaching targets, specify instances when targets can be breached and guide how to get back on target after such a breach. Sri Lanka is currently at 5.2% of GDP for fiscal deficit and 79% of GDP for public debt, against the targets of 3.5% for deficit and 60% for debt. yy Speeding up amendments to the Securities and Exchange Commission (SEC) Act and the Demutualisation Bill, helping to bring Sri Lanka’s capital market in line with global norms. yy Through the Debt Management Bill Sri Lanka’s public debt sustainability is to be managed at a national level. Foreign liability is a priority with the country facing its largest ever foreign debt servicing requirements during 2019-2022 amounting to almost USD 15 Bn. yy Encouraging market-based reforms to support private sector investments, the Government will be working to correct the country’s legal and regulatory frameworks, financial market infrastructure, and institutions, in a bid to attract FDI and portfolio investment. yy The Electronic Transactions (Amendment) Act aims to ensure that Sri Lanka’s e-commerce legislative framework is on par with those of Singapore, Australia, and China. The country’s cyber security framework will also be further strengthened.
  46. Strategic Report Outlook for 2018 and Beyond Banking sector Digital disruptions challenging conventional business models and changing user expectations with demographic shifts coupled with tightening regulations requiring higher and quality capital and liquidity are expected to have profound implications on financial institutions world over . Banks in particular will need to adapt themselves innovatively to face the potential impact of these headwinds and sustain their value creation. With the macro-economic environment expected to improve and stabilise in the medium term making it a conducive environment for achieving sustainable economic growth, Sri Lankan banking sector too is expected to continue its growth momentum. Both interest rates and inflation are expected to remain stable at the current levels. In the meantime, Sri Lanka will move towards the upper middle income category within the next three years. Historically, Sri Lanka’s economic growth has been driven by the services sector, banking industry in particular. Given the strong correlation between the banking industry and the economic activity, this augurs well for the banking sector, generating opportunities to grow its business volumes. With a fairly developed regulatory regime, Sri Lanka has been enjoying financial system stability. We have witnessed how resilient Sri Lanka’s banking sector is in the wake of external shocks in the past mainly due to stringent regulations and prudent industry practices. The banking sector has a fairly diversified loan portfolio at present with exposure to any particular sector not exceeding 20% on average. Several regulatory measures were taken in the recent past to further strengthen the sector, mostly in compliance with the Basel III requirements relating to capital and liquidity which will come into effect in full from January 1, 2019. These are however expected to reduce banks’ ability to leverage their balance sheets in terms of risk-weighted assets. Banks will aggressively concentrate on channel optimisation with physical branch expansion expected to slow down while online and mobile channels expanded to offer contextual banking (i.e., seamless banking through mobiles where financial services are offered to customers at the place and time of their choice). These factors are expected to have a positive impact on the cost to income ratio as well. Emerging trends are expected to have a significant impact on the banking business model. In order to respond to the accompanying challenges and meet ever growing customer expectations, banks will have to revamp their offering in terms of products and services, delivery channels, service standards and internal processes, making significant investments in technology. Move from collateral Based lending to cash flow-based lending will continue. There will be demands for and regulatory pressures on banks to be more transparent in their tariff structures. Data analytics will play an important role to overcome these challenges. Transaction banking (cash management, correspondent banking, international trade finance, factoring and related currency services) will increasingly become the basis for corporate banking relationships rather than previous investment banking considerations (such as corporate financing, M&A, equity financing and debt issuance.) Main Regulatory Changes that will affect the banking industry in future. yy Adoption of the “expected loss model” in place of the “incurred loss model” for impairment testing upon implementation of SLFRS 9 is expected to substantially increase the impairment provision of banks. yy Upon full implementation of Basel III, the minimum total capital adequacy ratio for domestic systemically important banks will be 14% from January 2019. yy Banks will come under pressure with the proposed increase in minimum capital requirements. yy Removal of most of the tax concessions currently available and the imposition of the debt repayment levy under the new Inland Revenue Act/Budget proposals for 2018 are expected to significantly increase tax liability of banks. Despite tax exemptions being no longer available on investments in listed debentures, banking sector will increasingly rely on capital market for meeting capital requirements by way of rights issue of shares and Basel III compliant debt securities. Government Budget 2018 had a proposal to set up a development bank. Given the fact that the country does not currently have a sizable development bank and commercial banks have limitations in funding development lending, this is certainly a welcome proposal. The Debt Repayment Levy proposed in the 2018 Budget and removal of most of the tax concessions currently available on investments in Government Securities are expected to negatively impact the internal capital generation of banks. Increased minimum capital requirement of Rs. 20 Bn. by December 31, 2020 will exert pressure on smaller banks. Commercial Bank of Ceylon PLC Annual Report 2017 45
  47. Strategic Report Outlook for 2018 and Beyond Our plans We are cognisant of the duality and the strong interconnectedness between the value delivered to the stakeholders and the value derived from them in turn . In fact, we know that the more value we deliver to our stakeholders, the more value we will be able to derive from them. Accordingly, taking the emerging trends and developments too into account, we will do our utmost to deliver enhanced value to all our stakeholders. Our focus remains fixed on the long term while balancing the demands of the short and medium term. Consistent growth: Stability and reputation has enabled the Bank to record a consistent growth throughout its history spanning close to 50 years in its present name. We enjoyed compounded annual growth rates in excess of 16% on average over the past five years, in business volumes. Our growth rates have been in excess of the industry averages, signifying gains in market share. As at December 31, 2017, we accounted for over 11% in loans, deposits and total assets of the banking industry. Our aim is to continue to maintain a consistent growth over the next several years and based on the strategies we have implemented/will be implementing shortly, we are confident of achieving the targeted growth. The table below outlines our financial goals for the medium term: Our goals Performance indicator Return on average assets Table – 07 Goal Over 2% Return on average shareholders’ funds Over 20% Growth in income Over 20% Growth in profit Over 20% Growth in total assets Over 20% Dividends per share Over Rs. 5 Capital adequacy: CET 1 – Minimum 6.25% 10% Total Tier 1 – Minimum 7.75% 10% Total capital – Minimum 11.75% 15% Financial inclusion: Providing banking services to the unbanked remains one of our priorities as we push further out into 46 Taking banking to the "unbanked" the peripheries beyond urban centres. We are proud of our reputation as Sri Lanka’s largest financier to the SME sector. Our 16 Agriculture and Micro-Finance Units work hand-in-hand with hard-to-reach communities, connecting rural households to our branch network and in turn providing us with invaluable insights on how to serve these customers better. The concept of a “Bank on Wheels”, for instance, is a result of our in depth insights into this segment. When our planned mobile branch receives significant demand from a particular area we are then able to establish a brick and mortar branch for the convenience of these customers. Digital connectivity: All our customers, in both rural and urban areas, are fast becoming or indeed have already become a long-established part of the digital revolution. Even our Corporate Social Responsibility Trust focuses on improving the digital savviness of children in rural and pages 78 to 89 under urban areas (refer Social and Network Capital). Indeed, many households in the peripheries have a family member or neighbour working abroad. For them, being connected to Commercial Bank means having direct and ready access to remittances from abroad and being able to significantly improve their lives. For our urban customers, our service must match the experience they have with international giants in the consumer business, but we are up for the challenge. We look forward to rolling out many new technological innovations and conveniences that our new digital platform will bring in 2018 and beyond. These include the digitalisation and centralisation of processes, the strengthening and increased security of core businesses, and a customer experience that is ever greater in value. Such outcomes will be achieved through mutually beneficial partnerships with global, regional, and local partners following due diligence. Commercial Bank of Ceylon PLC Annual Report 2017 International footprint: By expanding beyond the shores of Sri Lanka we diversify our geographical portfolio, minimise risk, and increase stability. For our customers – particularly in the corporate sector – it means greater access to their trusted Bank in the region. Our international operations have yielded many successes as outlined in Social pages 78 to and Network Capital (refer 89) and will continue to do so into the future. Our operations in Bangladesh, Maldives and Italy are already providing sound returns and opening many exciting new opportunities for expansion. Our representative office in Myanmar too is already providing considerable support for our corporate customers operating in the country and shows much promise for the future. Grooming talent: With the Bank able to attract school leavers who can then be groomed to lead, we take seriously our role in developing the professional skills and talents of our people. The Bank as University is a concept that has stood the test of time with employees given every encouragement – including financial incentives – to learn through internal and external education and development programmes and an extensive culture of mentorship. Long term succession plans are in place for all key roles to ensure that the Bank continues to be a leader in its field. Trusted brand: Our brand is built on a track record that spans close to half a century but, more importantly, it is our brand promise that ensures the loyalty and trust of our stakeholders. Our brand is built on a foundation of sound corporate governance practices. Competent risk management processes ensure that confidence in the brand remains strong. Our efficient processes and a performance culture that drives excellence ensure that corporate governance and risk management remain part of our core strength supporting our strategic initiatives well into the future.
  48. Strategic Report WHAT MAKES THE BANK SUSTAINABLE Sustainability as applicable to the Bank has two dimensions . Firstly, it is the ability of the Bank to sustain its performance into the foreseeable future as a going concern. Secondly, it relates to the way the Bank conducts its enterprise giving due consideration to society and the environment so that benefits accrue to the wider community and the environment. The two dimensions are so tightly interconnected that it is the sustained performance of the Bank that enables it to give due consideration to the society and the environment while the Bank cannot sustain its performance in the long run unless it gives due consideration to the social and environmental aspects. The Bank is cognisant of the need and its responsibility to deliver value to all its stakeholders. At the same time, poor social and environmental performance by its stakeholders, for example manifested by any irresponsible lending and investment decisions of the Bank, may pose a risk to the sustainability of the Bank. The Bank is aware that its overall performance and efficacy of long-term value creation will be judged by its contribution to society and the environment besides being economically successful – two mutually inclusive aspects. A profitable operation is a precondition for being sustainable. Accordingly, integrated thinking now pervades the Bank and sustainability is built into its strategy and decision-making process itself, making it a responsibility of each and every member of the staff. This has enabled the Bank to take a proactive approach to sustainability by integrating social and environmental considerations into all its core business activities and operations placing them at the heart of everything the Bank does. These activities vary from responsible lending, investments, new product development, procurement etc. to social and environmental initiatives such as recycling, use of renewable energy, supporting culture, health, and education etc. This has made the Bank’s intermediary role more efficient by balancing the interests of various stakeholders and optimising the trade-off between risk and return. The Social and Environmental Management System (SEMS) of the Bank which is a part of the loan approval process, plays a key role in managing the risk profile and making lending and investment activities responsible. Besides evaluating the feasibility of projects based on cash flows, all business and project loans are screened to ensure compliance with the applicable social and environmental regulations and are monitored on an ongoing basis. This in turn helps the entrepreneurs and SME customers to ensure the sustainability of their operations. The Bank also offers facilities for the adoption of environment-friendly technologies on concessionary terms and conditions. Operating in a highly regulated industry, the Bank is subject to regulatory oversight of the Central Banks/Monetary Authorities in the countries we operate in which has stipulated a range of compliance requirements. The Bank accords the highest importance to these compliance responsibilities and has complied with all the applicable rules and regulations, both in letter and in spirit as detailed later. No significant gaps, lapses, or inaccuracies were observed during the year. The Bank has a Code of Conduct for the staff which prescribes the expected behaviour of staff relating to ethics, conduct, and compliance to ensure their integrity and provides a relevant point of reference when enforcing corrective action. The Bank also has a Supplier Code of Conduct to ensure compliance to social and environmental considerations across the supplier value chain as well. The Bank procures from suppliers supporting ethical business ranging from the use of environmentally accredited materials, transport, and fair and honest dealings in finances and their staff. Demonstrating customer centricity, the Bank continued to enhance its offering of unparalleled convenience and unprecedented choice via a gamut of banking products and services to its customers through a wide network of 280 branches, 775 ATMs, and digital channels, with benchmarked service standards and streamlined internal processes. The Bank has in fact made banking more accessible and less intimidating, thereby promoting financial inclusion. The Bank has recognised certain global developments with the potential to disrupt conventional business models of banks which it also believes as providing opportunities for growth. Leveraging its standing, the Bank has developed and implemented new and innovative business strategies involving collaboration, digitalisation, use of latest technology, data analytics, customer experience, trust, and is confident that these initiatives will help it realise its growth aspirations. The Bank is in fact inspired and motivated by the value it creates for all its stakeholders by delivering value to and deriving value from them in turn. It is also aware that the higher the value it delivers, the higher the value it can derive in return. Focus on society and environment Focus on sustainable performance Commercial Bank of Ceylon PLC Annual Report 2017 47
  49. Strategic Report What Makes the Bank Sustainable What makes the bank sustainable Figure – 10 Understanding of the evolving future Optimum liquidity SEMS (Social and Environmental Management System) Staff Code of Conduct Internal Capital Adequacy assessment process Supplier Code of Conduct Reputation Inclusive culture Corporate governance framework Conservative risk profile Integrated thinking Wide reach Complete range of banking products and services Compliance with laws, both in letter and in spirit Transparency in reporting and disclosures Financial strength Views heightened concerns for sustainability as an opportunity Benchmarked service standards Robust risk management framework Whistle Blower Policy Board Charter Strategies in place to meet emerging risks 48 Commercial Bank of Ceylon PLC Annual Report 2017 Sustainability integrated into business strategy and decision-making Streamlined internal processes
  50. Management Discussion and Analysis Thanks to our winning strategy underpinned by the five strategic imperatives – prudent growth, customer centricity, digital leadership, operational excellence, and risk management, the Bank has made solid progress in gearing itself to make the most of a fast-evolving future. Despite challenges, we were able to create value for all stakeholders through careful and practical management of capitals. The information in this section has been structured as follows: 051 Operating Environment – the context within which our performance has to be evaluated 054 Financial Capital Including business lines review – broadly speaking, the funds available to the Bank which can be converted to other forms of capital 073 Manufactured Capital – tangible, human-made resources that support the Bank’s ability to produce high-quality products and services 078 Social and Network Capital – the stakeholder relationships and networks that the Bank has nurtured and developed over nearly half a century in business 090 Intellectual Capital – the intangible assets of the Bank such as institutionalised knowledge, systems and processes and brand value 094 Human Capital – the skills, competencies, and institutionalised knowledge of the Bank’s staff including leaders and managers 102 Natural Capital – pertaining to the natural environment within which the Bank operates and the natural resources such as water, air and earth that are essential for a sustainable future Once again our financial performance has been robust in the face of domestic and global challenges. We are studying the latest technological innovations in digital and mobile banking – adopting the best, while keeping a cautious eye on the risks that come with such rapid developments. The Bank continues to cultivate meaningful dialogue with all stakeholders, acting on their feedback to ensure that the value we derive from them is reciprocated. We are also exploring new avenues to expand our international business, including across Europe – further diversifying our geographical footprint and risk. During the year, we assessed the competencies and expertise of our employees, providing career advice, and training and development where needed, and moving people with the right skills to key positions – including to our overseas offices. Our entire business was conducted in a sustainable manner – for instance, through increased focus on our Social and Environment Management System (SEMS) to promote green lending – in order to safeguard the interests of future generations. Commercial Bank of Ceylon PLC Annual Report 2017 49
  51. Expectations are sky high The expectations of tomorrow will see “imagination” and “reality” move ever closer...in fact to “scoot” may soon mean to “blast off” 50 Commercial Bank of Ceylon PLC Annual Report 2017
  52. Management Discussion and Analysis OPERATING ENVIRONMENT This review covers the global economic and business operating environment and the performance of the Sri Lankan economy in the wake of such global and other country specific developments . It also looks at how all these events impacted the Sri Lankan financial sector. The performance of the Bank in 2017 and its future potential need to be assessed in the context of this review. Overview of global economic environment Global growth in 2017 is estimated to be at 3.7%, continuing the upswing in global economic activity experienced towards the end of 2016. Investment conditions further improved and global trade rebounded during the year. The IMF anticipates that growth in Europe, Japan, the US, and expected growth pickup in emerging market and developing countries will have accounted for the improvement over 2016. In particular, the IMF forecasts the growth rate in emerging market and developing countries to have reached 4.7% in 2017. The better prospects and moderate growth momentum in advanced economies and China is expected to have positive spillover effects on emerging economies. GDP growth Table – 08 2016 2017 2018 (Estimated) (Projected) % % % World output 3.2 3.7 3.9 Advanced economies 1.7 2.3 2.3 United States 1.5 2.3 2.7 Euro Area 1.8 2.4 2.2 Japan 0.9 1.8 1.2 United Kingdom 1.9 1.7 1.5 Emerging markets and developing economies 4.4 4.7 4.9 Russia -0.2 1.8 1.7 China 6.7 6.8 6.6 India 7.1 6.7 7.4 ASEAN 5 4.9 5.3 5.3 Source: IMF World Economic Outlook update January 2018 Given below is a synopsis of the economic performance of several developed and emerging market and developing countries and market trends for oil and a few other commodities that shaped the global economic development to a greater extent. Given the substantial trading relationships with these countries, these developments have had a significant impact on the Sri Lankan economy too. United States US tax reforms and associated fiscal stimulus are expected to temporarily raise US growth, with favourable demand spillovers for US. The growth forecast for the United States has been revised upto 2.3% in 2017 given stronger than expected activity in 2017, higher projected external demand, and expected macroeconomic impact of the tax reform, in particular the reduction in corporate tax rates and the temporary allowance for full expensing of investment. The United States accounts for 11.3% of Sri Lanka’s value of imports and exports. Euro Area With a projected growth of 2.4% for 2017, its fastest pace in a decade, the Euro zone benefited from increased exports that went hand in hand with the strengthened global trade activity. Stability in the financial and political climate also helped to drive domestic demand growth. Euro Area accounts for 17.0% of Sri Lanka’s value of imports and exports. Japan Japan is estimated to have achieved 1.8% growth in 2017. Conducive external environment and the resulting increase in exports and the temporary fiscal support package contributed to this growth. Demographic factors such as ageing population and shrinking workforce, low wage growth and low inflation are weighing heavily on the future growth, while growth in public investments in preparations for 2020 Olympic Games is expected to boost the economy. Japan accounts for 4.0% of Sri Lanka’s value of imports and exports. United Kingdom Growth in the United Kingdom, Sri Lanka’s second largest export destination, is projected to have slowed down to 1.7% by end 2017, with further slowdown anticipated in the future. This is primarily due to uncertainty arising from Brexit and inflationary pressures affecting real income and private consumption. Firms will also likely hold off on significant investment decisions until they understand better the future of the UK’s trading relationship with the European Union. The United Kingdom accounts for 4.6% of Sri Lanka’s value of imports and exports. Russia Recovery in trade, rising oil prices and macroeconomic stability helped Russian economy to return to an estimated modest growth of 1.8% during the year from -0.2% last year. Growth momentum is expected to continue aided by fiscal consolidation, new fiscal rule and significant advances in agricultural sector. China China’s growth in 2017 is projected to have reached 6.8%. Increased household incomes and domestic demand, a recovery in global trade, policy easing and supply-side reforms contributed to its strong performance. Given that it is the second largest economy in the world, its currency, Renminbi is now one of the most traded currencies in the world and is fast on its way to internationalisation. China accounts for 15.0% of Sri Lanka’s value of imports and exports. India A slowdown in India’s growth momentum saw their estimated growth at 6.7% at the end of 2017. The effects of the November 2016 currency exchange initiative still lingered in 2017. The introduction of a country-wide Goods and Services Tax in the middle of the year added further uncertainty. The Indo-Sri Lanka Economic and Technology Cooperation Framework Agreement (ETCA) that is currently being negotiated between India and Sri Lanka will potentially lead to increased investment opportunities for both countries. Furthermore, it would place Sri Lanka as the only country to have preferential access to China, India and Europe. India accounts for 14.7% of Sri Lanka’s value of imports and exports. Oil An improving global growth outlook, the extension of the OPEC+ agreement to limit oil production, and geopolitical tensions in the Middle East have attributed in increasing crude oil prices by about 20% between August 2017 and mid December 2017, to over USD 60 per barrel. Commercial Bank of Ceylon PLC Annual Report 2017 51
  53. Management Discussion and Analysis Operating Environment Sri Lankan Economy The Sri Lankan economy grew at a moderate 3 .7% in the first nine months of the year, compared to 4.0% in the same period during 2016. Growth continued to be affected by adverse weather taking a toll on the agriculture sector, which indirectly impacted other sectors such as agro-based industries as well. The Industry and Services sectors, however, had a positive impact on the growth of the economy. The Services sector in particular was propped up by strong performances in financial services, wholesale and retail trade, and transportation. Nevertheless, economic growth in 2017 is expected to be lower than the growth projected at the beginning of the year. Growth in 2018 is now projected between 5.0% – 5.5%. The increase in investment and consumption expenditure in the first half of the year also played a role in the growth of GDP. Sri Lanka announced plans to change its Foreign Direct Investment (FDI) policy to focus more on its competitive advantages in location, skills base, and its ongoing efforts to secure free trade agreements with developed and emerging markets such as Singapore, China and India. Ideally, the country wants to entice foreign investors from the US, China, and India with consistent policies, potentially attracting USD 5.0 – 6.0 Bn. in the next three years. The gains from export earnings were offset by weather-related imports and a decline in workers’ remittances. The Central Bank stated that the adverse economic and geopolitical situation in the Middle East will continue to have a negative impact on workers’ remittances, a key source of foreign exchange earnings. Inflation was marked by an increase to 7.3% (National Consumer Price Index, 2013 = 100) year on year in December 2017. The increase was beyond the CBSL’s target of 4-6%, a result of the combination of high food prices due to adverse weather, upward revisions of indirect taxes, and rising international commodity prices. 52 Inflation (Base: 2013=100) Graph – 22 % Gross official reserves CCPI – Headline (P.P.%) NCPI – Headline (P.P.%) 12 10 9 8 6 6 3 4 0 2 -3 Jan 2016 Jun 2016 Dec 2016 Jun 2017 Dec 2017 Source: CBSL Earnings from exports grew 7.6% year on year, thanks to the restoration of GSP+ concessions from the European Union, more effective trade policies, and a competitive exchange rate. However, imports expenditure grew 9.6% year on year, further widening the trade deficit. The Sri Lankan Rupee depreciated 2.6% against the US Dollar by end December 2017. A market tilted in favour of outflows through import expenditure, debt service payments, and the unwinding of foreign investments in Government Securities initially had a negative impact on the currency. Increased inflows from foreign investments to the Colombo Stock Exchange (CSE) and Government Securities market after the first quarter of 2017 started to ease pressure on the currency. The issuance of the International Sovereign Bond and the receipt of the fourth tranche of the International Monetary Fund Extended Fund Facility (IMF-EFF) in December 2017 helped to further ease-off the currency depreciation. More foreign exchange inflows are expected in the years ahead with the commencement of the Colombo Port City and the Hambantota Industrial Zone. The country’s gross official reserves increased to USD 7.9 Bn. by end 2017, compared to USD 6.0 Bn. at end 2016. Commercial Bank of Ceylon PLC Annual Report 2017 Graph – 23 USD Bn. 0 2013 Source: CBSL 2014 2015 2016 2017
  54. Management Discussion and Analysis Operating Environment Sri Lankan Banking Sector During the year 2017 , the CBSL took several measures to promote a dynamic and resilient financial sector in the country. These included, among others, the introduction of a transparent market-based auction mechanism for the issuance of Government Securities, the enactment of a new Foreign Exchange Act to enhance overall efficiency of forex transactions, the implementation of Basel III, the strengthening of the framework to regulate Non-Banking Financial Institutions sector, the resolution of distressed finance companies, the strengthening of the regulatory framework for the microfinance sector, and measures to modernise the payment and settlement infrastructure. Despite the relatively slower economic growth, the expansion of Sri Lanka’s financial sector continued in 2017, accounting for 3.4% of the country’s estimated GDP during the first nine months. The banking sector reported an 19.2% increase year over year in profits after tax in 2017 compared to 2016. The CBSL maintained a tight monetary policy by raising interest rates. Key policy rates of the Standing Deposit Facility Rate and the Standing Lending Facility Rate were increased by 25 basis points each to 7.25% and 8.75% respectively with effect from March 2017. This may have helped to reduce the inflationary impact of the increased supply of money and high financing requirement of the Government budget. The increased net interest income, revaluation gains, and lower operating expenses created optimal conditions for increased profitability for the Banking sector. The sector recorded a 13.8% increase in its asset base during the year. Assets of the banking sector Graph – 24 Rs. Tn. Banking sector loans and deposits Graph – 26 Rs. Tn. Loans 12.5 7.5 10.0 6.0 7.5 4.5 5.0 3.0 2.5 1.5 0 2013 2014 2015 2016 0 2017 Source: CBSL Banking sector funding composition Graph – 25 % Deposits Borrowings Other liabilities Capital 100 80 60 40 20 2013 2013 2014 2015 2016 2017 Source: CBSL Funding was primarily sourced from deposits, which accounted for 72% of the total assets of the sector. Asset quality improved while capital and liquidity levels were maintained well above regulatory minimum requirements, ensuring stability during the year. 0 Deposits 2014 2015 2016 2017 Source: CBSL Loans and advances grew by 16% during the year to Rs. 6.3 Tn. Despite the higher interest rates, lending to all economic sectors increased. However, due to macro-prudential policy measures implemented by the CBSL, the leasing portfolio only increased marginally by 3.1%. Key banking industry indicators Table – 09 Industry 2017 (%) CAGR* 2013-17 (%) Business volumes Assets (YoY) 13.8 15.1 Gross loans and advances (YoY) 16.1 15.3 Asset funding Deposits (YoY) 17.5 15.3 Borrowings (YoY) -5.3 14.8 Profitability Net Interest Income (YoY) 12.2 11.6 Return on equity 17.6 Net interest margin 3.5 Net NPL ratio 1.3 Capital adequacy Total capital ratio (Minimum 10%) 15.2 Liquidity Liquid asset ratio (Minimum 20%) 28.5 *Compounded Annual Growth Rate Source: CBSL Commercial Bank of Ceylon PLC Annual Report 2017 53
  55. Management Discussion and Analysis GRI 201 CAPITAL MANAGEMENT FINANCIAL CAPITAL Financial capital plays multiple roles in the case of a financial sector organisation . It facilitates the expansion of operations by acquiring physical property, plant and equipment (manufactured capital) at the inception, and the perpetuation of operations by acting as a cushion for absorbing unforeseen losses as a going concern. It also serves as a regulatory restraint on unwarranted asset expansion. Maintaining adequate capital for absorbing unanticipated losses is imperative for the vibrancy of the financial intermediation and maturity transformation roles of a bank since these roles expose banks to a gamut of risks. FINANCIAL REVIEW An overview Continuing on the stellar performance the Bank is renowned for, we recorded another excellent year in terms of overall performance. With compounded annual growth rates of 17.44%, 16.94% and 16.83% respectively, total assets, loans and receivables, and deposits again doubled over the past five years. Our growth rates in Sri Lanka have been in excess of the industry averages, enabling us to enhance our market share in total assets from 10.04% in 2012 to 11.11% in 2017. Profit attributable to equity holders increased to Rs. 16.581 Bn., a growth of 14.25% compared to 2016. This is particularly significant since it is higher than the “natural growth” the Bank could have achieved under normal circumstances with an estimated GDP (gross domestic product) growth of 3.7% and an inflation rate of 7.1% for the year, a reflection of the effective execution of a focussed strategy. Profit growth Graph – 27 % Rs. Bn. PAT VAT and NBT Income tax PAT growth YoY 30 25 24 20 18 15 12 10 6 5 0 2013 2014 2015 2016 2017 0 The Bank achieved growth of over Rs. 100 Bn. each in both loans and receivables (for the third consecutive year) and deposits (for the second consecutive year) during the year. Given that the Bank accounted for 98.92% of the assets and 99.73% of the profit of the Group, the analysis below refers to the Bank’s financial performance. A brief commentary on Group performance is given page 58. on A highlight of the year was the significant increase in trade finance business of the Bank. Imports turnover grew by 39.33% over 2016, increasing the Bank’s market share to 10.56% from 8.36% in 2016. Exports turnover grew by 14.58% over 2016, increasing the Bank’s market share to 18.58% from 17.82% in 2016. Income Statement Fund based operations Commercial Bank ranked among World’s Top 1000 Banks for 7th successive year Interest income which accounted for 89.14% (86.68% in 2016) of the gross income of Rs. 115.594 Bn. grew to Rs. 103.034 Bn. during the year from Rs. 80.738 Bn. in 2016 recording a growth of 27.62%. The main contributory factors were the growth in average interest earning assets by Rs. 110.269 Bn. (12.80%), the average interest rate thereon improving by 123 basis points to 10.60%, and the improvement in asset quality. Commercial Bank has been ranked in this prestigious global list compiled by “The Banker” magazine of the UK since 2010. Interest expenses, which accounted for 62.13% of the interest income (59.35% in 2016), grew by 33.59% to Rs. 64.011 Bn. for the year, up from Rs. 47.915 Bn. in 2016. The main contributory factors were the growth in average interest bearing liabilities by Rs. 102.560 Bn. (12.96%), continuing decline of the CASA ratio to 39.23% from 41.67% in 2016, and the average interest rate increasing by 111 basis points to 7.16%. Demonstrating the perceived potential and future prospects of the Bank and the underlying value of its shares, the Bank’s shares were trading at a premium to their book value with a price to book value ratio of 1.26 times as at December 31, 2017 (1.65 times as at December 31, 2016), the highest among all the banks listed on the Colombo Stock Exchange. Having due regard to dividend policy, the capital requirements to support growth plans, and the increase in the number of shares consequent to the rights issue, the Board of Directors has declared a final dividend of Rs. 2.00 per share in the form of shares, taking the total dividend to Rs. 6.50 per share for the year which is consistent with dividends paid for the past five years. Consequently, net interest income grew by 18.89% (compared to 8.17% in 2016) to Rs. 39.023 Bn. from Rs. 32.824 Bn. in 2016, accounting for 78.02% of the total operating income. This compares well against the growth of 12.24% in net interest income (NII) of the banking sector for the year. Net interest spread improved to 3.44% from 3.32% in 2016. Net interest income as a percentage of average assets of 3.62% too compares well with the 3.50% for the banking sector. Vibrancy of financial intermediation Table – 10 2017 2016 2015 2014 2013 Average interest earning assets (%)* 84.99 85.11 87.77 80.92 83.42 Average interest bearing liabilities (%)* 78.20 78.20 77.90 71.11 74.38 * As a % of total assets 54 Commercial Bank of Ceylon PLC Annual Report 2017
  56. Management Discussion and Analysis Capital Management GRI 201 Fee based operations Impairment charges Fee and commission income too recorded an impressive growth of 24 .88% to Rs. 10.169 Bn. for the year. The sources that recorded significant growth included services related to credit and debit cards, trade finance and remittance, and deposits. This was consequent to the Bank managing to significantly increase the number of credit and debit cards in issue as well as their utilisation, enhancing the Bank’s market share in both the trade finance and remittance business. Impairment charges for loans and other losses for the year increased by 25.13% to Rs. 1.914 Bn. from Rs. 1.530 Bn. This comprised individual impairment charges of Rs. 401.716 Mn. (compared to Rs. 3.440 Bn. in 2016) and collective impairment charges of Rs. 1.554 Bn. (compared to a reversal of Rs. 1.932 Bn. in 2016). Significant fluctuations in individual and collective impairment charges compared to 2016 are due to a revision of thresholds for identifying the loans to be subject to individual impairment in 2016 and the resulting shift of a sizable portfolio from collective impairment to individual impairment. Despite an improvement in asset quality, as reflected by a decline in the NPL ratio, the NPLs in absolute terms marginally increased. The substantial growth in the loan book recorded during the year too contributed to the increase in collective impairment provision. Fee and commission expenses which relate mostly to credit and debit cards related services increased by 38.96%. Consequently, net fee and commission income increased by 22.62% to Rs. 8.602 Bn. accounting for 17.20% of the total operating income (15.91% in 2016). Total operating income Improvements in NII and net fee and commission income as explained above coupled with the net gains from trading of Rs. 233.956 Mn. (mainly as a result of exchange gains of Rs. 107.201 Mn. compared to an exchange loss of Rs. 1.429 Bn. in 2016) contributed to a growth of 13.41% in the total operating income amounting to Rs. 50.016 Bn. The relative contribution to total operating income from other income, however, declined compared to 2016 due to lower gains on the revaluation of foreign exchange. Cumulative provision for collective and individual impairment was Rs. 17.261 Bn. as at December 31, 2017 compared to Rs. 17.373 Bn. as at end 2016. Impairment charges Graph – 29 Rs. Bn. Individual impairment Collective impairment 6 Graph – 28 Rs. Bn. NII 0 Net fees and commission Other income -2 50 -4 2013 2014 2015 2016 2017 Operating expenses 20 10 0 2013 2014 2015 2016 2017 Profit before tax and profit after tax Profit before tax increased to Rs. 23.183 Bn. for the year, up by 15.62% from Rs. 20.051 Bn. reported in 2016. Income tax for the year increased by a higher percentage of 19.19%, thereby limiting the profit after tax to Rs. 16.581 Bn. which resulted in a lower growth of 14.25% compared to 21.92% reported for 2016. The higher increase in income tax was mainly due to the VAT and NBT on Financial Services being disallowed for tax purposes. Profitability 40 30 More importantly, cost to income ratio decreased to 49.82% from 51.06% in 2016 and also the cost to income ratio excluding VAT and NBT on financial services improved to 40.06% from 42.67% in 2016. Accounting for 57.24%, Personal Banking Division made the highest contribution to the profit before tax, followed by 24.59% from the Corporate Banking division, 17.63% from International Operations and less than 1% from Treasury. 4 2 Total operating income However, the benefit of the lower growth in operating expenses compared to the growth in operating income was partly offset by the significant increase in VAT (Value Added Tax) and NBT (Nation Building Tax) on financial services by 31.80% to Rs. 4.881 Bn. from Rs. 3.703 Bn. This was mainly due to the increase in VAT on Financial Services from 11% to 15% effective November 1, 2016, the full year’s impact of which was felt in 2017. Consequently, operating expenses including VAT and NBT on financial services increased by 10.65%. Total operating expenses increased by 6.49% to Rs. 20.038 Bn. for the year from Rs. 18.816 Bn. in 2016. While the increase corresponds to the general increase in prices due to inflationary pressures and the impact of VAT increase on general expenses, certain cost elements such as establishment expenses, maintenance of property, plant and equipment, and office administration expenses witnessed increases corresponding to the expansion of the Bank’s operations through conventional as well as alternate channels. Reflecting the growth in profit for the year and average assets at approximately similar rates, Return on Average Assets marginally improved to 1.54% from 1.53% reported in 2016. However, Return on Average Equity decreased to 17.88% from 19.52% reported in 2016 due to average equity growing at 24.72% during the year compared to growth in profit for the year by 14.25% only. The reasons for higher growth in average equity was the infusion of Rs. 10.144 Bn. through the rights issue in June 2017 (but the funds were utilised only for part of the year for income generation), gains recognised in Other Comprehensive Income on favourable movement in the mark to market valuation of the Available-For-Sale portfolio and the Commercial Bank of Ceylon PLC Annual Report 2017 55
  57. Management Discussion and Analysis Capital Management GRI 201 Loans and receivables Deposits Loans and receivables is the single biggest asset of the Bank on its balance sheet , accounting for 64.50% of total assets compared to 60.86% a year ago. The Bank continued to sustain its growth momentum in loans and receivables from last year, recording a 19.71% growth to Rs. 737.447 Bn. as at December 31, 2017 compared to Rs. 616.018 Bn. a year ago. This compares well with the industry growth of 16.18% for the year as well as our own 5-year CAGR of 16.94%. Key contributors to the loans and receivables growth came from term loans, overdrafts, and housing loans. Heightened focus on SMEs, new customer acquisition, higher Single Borrower Limit, etc. contributed to this achievement. With a solid domestic franchise in Sri Lanka, deposits is the single biggest source of funding for the Bank and accounted for 74.35% of the total assets as at December 31, 2017 compared to 73.06% a year ago. Deposits grew by 14.95% during the year and reached Rs. 850.128 Bn. as at December 31, 2017 compared to Rs. 739.563 Bn. as at the previous year end. With the wide gap in interest rates between CASA and time deposits, shift of funds from current and savings accounts to high yielding time deposits continued as evident from the CASA ratio declining to 39.23% as at December 31, 2017 from 41.67% a year ago. Nevertheless, this compares well with the industry CASA ratio of 34%. Statement of Financial Position Asset quality Other liabilities Assets With loans and receivables accounting for two thirds of total assets, the importance of a quality portfolio cannot be overemphasised for the profitability and stability of the Bank. Following two consecutive years of decreases in absolute terms, NPLs increased marginally during the year by 3.0% as against the industry NPL increase of 12.90%. However, with the significant growth in loans and advances portfolio during the year both the gross NPL and net NPL ratios improved to 1.88% and 0.92% as at December 31, 2017 from 2.18% and 1.09%, respectively a year ago. Backed by the moderate risk appetite, the Bank has a conservative risk profile. The Bank’s NPL ratios compare well with the industry ratios of 2.5% and 1.3% for the gross and net NPLs, respectively. The Bank has a strong and resilient funding profile. Customer deposits and equity capital together funded 83.72% of the total assets as at December 31, 2017 with all forms of other liabilities such as trade related payables and borrowings accounting for 16.28% or Rs. 186.147 Bn. compared to 19.19% or Rs. 194.284 Bn. as at December 31, 2016. Significant growth in deposits, borrowings of USD 100 Mn. from IFC coupled with the capital funds from the rights issue of shares lowered the need for other borrowings during the year. Securities sold under re-purchase agreements, borrowings from IFC, China Development Bank, and subordinated liabilities represented significant forms of borrowings as at the year end. Cumulative impairment provision for loans and other losses as a percentage of the loans and receivables as at the end of the year amounted to 2.29% compared to 2.74% in 2016. Provision cover improved to 51.05% in 2017 as against 50.11% in 2016. Open credit exposure ratio (which is net exposure on NPLs as a percentage of capital funds) improved from 9.53% at end 2016 to 7.60% as at December 31, 2017. Equity funded 9.37% of the assets as at the current year end, a significant improvement in comparison to the 7.74% as at December 31, 2016. This was consequent to the successful rights issue of shares, as proactively identified through the ICAAP and also to meet the enhanced capital requirements under the Basel III, effective from July 2017 that infused Rs. 10.144 Bn. in capital to the Bank, increasing the loss absorption capacity further. In addition, the Bank ploughed back Rs. 12.098 Bn. out of profit for the year after setting aside the dividends declared. Consequently, both the Common Equity Tier 1 ratio and the total capital ratio improved to 12.11% and 15.75%, respectively as at December 31, 2017, exceeding the higher levels of minimum capital requirements imposed on the Bank recognition of the surplus on revaluation of land and buildings in December 2017. ROA and ROE Graph – 30 % ROA ROE 20 18 16 2 1 0 2013 2014 2015 2016 2017 Total assets of the Bank grew by 12.96% during the year and reached Rs. 1.143 Tn. at the year end compared to Rs. 1.012 Tn. as at December 31, 2016. It is noteworthy that of the growth in total assets in absolute terms of Rs. 131.173 Bn. during the year, 92.49% or Rs. 121.317 Bn. came from loans and receivables, reflecting the robustness of the Bank’s primary activities of financial intermediation and maturity transformation. The asset growth of the banking industry moderated to 13.77% for the year. Contribution from the Bank’s International Operations now accounts for 11.50% of total assets and 17.63% of profit before tax. Composition of total assets Graph – 31 % Rs. Bn. Loans and advances Other assets ROA 1,250 2.0 1,000 1.6 750 1.2 500 0.8 250 0.4 0 56 Other interest earning assets 2013 2014 2015 2016 2017 0 The loans and receivable portfolio is fairly well diversified across several industry sectors with exposure to any particular sector not exceeding 20% of the total. Commercial Bank of Ceylon PLC Annual Report 2017 Capital
  58. Management Discussion and Analysis Capital Management under Basel III as a Domestic Systemically Important Bank and creating sufficient leeway for the planned expansion of the Bank ’s operations. Consequently, the equity multiplier (gearing ratio) declined to 11.61 times from 12.76 times a year ago. Shareholders funds Graph – 32 Rs. Bn. Stated capital Statutory reserves Retained earnings Other reserves 125 GRI 201 Financial soundness indicators Table – 11 2017 2016 Common Equity Tier 1 ratio 12.11 10.37 – – – Tier 1 capital ratio 12.11 10.37 – – – Total capital ratio 15.75 14.87 – – – Non-performing loans [net of interest in suspense and specific provisions] to equity 6.39 8.65 10.36 10.95 12.58 Equity to total assets 9.37 7.74 8.00 8.86 10.06 Financial soundness indicator (%) 2015 2014 2013 Capital adequacy: Asset quality: 100 Gross NPL ratio 1.88 2.18 2.74 3.47 3.88 75 Net NPL ratio 0.92 1.09 1.41 1.86 2.12 50 Total provisions made against gross loans and receivables 25 Provision coverage ratio 0 2013 2014 2015 2016 2017 The liquidity position remained healthy across the banking industry throughout the year. In fact, during most of the year it remained above the level we would consider to be the optimum. While higher liquidity levels may be welcome from the perspective of some of the stakeholders, the Bank is mindful of the trade-off between liquidity and profitability and has already taken appropriate measures in this regard. Liquid asset ratio was 27.64% as at December 31, 2017. Loans to deposits ratio was 88.78%. 1.53 1.75 1.65 1.87 50.11 48.49 46.34 45.41 78.02 74.43 73.51 72.82 71.45 3.62 3.47 3.62 3.88 4.63 17.33 20.20 22.22 21.62 19.73 3.83 3.47 9.55 8.64 14.36 Earnings and profitability: Net interest income to total operating income Liquidity 1.40 51.05 Interest margin (Net interest income to average assets) Operating expenses to gross income Impairment charge to total income Return on assets 1.54 1.53 1.42 1.60 1.87 Return on equity 17.88 19.52 16.90 17.01 18.40 Cost to income ratio 49.82 51.06 48.92 49.26 45.59 Statutory liquid assets ratio (DBU) 27.28 27.19 26.24 33.15 33.66 Statutory liquid assets ratio (OBU) 30.95 30.19 49.13 31.43 29.38 150.45 Liquidity: Liquidity Coverage ratio (All currency) 209.17 Available stable funding based on definitions prescribed by the CBSL stood at Rs. 865.468 Bn. as at December 31, 2017, leading to a Net Stable Funding Ratio (NSFR) of 127.87% comfortably above the statutory minimum of 100%. Net Stable Funding ratio 127.87 Demonstrating the availability of unencumbered high quality liquid assets at the disposal of the Bank, the Liquidity Coverage Ratio (All currency) stood at 209.17% as at December 31, 2017 as against the statutory minimum of 80%. Borrowings to total assets Equity to total assets – – – – – – – CASA ratio 39.23 41.67 49.70 48.38 43.51 Gross Loans to deposits ratio 88.78 85.64 84.31 79.79 94.59 74.35 73.06 70.94 66.54 74.45 4.28 3.37 2.50 2.85 3.23 9.37 7.74 8.00 8.86 10.06 112.64 116.76 118.61 125.33 105.72 Assets and funding structure: Deposits to total assets Deposits to gross loans Core Financial Soundness Indicators (FSIs) Financial soundness indicators given below provide insights into the financial health and stability of the Bank. Commercial Bank of Ceylon PLC Annual Report 2017 57
  59. Management Discussion and Analysis Capital Management Subsidiaries and Associates The Bank operates with six subsidiaries and two associates and group structure of page 173 . The the Bank is depicted on following is an overview of the subsidiaries and associates of the Bank. Commercial Development Company PLC (CDC) Established in 1980 as the Bank’s first subsidiary, CDC was responsible for building the present Head Office building of Commercial Bank. The Bank holds a 92.97% stake in CDC which handles a major portion of the Bank’s utility services. A large part of its income is derived from renting space in the “Commercial House’ building and outsourcing staff. At end 2017 CDC recorded a post-tax profit of Rs. 426.780 Mn. up 30.74% from Rs. 326.441 Mn. in the previous year. ONEzero Company Ltd. Providing Information Technology Services and Solutions to the Bank, ONEzero is a wholly-owned subsidiary of Commercial Bank. Its four main lines of business are: – the provision of hardware and software related support services – the supply of computer hardware and licensed software – the development of software and – the outsourcing of professional and skilled manpower to the Bank Recording a post-tax profit of Rs. 44.274 Mn. at end 2017, ONEzero posted year-on-year growth of 33.32%. Serendib Finance Ltd. (SFL) Acquired by Commercial Bank in September 2014 when it was Indra Finance Ltd., this licensed specialised leasing company was renamed Serendib Finance Ltd. in March 2015. SFL plays a role in the Bank’s strategic plan to reach out to untapped market segments. The Company’s strategy reflects this goal and through a network of 11 branches provides leasing, hire purchase, mortgage lending and business loans facilities. Company managed an asset portfolio of approximately Rs. 5 Bn. as at end 2017. 58 Commercial Bank of Maldives Private Limited (CBM) Established during the latter part of 2016, CBM opened its Head Office and first branch in the capital, Malé. During the year it opened its second branch on the island of Hulhumalé. Commercial Bank has a 55% stake in CBM. Founded in May 2013 by a diverse group of successful shareholders in the Maldives, Tree Top Investments is the Bank’s Maldivian partner. It holds the balance 45% stake in CBM and contributes vital local market knowledge to the team. While offering an extensive range of financial services, CBM’s goal is to be the most technologically advanced, innovative, customer friendly and most sought-after financial service organisation in the Maldives. In just over a year of operation, CBM recorded a profit of Rs. 32.984 Mn. Commex Sri Lanka S.R.L. – Italy Having established itself as one of the first Sri Lankan banks to launch money transfer facilities in Italy, the Bank incorporated its own subsidiary for these services. This marked the incorporation of Commex Sri Lanka, in Rome as a fully-owned subsidiary of the Bank, to serve the fund transfer needs of Sri Lankan expatriates in Italy. Able to break-even by January 2017 Commex recorded a profit after tax of Rs. 17.702 Mn. by the year end. CBC Myanmar Microfinance Company Limited Having identified the enormous potential available in the microfinance business in Myanmar, the Bank incorporated a 100% fully owned subsidiary, CBC Myanmar Microfinance Company Limited in April 04, 2017. The Bank is in the process of finalising all formalities and necessary logistical arrangements to start commercial operations during the first half of 2018. Commercial Bank of Ceylon PLC Annual Report 2017 GRI 201 Commercial Insurance Brokers (Pvt) Ltd. (CIBL) Through its subsidiary Commercial Development Company PLC., the Bank holds an indirect stake of 18.77% in CIBL. The line of business of the Company includes insurance brokering for all types of insurance through reputed life and general insurance companies in Sri Lanka. CIBL recorded a growth of Rs. 3.1 Mn. profit after tax, for the year ended 2017 up from Rs. 25.614 Mn. in 2016. The Company’s total assets stood at Rs. 303.564 Mn. as at December 31, 2017. Equity Investments Lanka Ltd. (EQUILL) The Bank owns a 22.92% stake in EQUILL, a venture capital company established 27 years ago. EQUILL invests in Equity and Equity featured Debt Instruments. The Company recorded an after tax loss of Rs. 6.716 Mn. compared to the profit after tax of Rs. 11.949 Mn. recorded for the previous financial year. Returns to shareholders The Bank’s business model enables creating value for its shareholders by delivering value to various stakeholders and deriving value from them in turn. Such value created enables the Bank to enhance shareholder wealth both in the short term and the long term through dividend payments and increases in the market capitalisation that enable them to realize capital gains. The Bank’s dividend policy seeks to balance the short-term shareholder returns and supporting business expansion in the long-term. Bank proposed a final dividend of Rs. 2.00 per share for the year ended December 31, 2017 which together with the two interim dividends add up to a total dividend of Rs. 6.50 for the year. Further, the Bank made a rights issue of shares on the basis of 1 for 10 at a discounted price of Rs. 113.60 and Rs. 90.80 for ordinary voting and non-voting shares respectively during the year. The Bank’s shares were trading at a premium to its book value throughout the year and the price to book value stood at 1.26 times as at December 31, 2017, the highest among all the banks listed on the CSE.
  60. Evolution is real An era is evolving where technology and equipment will render a whole new meaning and experience to “a walk about” Commercial Bank of Ceylon PLC Annual Report 2017 59
  61. Management Discussion and Analysis Capital Management KEY BUSINESS LINES REVIEW The Bank is cognisant that the requirement for financial services differs in many respects among its customers . In order to better understand them and align its value proposition in terms of products, services, and delivery channels to suit them, the Bank has segmented the customers and set up four primary customer facing business lines with several sub business lines coming under them as detailed in the table below. This has enabled the Bank to meet and regularly exceed customer expectations across all business lines. Further, it has afforded the Bank a certain degree of diversification in terms of exposures, sources of income and geographies to make growth more prudent and manage risks within the Bank’s risk appetite. In line with strategic imperatives that have the biggest impact on external stakeholders – customer centricity, digital leadership, and operational excellence – the Bank continued to expand its operations across all four business lines during the year, focussing mostly on the following: yy Diversifying products and services yy Widening its reach yy Streamlining service standards yy Optimising processes. Activities that furthered these goals and strengthened the brand are discussed under the four business lines. Criteria Corporate SME Micro customers Mass market High net-worth Income/Size of relationship/Business turnover/Exposure Annual business turnover>Rs. 750 Mn./ Exposure> Rs. 250 Mn. Annual business turnover<Rs. 750 Mn./ Exposure< Rs. 250 Mn. Exposure< Individuals not falling Rs. 500,000 and availing into other categories dedicated products Individuals with banking relationships above set thresholds Price sensitivity High Moderate Low Low High Products of interest Transactional, trade finance, and project finance Factoring, leasing and project financing Transactional Transactional Investment No. of transactions High Moderate Low Low Low Level of engagement High Moderate Low Low High Objective Funding & growth Funding & growth Funding & advice Personal financial needs Wealth maximisation Background Rated, large to medium corporates Medium business Self employed Salaried employees Business community/ Professionals No. of banking relationships Many Many Few Few Many Level of competition from banks High Moderate Low Moderate High The type of segmentation illustrated here provides the Bank with greater knowledge and understanding of the customer and enables it to better align with the banking requirements of each category (refer Table 12). Channel mix and target market based on perceived customer preference Customer Segment Branches Internet Banking ATMs Table – 12 Call Centre Mobile Banking Relationship Managers Business Promotion Officers Premier Banking Units Corporates √ √ X √ X √ X X SMEs √ √ X √ X X X X Micro √ X √ X √ X X X Mass: Millennials X √ √ √ √ X X X Others √ √ √ √ √ X X X √ √ √ √ √ √ X √ High net-worth The four business lines work in collaboration with each other and the various service units of the Bank to drive growth and further strengthen the Commercial Bank brand. 60 Commercial Bank of Ceylon PLC Annual Report 2017
  62. Management Discussion and Analysis Capital Management PERSONAL BANKING Serving a total of over three million customers through its Personal Banking arm , the Bank continues to pursue its goals of increasing access to banking services, supporting wealth creation, and promoting financial inclusiveness across Sri Lanka’s diverse communities. With over 1,000 physical customer touch points, it has also invested deeply in plans to accelerate growth in online and mobile banking. 1,016 Customer touch points Products and services The Bank’s Personal Banking portfolio is designed to cater to the ever-evolving banking needs of our customers as their aspirations and lifestyles change over time. This portfolio includes products and services used by the small and medium enterprise (SME) sector and the micro and mass market segments. Products and services Table – 13 SME and micro sector. The SME sector is the backbone of the Sri Lankan economy. As the country’s lead investor in this vital sector, the Bank continued to invest heavily on improving the lives and livelihoods of our SME and micro sector customers. Commercial Bank affirmed Best SME Bank in Sri Lanka in 2016 by International Finance Magazine (IFM) of the UK Deposits Current accounts Savings accounts Deposits grew by over 14% Foreign currency accounts Call deposits Fixed deposits Over Treasury bill repos 10% Loans Growth in savings account holders Term loans Advances grew by over Home loans 15% Agriculture & Microfinance loans Growth in credit cards (year on year) Leasing 17% Other with total credit card outstanding reaching Rs. 9 Bn. by year end Market share in debit cards approx: 33% market leader USD 1 Mn. Investment in online and mobile banking Commercial Bank was awarded for “making a significant difference and adding value, and achieving the highest standards of innovation and performance” for Small and Medium Enterprise clients. Personal loans Industrial loans Credit cards Bancassurance Focus on deposits Personal Banking enhanced its products and services during the year, launching new offerings and initiatives for the benefit of key customer segments including SME and mass market. Intensifying its focus on deposits the Bank enhanced and promoted a number of products that encourage the saving habit for every stage of a customer’s life cycle. For instance, "Gedarata Thegi" was the Bank's biggest promotion during the year which helped grow the Bank's remittance business, while the “Arunalu Siththam” art competition promoted the Bank's flagship children’s account. This focus on deposits went handin-hand with the Bank’s strategy to increase both brick-and-mortar and digital banking channels, while reaching out to the peripheries of communities in its drive to support financial inclusion. In a challenging operating environment Personal Banking saw its deposit growth increase by 14.63% during the year to reach Rs. 646.742 Bn. The Bank’s CASA ratio of 39.23% remains higher than the industry. The Mastercard branded Dual Interface Card was launched exclusively for entrepreneurs in the SME sector in collaboration with The Federation of Chambers of Commerce and Industry of Sri Lanka (FCCISL) and Channel 17 (CH17). Issued by the FCCISL to its members these cardholders will be eligible for special benefits such as substantial discounts on products and services ranging from telecommunications, healthcare and hospitality, to hardware and vehicle maintenance. This debit card complies with EMV (EuroPay, Master Card and Visa) standards providing greater security for our customers. Commercial Bank launches NFC enabled card acquiring POS for both Visa and MasterCard Commercial Bank became the first Bank in Sri Lanka to launch NFC enabled card acquiring POS for both Visa and Master cards. Commercial Bank of Ceylon PLC Annual Report 2017 61
  63. Management Discussion and Analysis Capital Management Commercial Bank Biz Club was another important initiative that was launched in 2017 . Its aim was to bring together SME customers and help create new business opportunities while providing them with support that goes beyond lending. The business club’s goal is to build a bridge that connects SMEs with each other and the larger businesses of the world. Consisting of four segments categorised as platinum, gold, silver and bronze, the Personal Banking Division focuses on the needs of each segment, providing free advice, training, networking opportunities and other benefits in order to advance each group to the next level. Diribala industrial loan Portfolio value as at end of the year Loans to agriculture and microfinance Graph – 33 Rs. Bn. Loans to agriculture sector Nos. Loans to microfinance sector No. of No. of agriculture microfinance loans loans 10 15,000 8 12,000 6 9,000 4 6,000 2 3,000 0 2013 2014 2015 2016 2017 0 Diribala, the Bank’s branded SME industrial loan portfolio was reviewed to meet changing customer expectations and relaunched in 2016. Following this modification and relaunch loans in this portfolio grew by 10% to over Rs. 56 Bn. with NPL’s amounting to less than 1.5% at year end. 62 Disbursed during the year No. of loans (as at end of the year) No. of loans (granted during the year) 60 7,500 48 6,000 36 4,500 24 3,000 12 1,500 0 Our microfinance portfolio performed well during the year. Comprising loans below Rs. 500,000/- this segment demonstrated a strong growth of nearly 14% during the year. Graph – 34 Nos. Rs. Bn. 2013 2014 2015 2016 2017 0 Dedicated to promote agriculture lending and micro finance, the Bank added one more Agriculture and Micro Finance Unit (AMFU) to its network during the year, taking the total number to 16. These AMFUs continue to assist the Bank in identifying the specific needs of people attempting to develop either their agricultural activities or micro businesses and these officers move beyond urban centres to reach out to the “unbanked”. Partnering with WEBXPAY, the Bank launched an internet payment gateway (IPG) facility to support a new e-commerce platform in Sri Lanka that should increase sales for its SME customers. The new online platform facilitates e-commerce solutions for SMEs enabling transactions in Sri Lankan Rupees and US Dollars through credit and debit cards, mobile wallets and internet banking networks. During the year the Personal Banking Division conducted 8 seminars for SME customers on a range of subjects such as entrepreneurship and succession planning. A total of over 1,000 participants attended these seminars. In line with Government initiatives the Bank paid special attention on the support of female entrepreneurs. Mass market sector. Encompassing regular Personal Banking customers whose main interest is transactional banking, this segment continues to be a key driver of growth for the Bank. A range of initiatives were launched during the year to enhance banking services to this important segment. Special emphasis was given to provide digital banking solutions that allow customers the freedom to conduct their banking transactions at their convenience. We further enhanced our Online Banking platform with the introduction of Electronic Fixed Deposits (or e-FDs) in both local and foreign currencies. These e-FDs can now be opened through the Bank’s online portal at www.combank.lk allowing customers to open a fixed deposit with ease and convenience at any time, any day of the year, regardless of their geographical location. Customers eligible to open e-FDs are Sri Lankan citizens and holders of foreign currency accounts in the Domestic Banking Unit. Foreign Currency e-FDs can be opened in four major currencies, namely the US Dollar, Great British Pound, Euro or Australian Dollar. Commercial Bank reaches out to SMEs in Gampaha and Puttalam Commercial Bank offers e-FDs online Commercial Bank interacted with 160 entrepreneurs from the Gampaha and Puttalam Districts as part of the Bank’s ongoing initiative to develop entrepreneurship skills of the SMEs in the country. The Bank’s Online Banking platform has been further enhanced with the introduction of Electronic Fixed Deposits (e-FDs) in both local and foreign currencies. Commercial Bank of Ceylon PLC Annual Report 2017
  64. Management Discussion and Analysis Capital Management It is encouraging to note that a growing number of customers are getting on board the e-Passbook facility launched in 2016 . In 2017, just one year after it was launched, this ground-breaking mobile app won Gold for “Most Admired Customer Engaged Mobile App” at the sixth Asia Pacific Customer Engagement Awards in Mumbai, India. The Bank was the first financial services institution in Sri Lanka to offer customers an e-Passbook that provides real-time access to details of a range of deposit products and credit cards on Android and iOS powered mobile devices. This breakthrough digital mobile application offered free by the Bank enables account holders to view transactions of the past 30 days on their mobile phones or tabs even when the device is offline. Commercial Bank’s “e-Passbook” wins gold at the 6th Asia Pacific Customer Engagement Awards by the Asian Customer Engagement Forum (ACEF) in Mumbai, India One year after it was launched, Commercial Bank’s groundbreaking mobile app “e-Passbook” won a prestigious international award for design, creativity and innovation. The app bagged the Gold for “Most Admired Customer Engaged Mobile App” For the Bank, 2017 proved to be a good year for progressive technologies in banking with total fund transfers via mobile banking amounting to Rs. 12.34 Bn. for the year. Constantly looking to push the boundaries to offer the ultimate in technology-enabled convenience to customers, the Bank continues to invest in and explore new technologies that can improve the lives and lifestyles of its loyal customers. In addition to lending the Bank also ventured further into innovations in lending. It launched Instant Loan Approvals for Personal Banking loans via an automated system. For the customer this means having faster access to funds without the hassle of multiple visits to a branch. Value of ATM withdrawal and card transactions The Bank also enabled Loan on Fixed Deposit which allows customers access to funds on their deposit by way of a credit facility while their deposits earn interest. Funds can be obtained through ATMs via a Debit Card issued for customers who register for this facility. Value of ATM withdrawals Commercial Bank launched a fixed deposit linked facility that provides depositors with credit against their fixed deposits in full or in part at their discretion while their deposits earn interest. Another innovation in lending launched by the Bank in 2017 is Hybrid Leasing which makes leasing a higher value vehicle more affordable at commencement by combining the features of a Super Lease. This gives professionals and upwardly mobile executives the option of paying a comparatively low rental during the first six or 12 months, paying regular rentals thereafter, and a lump sum at the end of the lease. The Bank introduced Mastercard Debit Cards with Chip and PIN technology for the first time in Sri Lanka. With their magnetic strips, these new cards are considered risk averse as they require the card holder to authenticate each transaction using a PIN, or an OTP (One Time Password) for e-commerce transactions. Value of credit card transactions Value of debit card transactions 600 50 480 40 360 30 240 20 120 10 0 The new Chip and PIN Debit Card will minimise the possibility of fraudulent transactions at point-of-sale (POS) due to the PIN requirement. Rs. Bn. Rs. Bn. Commercial Bank launches “Loan on FD” to offer emergency cash to fixed deposit holders Commercial Bank introduces Sri Lanka’s first Chip and PIN debit card Graph – 35 2013 2014 2015 2016 2017 0 During the year, point-of-sale (POS) usage was enabled for UnionPay cards by the Bank, making it possible for cardholders of the world`s largest card base in circulation to pay for purchases at local retailers with these cards. Visiting leisure and business travellers, from China in particular, benefit most as they enjoy the convenience of cashless payments in Sri Lanka. UnionPay cards have been accepted by the Bank’s ATMs since 2012. Commercial Bank was the first Sri Lankan bank to link its ATMS with UnionPay. EMVenabled UnionPay cards also enjoy additional security following the upgrade of all Commercial Bank ATMs to offer significantly higher protection against counterfeit fraud. FLEXI Plan, was another initiative launched in 2017. It is an easy payment scheme for credit cardholders who have been unable to convert high value transactions into easy payment plans at the point of purchase. Designed to ease the cardholder’s repayment burden, FLEXI Plan is effective when customers need to purchase air tickets, electrical appliances and consumer products or when they pay educational or medical bills. Personal Banking grew its Bancassurance fee income to 34% during the year despite challenging market conditions. Competition from broker firms and other banks, and the possibility of new legislation being introduced are key concerns that could negatively impact growth in this business line. During the year, the Bank also launched Combank Auto Bill Pay through which Personal Banking customers can settle monthly bills for several Dialog services by due date through their credit card. Commercial Bank of Ceylon PLC Annual Report 2017 63
  65. Management Discussion and Analysis Capital Management The Bank launched the INSEE loyalty card in partnership with Siam City Limited . This card is the instrument through which all Siam City’s loyalty points are distributed. Reaching out Commercial Bank opens 257th and 258th Branches at Katana and Rambukkana 750 500 250 0 Commercial Bank opens 259th, 260th and 261st Branches at Yatiyantota, Bopitiya and Kolonnawa 2013 2014 2015 2016 2017 The Bank’s mobile payment solution, Fast Pay, described previously under mass market products and services, provides Personal Banking customers with yet another innovative channel through which to access their funds for daily expenses. Online transfers Graph – 37 No. of transfers ’000 15,000 12,000 9,000 6,000 3,000 The Bank’s 700th ATM terminal was “opened for business” in Kilinochchi further increasing the Bank’s 24/7 customer touch points. Commercial Bank commissions landmark 700th ATM in Sri Lanka at MAS Intimates Vidiyal in Kilinochchi Commercial Bank’s 256th Branch opens in Point Pedro 64 ATMs/CRMs – Sri Lanka 1,000 Customer outreach The Bank continued to invest in its Personal Banking channels increasing and improving customer touch-points even further. The six new branches opened during the year take the Bank’s total number up to 261. In addition to expanding its branch network the Bank is also focusing on creating greener, more energy efficient branches page 103 under Natural Capital (refer for more details). All new and refurbished branches will sport a uniform external façade, with automated banking facilities available for customers on a 24/7 basis. Branches – Sri Lanka 1,250 Several other types of cards were also launched during the year to offer customers greater convenience. The Prepaid Web Card is designed for customers who carry out regular online transactions and prefer to maintain a separate card for ease of monitoring. A multipurpose Prepaid Spend Card was launched to enable customers to manage their spending individually, make a gift to their loved ones or manage the cash floats of their personal assistants or helpers. The purchase of a new digital platform from Fiserv during the year will expand the Bank’s digital solutions offering for all customers soon, including the SME segment. While providing customers with a new and improved digital banking experience, this platform will significantly increase the Bank’s page 77 operational effectiveness (refer for more details). Graph – 36 No. Commercial Bank of Ceylon PLC Annual Report 2017 0 2016 2017 During the year the Bank added substantial number of new current and savings account relationships to its portfolio and provided every customer with access to internet banking. A one week “Online Banking Drive” was held at 38 selected branches with branch staff at hand to demonstrate the convenience of online banking. Continuously seeking out and initiating improvements, the Bank introduced a new initiative in its award-winning corporate website. The corporate website is now equipped with assistive technology to enrich the experience of differently-abled persons.
  66. Management Discussion and Analysis Mobile banking transfers Capital Management Graph – 38 No. of transfers 260,200 259,800 259,400 259,000 258,600 258,200 2016 2017 With financial inclusion always top-of-mind, the Personal Banking Division has begun investing in a Bank on Wheels – a mobile bank with automated banking facilities that would benefit traditionally “unbanked” customers who live far from urban centres. Working with its 16 AMFUs to identify areas that would benefit from such an innovation, the Bank will be sending this mobile bank to help ascertain the appetite for a brick and mortar branch in the area prior to investment. Commercial Bank launches new version of its “Millionaire Account” Commercial Bank relaunched its popular “Millionaire Account” enabling a larger group of aspiring savers to open accounts and benefit from its unique structure. Benchmarked service standards. Personal Banking focuses on several key service standards to ensure it meets and exceeds the expectations of the Bank’s stakeholders. To protect customer data the Bank has ensured that it is compliant with PCI Security Council standards which, for example, prevents the printing of a customer’s entire bank account number on ATM slips. Following the introduction of 3D secure enabled cards the Bank revamped all cards, POS machines and ATMs to the EMV standard which will greatly reduce instances of card present fraud. All IT and other equipment procured by the Bank for branches and other buildings is energy efficient, with “Energy Star 5” ratings that are compliant with the RoHS (Restriction of Hazardous Substances) standards. ATM machines that have been purchased during the year are energy efficient, able to function without air conditioning. Streamlined processes. Providing customers with the service expected of one of Sri Lanka’s leading private-sector banks means ensuring that systems and processes are simple and streamlined – an ongoing exercise that the Bank takes very seriously. The Central Credit Approval Unit (CCAU) now supports a majority of the micro and SME-related loan facilities up to a certain threshold, helping to track and eventually reduce the Bank’s non-performing loans. The centralisation and integration afforded by the CCAU allows greater uniformity in the assessment of credit quality. Integrating our call centres in order to improve processes is another initiative that was begun during the year. The Bank’s four call centres – Card Centre, Digital Banking, Recoveries, and the regular telephone operators – are now in the process of being connected. Over the course of 2018 the integrated call centre will have the ability to track a single caller’s every contact with the Bank, including their interaction via social media. Commercial Bank is a trusted brand that has a track record that stretches back to almost half a century. Thanks to its brand reputation and strength the Bank is able to partner with international organisations such as MasterCard and Visa and widen the scope of banking related initiatives that its Personal Banking customers may avail themselves of. Often these initiatives result in greater upward mobility for more people. Through its Personal Banking Division the Bank is also preparing customers for the new digital revolution in financial services. Investing in top-of-the-line online and mobile banking services, conducting digital banking awareness campaigns and making banking more convenient and accessible for its over three million customers – these are some of the many ways in which the bank indirectly impacts the economy. Convenient banking Figure – 11 yy ComSMS yy USSD yy Mobile Apps for Android and iOS applications yy Combank eLoad yy e-passbook M Ba obi Pr nki le od ng uc ts In addition to the collaboration of front line teams from Branches and the “third line” team which is Audit, assurance mapping now directly involves the second line – teams from Procurement and Risk Management for instance – to ensure that risks are managed with even greater efficiency. Impact on the economy Through the activities of its Personal Banking arm Commercial Bank is making an indirect impact on the economy. Furthering financial inclusion in Sri Lanka is one such initiative. The Bank works towards this goal mainly through the work of its AMFUs – taking banking to the peripheries, and by encouraging and supporting entrepreneurship through a range of effective awareness and education programmes. Commercial Bank of Ceylon PLC Annual Report 2017 65
  67. Sustainability is a given In the era unfolding , man will listen ever more closely to the universe and fashion enterprise around a mutuality of well being 66 Commercial Bank of Ceylon PLC Annual Report 2017
  68. Management Discussion and Analysis Capital Management CORPORATE BANKING Our corporate customers rely on us to be a trusted partner , able to provide financial services that are tailored, relevant, and timely. For us, living up to their expectations and maintaining their loyalty means using our global and local networks, insights, and experience to enable them to reach their full potential in the industries and communities within which they operate. Products and services With an in-depth understanding of customer needs gleaned over nearly half a century of expertise in the field, the Corporate Banking team continued to develop customised solutions that include project lending and packaged facilities for medium to large corporates. Corporate Banking products and services Table – 14 Financing Transaction Products Investment Banking Overdraft Trade Finance services Initial Public Offerings (IPOs) of equity and debt 24% Short-term loans Combank Online Private placements of equity and debt Import financing Pay Master Securitisations 25% Export financing Interest rate swaps Syndications Long-term financing Currency swaps Specialised project financing Accounted for of the Bank’s assets portfolio and of its profits before tax 23% Growth in Corporate loan book (year on year) 0.6% Non-performing loans ratio Accounted for 10.56% of Sri Lanka’s imports and 18.58% of the country’s exports Rs. 7.8 Bn. Funds raised by Investment Banking unit Funded domestic airport in the Maldives Professional client guidance training for all Relationship Managers Term loans Margin trading Customised project loans Escrow accounts Leasing Custodian services Factoring Advisory services on equity and debt Islamic Banking Corporate Banking was able to acquire new corporate clients during the year with a total relationship over Rs. 40 Bn. Commercial Bank among Top Companies in Asia – recognised for leadership and green efforts Loans in the Corporate Banking Division grew by 23% as the Bank strove to maintain a balance between growth, asset quality and pricing. Usage of Pay Master increased by 12.97% year on year. Pay Master is a revolutionary payment solution that relieves customers of the burden and cost of large scale, repetitive but highly important tasks such as regular payments to suppliers and salary payments to employees. This product frees business owners, allowing them more time to focus on their core business. The Corporate Banking arm was able to increase its green lending portfolio during the year. Social and Environmental Management System (SEMS) ensures that the Bank’s lending is environmentally sustainable, socially acceptable and economically viable. Green lending contributed to Commercial Bank being named among the “Top Companies in Asia” and the “Top Green Companies in Asia” at the 2017 Asia Corporate Excellence & Sustainability (ACES) Awards. Commercial Bank was named among the “Top Companies in Asia” and the “Top Green Companies in Asia” at the 2017 Asia Corporate Excellence and Sustainability (ACES) Awards that honour and showcase Asia’s finest and most responsible corporate leaders During the year a new database was set up to ensure lending officers knowledge of key industries is always up to date. Supported by the Bank’s Research and Development Department this initiative has received positive feedback from lending officers. Corporate Banking was able to grow the Bank’s import and export volumes by 39.33% and 14.58% respectively (Graph 39), during the year. Commercial Bank of Ceylon PLC Annual Report 2017 67
  69. Management Discussion and Analysis Import and export turnover Capital Management Graph – 39 USD Bn. Import turnover Export turnover 2.50 2.00 1.50 Islamic Banking was another area that the Bank focused on during the year. A marketing campaign to highlight Islamic Banking and a successful collaboration with Branches contributed towards growth of this segment. Mudaraba Savings and Mudaraba Investments, deposits products in the Islamic Banking Unit increased by 19.83% over 2016 while assets products increased by 17.56%. 1.00 Islamic Banking Products 0.50 0 Deposits 2013 2014 2015 2016 2017 Commission income from trade contributed approximately 17% of the commission income of the Bank supported by increased focus on this area by Corporate Banking. During the year Corporate Banking put together a strategic team that worked on developing new products, modifying existing products, expanding delivery and expanding revenue. The results of their work will be apparent in 2018 and beyond. Always tuned into the needs and preferences of its customer base Corporate Banking was happy to launch a new initiative that filled a need identified by customers. The Bank launched a monthly “Economic Overview” developed in collaboration with Treasury and Research and Development Unit for Corporate Banking customers. This monthly report is designed to provide customers with useful information from their trusted Bank. The establishment of two new accounts under Margin Trading with facilities totalling Rs. 600 Mn. despite suppressed market conditions and rising interest rates was another achievement worth noting for the year under review. 68 yy Mudaraba Savings Benchmarked service standards Corporate banking division constantly reviews its’ service standards and conducts benchmarking of such service standards with peers with a view to providing superior customer service. Plans are afoot to carry out a customer survey and a work study in order to identify any areas for further improvement. Streamlined processes During the year, Corporate Banking paid special attention to the review of all processes relating to Credit, Import, and Export to optimise efficiency, enhance customer convenience, and reduce costs. yy Mudaraba Investments Assets yy Murabaha yy Musawama yy Wakala yy Musharaka yy Diminishing Musharaka yy Ijara Customer outreach Corporate Banking continued to look at new ways to improve customer touch-points during the year. With 55 correspondent banks and 261 branches our clients have access to seamless banking solutions irrespective of whether they operate in a global market or a bustling rural village. Corporate Banking considered face-to-face meetings an important channel to reach out to and stay in contact with its customers. Special training programmes during the year provided relationship managers with the skills they need to be able to exceed the expectations of high-ranking customers. Additionally, performance dashboards were introduced during the year to help monitor the activity of relationship managers visiting clients to ensure an adequate number of customer visits and uniformity of service quality. Commercial Bank of Ceylon PLC Annual Report 2017 To ensure processes within Corporate Banking remain smooth, a review of employee skills was conducted and the appropriate core banking training and personal development guidance provided for all staff within this business line. The automation of Overdraft Overline Report for excess monitoring and the automation of monitoring mechanism of Stocks and Debtors positions against exposures were two initiatives that greatly improved internal processes during the year. The monitoring of borderline advances were further strengthened using “Early Alerts” to minimise non-performing loans. Impact on the economy In Sri Lanka, Corporate Banking supports the many specialised banking requirements of its corporate customers, opening the door for large scale economic activities within these economies. The Bank accounts for 10.56% of imports and 18.58% of exports in Sri Lanka, drawing on its vast experience in Trade Finance to play an important role in facilitating trade. Reflecting key areas of growth for the Sri Lankan economy, Corporate Banking noted loan growth in the health care, trading, apparel, education and leisure sectors.
  70. Management Discussion and Analysis Capital Management TREASURY The Treasury Department has the overall responsibility for managing the Bank ’s balance sheet which demands balancing and managing the capital, funding and liquidity requirements of the Bank. It also plays a key role in managing market risk – interest rate and exchange rate risks in particular – and underlying margins and mismatches in assets and liabilities. Treasury’s role is crucial to maintain the financial security and stability of the Bank while enabling other business lines to readily access funds as they endeavour to meet customer needs. A key player in interbank foreign exchange and fixed income securities Products and services Treasury operations comprise three specialised areas, Foreign Exchange and Corporate Sales, Fixed Income Securities Investment and Trading, and Assets and Liabilities Management (ALM Operations). Reporting to the Head of Global Markets and the Head of Global Treasury, the Treasury manages the following products and services. Treasury products and services Table – 15 Investment products Foreign Exchange Fixed Income Products Financial Derivatives Sri Lanka Development Bonds Forward Contracts Treasury Bills Interest Rates Derivatives Special Foreign Currency Investment Deposit Accounts Spot Contracts Treasury Bonds Currency Options REPOs Reverse REPOs Contributed 22% of Bank’s assets through fixed income securities Mobilised USD 410 Mn. by way of foreign currency borrowings Strategic rebalancing of fixed income securities portfolio Through the prudent management of these products and services Treasury reported the following results during the year. able to successfully hedge the risk of increasing USD rates, while maintaining a positive margin. The Bank’s Fixed Income Securities portfolio is one of the largest in the country, and accounts for approximately 22% of the Bank’s total assets. It is managed to support the liquidity of the Bank, while optimising earnings. The Bank’s forex profit of Rs. 588.213 Mn. reflects increased volumes of trade finance business and remittances. Treasury remains the market leader in Interbank FX Operations, providing liquidity in spot, forward and swap transactions. Policy and market interest rates Graph – 40 % Exchange rate – Annual average Graph – 41 Rs. AWLR SLFR AWFDR USD SDFR 17.5 250 14.0 200 10.5 150 7.0 100 3.5 50 0 2013 2014 2015 2016 0 2017 The Treasury Division’s fixed income portfolio is a combination of both Rs. - and USDdenominated Sri Lanka Government debt securities. The USD denominated bonds in particular are a very attractive investment option, although the Sri Lanka Development Bond (SLDB) portfolio may lose some of the tax exemptions in 2018. By maintaining a major portion of the USD investments in floating rated bonds Treasury has been GBP 2013 EUR 2014 2015 2016 2017 During the year the Treasury Division diversified its foreign currency borrowing base and increased business relationships in order to support the Bank’s other business lines, such as Personal Banking and Corporate Banking. Through structured funding (DPR) and bilateral agreements, Treasury also increased the duration of Commercial Bank of Ceylon PLC Annual Report 2017 69
  71. Management Discussion and Analysis Capital Management borrowings at a relatively low increase in borrowing costs . This improved the Bank’s stable funding position supporting Basel III driven Net Stable Funding Ratio (NSFR) requirements. The Bank’s Treasury arm also increased its Special Foreign Currency Investment Deposit Account (SFIDA) and investment in Government security (G-sec) through Securities Investment Account (SIA). To support the lending and investment activities of the Bank, the Treasury was successful in borrowing USD 100 Mn. from the International Finance Corporation (IFC) during the year. Other activities during the year included entering the interest rate derivative market, arranging funding lines from reputed Development Finance Institutions (DFIs), and introducing SLDB and Sri Lanka Sovereign Bonds (SLSB) backed REPOs. The Treasury Division also worked with an advisory from the International Finance Corporation (IFC) to educate employees on how to better promote green lending. Customer outreach The main customers of Treasury are the Bank’s business lines and, subsequently, their customers. The department is structured to ensure that it operates at an optimal level. As one team, the Treasury Division focuses on and emphasises customer satisfaction, both internal and external. Its business strategy is based on meeting and satisfying customer needs. Constantly working towards this goal, Treasury maintains a close rapport with the Personal Banking and Corporate Banking divisions of the Bank, providing relevant market information, supporting client acquisition and proposing suitable instruments and solutions to meet clientspecific needs. Through its dedicated sales desk, which is the largest unit within Treasury, it services all key stakeholders, striving to maintain high standards throughout all interactions. 70 During the year, the Foreign Exchange and Corporate Sales team conducted foreign exchange trading operations while supporting the Personal Banking, Corporate Banking, and Trade Finance businesses. They also managed the foreign exchange requirements of their customers and the Bank’s Foreign Exchange risk. ALM Operations focuses on maintaining adequate liquidity for the Bank’s operations, while ensuring optimal pricing for its assets and liabilities. The Department was also actively engaged in the activities of the asset-liability committee (ALCO) and regularly provided strategic direction for banking operations. Treasury assigned dedicated dealers for each product, improving this important customer channel – face-to-face customer interaction. Benchmarked service standards During the year, the Treasury Division conducted process improvements to ensure attending to customer needs with greater speed and accuracy. Systems capabilities were also reviewed and enhanced with an eye to the future. As the Bank prepares to make the most of future opportunities, this Division too is dedicated to being future-ready. Streamlined processes Treasury focused on optimising internal relationships while gearing staff to make the most of potential opportunities. The Treasury Division streamlined its process of cross-selling with Corporate Banking as this provides access to financially stable customers with whom the Bank already has a relationship. To further streamline existing processes, a skills assessment of people within Treasury resulted in additional training for all levels of employees, an initiative dedicated to ensure that employees were engaged in Commercial Bank of Ceylon PLC Annual Report 2017 value-added activities rather than routine work. This also resulted in the transfer of experienced senior staff to top positions in international offices. Impact on the economy Declining interest rates resulted in decreasing mark to market losses, increasing the shareholders’ equity, leading to an increase in net book value per share. Government initiatives taken to make the process more transparent and declining US Government treasury rates resulted in greater foreign inflows to Sri Lanka as foreign investors looked for higher yielding securities. As one of the largest players in the market, Commercial Bank accounts for 10.56% of imports to and 18.58% of exports from Sri Lanka. Ties with foreign DFIs (Development Finance Institutions) improved the reach of the Bank in terms of Foreign Currency funding. With customers more informed and keener to experience more complex products, Commercial Bank’s Treasury Department was able to offer a range of hedging instruments and new products for their benefit.
  72. Management Discussion and Analysis Capital Management INTERNATIONAL OPERATIONS The Bank ’s International Operations is progressing from strength to strength. From our initial overseas venture in Bangladesh in 2003, we have expanded to Italy, Myanmar and the Maldives. When we acquired the operations of Crédit Agricole Indosuez in Bangladesh it consisted of two branches and two booths. We have been successful in expanding our business and network over the years, and will be setting up an Automated Banking Centre (ABC) in the country shortly. Bangladesh operations now accounts for 7% of the Bank’s assets AAA for the seventh successive year for Bangladesh operations by Credit Rating Information and Services Limited. Third in terms of profitability, among the nine foreign banks in Bangladesh and first among regional banks Maldivian operation began to record profits The opening of the second branch on the island of Hulhumalé in the Maldives “Commex Sri Lanka S.R.L. – Italy” nine agents covering Northern region of Italy A contribution of 17% to the Bank’s profit before tax from International Operations Overview of Bangladesh Economy Rising income, low inflation and increased public expenditure coupled with resulting increase in consumption led to Bangladesh achieving GDP growth of 7.24% in 2017. Per Capita Income also increased to USD 1,602, leading to a decline in poverty rates. Industrial sector followed by services sector made significant contributions to growth. Stronger Taka is attributed as one of the reasons for poor performance in exports. Remittances to the country from expatriate workers continued to decline. Standard & Poor and Moody rated Bangladesh at BB- and Ba3 respectively with stable outlook. Banking sector faces challenges in terms of rising non-performing loans, lower levels of capital adequacy, slippages of addressing fiscal reforms, political uncertainties and governance related issues. Year 2018 is significant for Bangladesh since the country is set to graduate from a least developed country and also a General Election is due to be held early 2019. Other countries Our subsidiary in Italy continues to boost our leadership position in inward remittances. Our fully-fledged Tier 1 Bank in the Maldives has already begun to return profits. During the year, the Bank obtained an Operation Licence to carry out microfinance business in Myanmar and arrangements are being made to commence commercial operations in the near future. As our horizons continue to expand we are banking on a promising future. Products and services Commercial Bank has been in operation for close to 50 years. It is this experience and strength which propels the success of the Bank’s international operations in the form of products and services that have proven successful. Deposits and advances Graph – 42 % BDT Bn. Deposits Loans and advances (gross) Gross NPA Ratio 40 2.50 32 2.00 24 1.50 16 1.00 8 0.50 0 2013 2014 2015 2016 2017 0 The number of accounts in Bangladesh grew by over 9% during the year, while deposits and advances grew by 24.58% and 31.31% respectively compared to 2016. Having offered exceptional relationship banking to our corporate banking customers, and expanded the Corporate Banking portfolio in Bangladesh, we are on par with the multi-national banks operating in the market in terms of products and services. As a foreign bank we have good access to large corporates but must compete with international banks and local banks in this space. In our efforts to be the preferred service provider for Personal Banking customers in Bangladesh we offer a superior online banking platform, innovative products, and customer service that is of a high standard. Despite our conservative ethos and competition from other commercial banks including the nine new banks established in 2013, we are able to attract a quality deposit mix consisting of savings and low cost deposits. We also introduced a new Floating Rate Housing Loan product to the market which at this early stage, is showing much promise. Our Treasury operations in Bangladesh offer consistent, cost-effective fund management and trade finance services providing customers with some of the best treasury products available in the region. Thanks to our proven expertise and market knowledge in foreign exchange, money market, and fixed income products we are able to compete with other foreign banks and big local banks that enjoy larger business volumes due to their global and local references. Online banking in Bangladesh is picking up with the total number of online fund transfers during the year amounting to BDT 598 Mn. Active users of the ePassbook among Personal Banking customers in Bangladesh and the Maldives reached 2,835. This was the first time such a product was offered in either of these countries. In the Maldives the number of accounts grew by approximately 74% year on year. Customer outreach With our overseas employees now numbering 281, an increase of over 9% over 2016, and contributing approximately 17% of profit before tax, International Operations provides Commercial Bank of Ceylon PLC Annual Report 2017 71
  73. Management Discussion and Analysis Capital Management a source of risk diversification and greater stability for the Bank . Profit before and after tax Graph – 43 BDT Mn. Profit before tax Profit after tax 2,000 1,600 1,200 800 400 0 2013 2014 2015 2016 2017 We have been successful in expanding our business in Bangladesh to 11 branches, six SME centres, two offshore banking units, and 20 ATM machines (including three off site). Shortly we will be setting up an Automated Banking Centre (ABC) attached to the new Corporate branch, with a real time cash deposit machine – the first of its kind in the country. The subsidiary, namely Commercial Bank of Maldives Private Limited, is a fully-fledged Tier 1 bank under the licence issued by the Maldives Monetary Authority has began to make profit during the year. With the opening the second branch this year, and commissioning of digital banking services, business volumes in Maldives have grown rapidly since its commencement in 2016. Commercial Bank of Maldives opens its second branch in Hulhumale business under the Authorized Payments Institute (API) License issued by the Bank of Italy in February 2016. This licence allows the Bank to expand further across Europe and plans to do so are currently being laid out. Impact on the economy The Bank’s International Operations allow Sri Lankan corporates, SMEs and Personal Banking customers the opportunity to widen their horizons. The Bank opened a representative office in Myanmar in June 2015, and during the year, received a micro finance licence. Leveraging its expertise in this sector, Myanmar Operations will commence expanding customer touch points and growing its micro finance business. At the same time, the presence of a stable, long-standing bank like Commercial Bank in Bangladesh, Italy, the Maldives, Myanmar, and also the Middle East region (through BPOs), brings greater investor attention and business opportunities to Sri Lanka. The Bank also has placed its own Business Promotion Officers (BPOs) in key markets around the world to cater to the banking needs of Sri Lankans working in those markets. Products and services offered include money transfer facilities via the Bank’s e-Exchange remittance services. International Operations continued to facilitate mobile to account remittances in real time with the Bank’s partner in the Sultanate of Oman. In the Kingdom of Saudi Arabia, the Bank’s partner continued to facilitate real time transfers through the ATM network and online banking channels. Benchmarked service standards The Bank’s license in Italy is valid throughout the European Union. In addition to signalling that Commercial Bank’s service standards are in line with European requirements it also opens the door for the Bank to expand across the continent. The Bank also grew its market share of remittances in Sri Lanka from 16% to 18% during the year – a major achievement for the Bank, providing greater liquidity in the market. Inward remittances from migrant workers, a vital source of foreign exchange for Sri Lanka, amounted to USD 7,164 Mn. for the year 2017, a decrease of 1.07% over 2016. One of the biggest markets for migrants, Italy has an estimated population of 150,000 Sri Lankans. The monthly value of fund inflows from Italy to Sri Lanka amounts to roughly Rs. 3 Bn. Using the Bank’s e-Exchange and other remittance services Commercial Bank acted as a catalyst, promoting many overseas Sri Lankans who had previously used informal channels to remit money to Sri Lanka. Commercial Bank fetes top customers and business partners in Abu Dhabi Streamlined processes The Bank’s Bangladesh operation’s pricing strategy was further streamlined and customised enabling loan growth and an increase in overall returns on advances. Risk acceptance processes were strengthened to further enhance asset quality. The Commercial Bank of Maldives (CBM), a subsidiary of the Bank, opened its second branch in the Republic of Maldives, a little over a year since it commenced operations in the archipelago. With nine agents covering the northern region of the country, Commex Sri Lanka S.R.L. – Italy, is a fully-owned subsidiary of the Bank which commenced its own 72 Employee competencies were classified across the Bank with career guidance, and training and development provided where necessary. In Bangladesh in particular, where nine commercial banks were opened together in 2013, human resources are stretched. This exercise helped the Bank redistribute talent where it is needed the most – including overseas postings which ensure that experienced personnel head key operations while receiving invaluable career opportunities and experience. Commercial Bank of Ceylon PLC Annual Report 2017 Commercial Bank hosted the Bank’s top customers and business partners in the remittance business in the United Arab Emirates.
  74. Management Discussion and Analysis MANUFACTURED CAPITAL By definition , and as it applies to the Bank, Manufactured Capital includes artificial (as opposed to natural) physical objects that are on hand for use in the provision of products and services. These objects include buildings, vehicles, and equipment. Manufactured capital may be created by external entities and is often used directly for the benefit of customers and other stakeholders. As the Bank continues to grow – expanding its branch network for instance – so too will its manufactured capital. Convenient banking Figure – 12 675 ATM Machines 38 CDM Machines 100 CRM Machines In addition to meeting stakeholder expectations, the Bank uses such tangible assets to meet future challenges. Naturally the quality of these assets has a profound impact on the Bank’s future-readiness and the value it creates for all stakeholders. To ensure that the value it derives is at a premium, the Bank makes every effort to develop and continues to maintain the high standards of its manufactured capital. This section explores how the Bank deploys manufactured capital to meet three of the Bank’s strategic imperatives – namely operational excellence, customer centricity and risk management. Operational excellence Diversified property. Maintaining a healthy balance between owned and rented buildings is one example of how the Bank optimises its manufactured capital. Since 2009, Sri Lanka’s property market has been on an upward trajectory with the demand for commercial and residential real estate growing each year. 280 Branches 839 kWh Solar power generated by branches Commercial Bank of Ceylon PLC Annual Report 2017 73
  75. Management Discussion and Analysis Manufactured Capital Network of delivery points in Sri Lanka Central Province North Western Province Kandy District Akurana (Minicom) K Anniwatte (Nihals Super) K Digana Gampola Gelioya (Arpico Super) K Kandy A Kandy (City Office) K Katugastota Katugastota (Minicom) K Kundasale (Dumbara Super) K Nawalapitiya Peradeniya Pilimatalawa Wattegama Ext. Office Kurunegala District Alawwa Giriulla Kuliyapitiya Kurunegala B Kurunegala (Minicom) K Kurunegala City Office Mawathagama Narammala Nikaweratiya Pannala Polgahawela Wariyapola Nuwara Eliya District Hatton Maskeliya Nuwara Eliya Thalawakelle Matara District Akuressa Deiyandara Deniyaya Kamburupitiya Matara B Matara (Keells Super) K Matara City Office Morawaka Urubokka Weligama Jaffna District Achchuvely Chankanai Chavakachcheri Chunnakam Jaffna G Jaffna Stanley Road A Kodikamam Manipay Nelliady A Point Pedro* Thirunelvely Velanai Ampara District Akkaraipattu Ampara Kalmunai Pottuvil Batticaloa District Batticaloa A Batticaloa (Minicom) F Chenkalady Kattankudy Valaichchenai Uva Province Badulla District Badulla Badulla (Minicom) F Bandarawela Mahiyanganaya Passara Welimada Kilinochchi District Kilinochchi Kilinochchi (Minicom) Trincomalee District Trincomalee Mannar District Mannar North Central Province Monaragala District Kataragama Monaragala Wellawaya Mullaitivu District Mulliyawalai Anuradhapura District Anuradhapura A Anuradhapura New Town Kekirawa Medawachchiya Nochchiyagama Thambuttegama Colombo District ABC M Athurugiriya Attidiya Avissawella Bambalapitiya Bambalapitiya (Majestic City) K Baseline Road Battaramulla Battaramulla (Arpico Super) K Bokundara (Minicom) K Boralesgamuwa Boralesgamuwa (Laugfs Super) K Borella A City Office Colombo 07 B Colombo Gold Centre Dehiwela Dehiwela (Arpico Super) K Delkanda Digital Banking Duplication Road Elite A Foreign D Grandpass Hanwella Homagama Hulftsdorp Hyde Park Corner (Arpico Super) K Kaduwela Katubedda Katubedda (K-Zone) K Keyzer Street Kirullapone Kirulapone (Minicom) K Kohuwala Kohuwala (Keells Super) K Kolonnawa* Kollupitiya Kollupitiya (Liberty Plaza) K Kotahena A Kotikawatte A Kottawa Maharagama A Maharagama (Laugfs Super) K Malabe Maradana Mattegoda (Laugfs Super) K Moratuwa A Moratuwa (Laugfs Super) K Mount Lavinia Mutwal Narahenpita Nawala Nawala (Minicom) K Nawam Mawatha Nawinna (Arpico Super) K Nugegoda A Old Moor Street Padukka Panchikawatte Pelawatte (Laugfs Super) K Pettah Pettah Main Street E Piliyandala Pita Kotte Rajagiriya Rajagiriya (Keells Super) K Ramanayake Mawatha Ratmalana Reid Avenue J Thalawathugoda Union Place Union Place (Keells Super) K Vauxhall Street (SLIC) Ward Place L Wellawatte I Wellawatte Second World Trade Centre Hambantota District Ambalantota Beliatta Hambantota Middeniya Tangalle Tissamaharama Northern Province Eastern Province Western Province Galle District Ambalangoda Baddegama Batapola Deiyandara Elpitiya Galle City B Galle City Main Street Galle Fort Hikkaduwa Karapitiya Koggala Neluwa Udugama Puttalam District Chilaw Dankotuwa Marawila Nattandiya Palavi Puttlam Wennappuwa (Arpico Super) K Wennappuwa Matale District Dambulla Galewela Matale Southern Province Vavuniya District Vavuniya A Vavuniya Second Sabaragamuwa Province Polonnaruwa District Hingurakgoda Kaduruwela Kegalle District Kegalle A Mawanella Rambukkana* Ruwanwella Warakapola Yatiyantota* Ratnapura District Balangoda Eheliyagoda Embilipitiya Godakawela Kahawatte Kalawana Kuruwita Pelmadulla Ratnapura Ratnapura (Minicom) K Gampaha District Bandarawatte (Laugfs Super) K Biyagama Bopitiya* Delgoda (Laughs Super) K Divulapitiya Ekala Gampaha A Gampaha (Minicom) K Ganemulla Hendala (Minicom) K Ja-Ela Ja-Ela (Minicom) K Kadawatha Kadawatha (Arpico Super) K Kandana A Katana* Katunayake BIA Arrival Lounge M Katunayake BIA Departure Lounge M Katunayake FTZ Kelaniya Kiribathgoda J Kiribathgoda (Laugfs Super) K Kirindiwela Kochchikade Makola Minuwangoda Mirigama Negombo B Negombo (Arpico Super) K Negombo Second Nittambuwa Nittambuwa (Nihal Super) H Peliyagoda Raddolugama A Ragama A Seeduwa J Veyangoda Wattala Wattala (Arpico Super) K Weliveriya Yakkala Kalutara District Aluthgama Bandaragama Beruwala (Minicom) K Horana Horana (Wijemanna Super) K Kalutara Kalutara (Arpico Super) K Katukurunda (Minicom) K Matugama C Panadura Panadura (Keells Super) K Panadura Second Wadduwa * Branches opened in 2017 Arpico Super: Banking Centers at Arpico Super Markets Minicom: Banking Centers at Keells and Laugfs Super Markets Banking Hours Banking hours symbol Weekdays 9.00-3.00 A B C D E F G H I J 9.00-3.00 9.00-3.00 9.00-3.00 9.00-4.00 9.00-6.00 9.00-6.00 9.00-6.00 9.00-6.30 9.00-8.00 9.00-9.00 9.00-3.00 Saturday – Sunday – 9.00-1.30 – 9.00-1.30 9.00-1.30 Bank Holidays/Poya* – – 9.00-1.30 – 9.00-1.30 – – 9.00-1.30 – – – – Branches open from 9.00 a.m. to 1.30 p.m. on bank holidays will be notified by press releases. 74 Commercial Bank of Ceylon PLC Annual Report 2017 – 9.00-1.30 – L M 9.30-7.00 10.00-5.00 K 24*7 9.00-1.30 9.00-6.30 9.00-9.00 9.30-7.00 10.00-5.00 24*7 9.00-1.30 9.00-6.30 – 9.00-9.00 9.30-7.00 – 24*7 9.00-1.30 9.00-1.30 – 9.00-9.00 9.30-7.00 – 24*7
  76. Management Discussion and Analysis Manufactured Capital Figure – 13 Jaffna District 12 Mullaitivu District 26 1 1 Kilinochchi District 2 5 1 Vavuniya District 2 6 – Mannar District 1 2 – Anuradhapura District 6 11 1 Puttalam District 8 17 5 Trincomalee District r 1 No. of Branches No. of ATMs Kandy District 14 27 6 Matale District 3 10 2 4 9 1 21 46 9 2 – 2 1 Nuwara Eliya District Central Province Ampara District 4 8 – Batticaloa District 5 13 2 Trincomalee District 1 2 1 10 23 3 Anuradhapura District 6 11 1 Polonnaruwa District 2 7 2 North Central Province 8 18 3 12 42 5 8 17 5 North Western Province 20 59 10 Jaffna District Eastern Province Kurunegala District Kurunegala District 12 Polonnaruwa District 42 5 2 27 6 41 1 13 2 Mannar District 1 2 – Mullaitivu District 1 2 – Matale District Vavuniya District 2 6 – 18 41 2 4 200 32 10 2 8 – Badulla District 6 31 3 11 3 Monaragala District 3 Kegalle District 6 1 5 Ampara District Kalutara District 13 26 2 3 124 19 Colombo District 77 12 5 Gampaha District 11 3 6 – Hambantota District 6 13 – Nuwara Eliya District 4 Galle District 12 30 5 Matara District 10 9 1 Ratnapura District 22 3 10 # Branches Puttalam District Kilinochchi District Batticaloa District Kandy District 14 7 2 No. of CRMs Northern Province 6 11 3 Ratnapura District Kegalle District 10 20 5 Sabaragamuwa Province 16 31 8 Galle District 12 30 5 6 13 – Matara District 10 22 3 Southern Province 28 65 8 Badulla District 6 11 3 Monaragala District 3 6 – Uva Province 9 17 3 Colombo District 77 200 32 Gampaha District 41 124 19 Kalutara District 13 31 3 131 355 54 261 655 100 Hambantota District Western Province 20 5 # Automated Teller Machines # Cash Recycler Machines Commercial Bank of Ceylon PLC Annual Report 2017 75
  77. Management Discussion and Analysis Manufactured Capital Network of delivery points in Bangladesh Figure – 14 Rangpur Rajshahi Sylhet Dhaka Sylhet District Sylhet Branch Khulna Dhaka District BHS Corporate Branch Dhanmondi Branch A Gulshan Branch B Mirpur Branch Motijheel Branch Panthapath Branch Tejgoan Branch Uttara Branch Old Dhaka – SME Centre Progati Sharani – SME Centre Shanthinagar – SME Centre Gulshan – OBU Smarter branches. The Bank is mindful of the requirement to maintain the state of art work environment within the Bank premises and continues to make substantial investments in upgrading the existing premises to be in line with industry standards. Chittagong Barisal Gazipur District Tongi SME Centre Narayanganj District Narayanganj Branch To reflect its continued goal of providing customers with a consistent, high standard of service at every touch point the Bank redoubled its focus on standardising the façades of all its branches in the Colombo area. Work on standardising the internal layout of branches is also ongoing. Chittagong District Chittagong Branch CDA Avenue – SME Centre Jublee Road – SME Centre CEPZ – OBU Six new branches were added to the Bank’s network during the year, taking the total to 280 by end of 2017. Taking up less square-footage these branches include an automated banking services section to provide greater customer convenience. Banking Hours Banking Hours Symbol Sunday to Thursday 10.00-4.00 Friday and Saturday A B 10.00-4.00 10.00-8.00 9.30-12.30 Holidays BHS: Banking Hours Symbol SME: Small and Medium Enterprises At the end of 2017 there were an estimated 8,000 apartments being built in Colombo compared to less than 1,000 in 2008. Following concessions for foreign investors in the real estate sector included in the 2016 and 2017 Government budgets, investments in strategic development projects in the city, such as, the Shangri-la, Tata Housing, and the Astoria are also expected to increase. 76 OBU: Off-Shore Banking Unit Such development means that renting in urban centres such as Colombo, Galle, and Kandy is neither easy nor cost-effective. Property owners have their pick of short-term tenants from start-ups to established companies all jostling for a piece of the action. Commercial Bank of Ceylon PLC Annual Report 2017 To meet the challenges presented by this scenario the Bank has made every effort to move back office and support staff into owned buildings. Buying premises strategically in key locations and renting – especially in rural areas where the security of renting to a trusted local bank is highly valued – the Bank has balanced its investments in properties to generate greater economies. Sustainable energy. The Bank installed solar panels in 20 branches during the year under review, converted all lighting to LEDs (light-emitting diodes). It also invested in the optimisation of air conditioners in the Head office building through its subsidiary Commercial Development Company PLC, which resulted in the Bank achieving approximately 15% reduction in its energy bill. Rationalising office equipment. Buoyed by the ability to reap benefits of moneys spent on strengthening infrastructure, the Bank will continue to invest in ICT with the objective of delivering unprecedented customer experience through technology.
  78. Management Discussion and Analysis Manufactured Capital During the year under review the Bank also increased its ratio of hired versus owned office equipment , engaging a third party supplier for the renting of machines such as printers. This has resulted in approximately 35% shift from capital expenses to operational expenses across the branch network, with maintenance and repair costs being borne by the supplier. Customer centricity Software solution. In 2012, the Bank launched its own home-grown online financial services solution which provided distinctive experiences for both retail and corporate customers. Five years on and the needs of its stakeholders have grown exponentially. With plans to further expand digital solutions for customers – including mobile banking solutions for its Small and Medium Enterprise (SME) segment – the Bank procured a new digital platform from Fiserv, a global leader in financial services technology solutions, during the year and it will become fully functional in 2018. The Bank will continue to upgrade its IT platforms to maintain a state of the art infrastructure. Effective transport. To maintain the cost-efficiency of the transport arrangements the Bank now employs a combination of owned and rented vehicles. In addition to the use of commercial cab services the Bank has also negotiated with a third-party supplier to provide manned vehicles at a monthly fixed rate per kilometre. Managing Risk Online procurement. Online procurement of all fixed assets and inventory was a challenging but productive operation which involved changing employee mindsets throughout the Bank. Maintaining the usual dual control system, monthly requirements are submitted to the Bank’s Logistics team who in turn alert the Procurement team. This process, including the supply of items from the Bank’s warehouses to the point of delivery, is now entirely traceable online. This has helped in proper accounting and physical verification. It is heartening to note that the Bank has received zero complaints on procurement practices through its whistle-blowing system this year. Total investments in the Manufactured Capital of the Bank (Property, Plant and Equipment, Intangible Assets, and Leasehold Properties) stood at Rs. 15.484 Bn. as at end refer Note 39 on page 245 2017 (please for details). Maintaining an efficient and productive environment for all its stakeholders is of paramount importance to the Bank and helps fulfil its aim of creating value and being future ready. Commercial Bank of Ceylon PLC Annual Report 2017 77
  79. Management Discussion and Analysis SOCIAL AND NETWORK CAPITAL The communities within which we operate have expectations of us for their well-being in the same way that we have expectations of them for our growth and sustainability . As we create value for them so they too create value for the Bank. The networks that have sprung up between the Bank and each stakeholder group – namely, customers, suppliers and business partners, and communities – are built on trust, loyalty, and shared values. These networks enhance the well-being of both the individual and the community as a whole, providing the Bank with a legitimate social license to operate. This section explores how the Bank leverages social and network capital by delivering value to and deriving value from customers, suppliers and business partners and community thereby meeting all five of the Bank’s strategic imperatives – namely prudent growth, customer centricity, operational excellence, digital leadership, and risk management. Customers Customer centricity Anticipating customer needs. The term customer service has taken on a completely new meaning in today’s context and judging by current trends will continue to morph even further. Service providers such as banks now need to be at least two steps ahead of the customer – being where they are, when needed. Commercial Bank expands its social media offerings with attractive new features on Viber To stay in touch with customers the Bank employs a number of channels such as customer gatherings, one-to-one meetings, social media, its widespread branch network, and complaints and feedback. For instance, during the year under review, the Bank’s Corporate Banking arm increased the number of face-to-face customer meetings by specially trained business promotion managers resulting in a net increase in customer acquisitions. The Bank’s Personal Banking arm continues to have regular conversations with customers and uses such feedback to design customised products to drive financial inclusion and continue its expansion into the peripheries. The Bank on Wheels concept, succession planning for entrepreneurs and the ComBank Biz Club for small and medium enterprises (SMEs) were all ideas that sprang up as a result of customer conversations (refer Review of Key Business pages 61 to 65 for more details). Lines on Further investment in digitalisation and branch automation, online banking, mobile banking and collaborative networks was a result of the Bank’s determination to fulfil the financial needs of its customers. Instant loan approvals, which were launched in June 2017, have proved to be very successful. Through this initiative loans are instantly approved or registered subject to document verification and credit clearance. By the end of 2017, Rs. 143.670 Mn. worth of advances have been approved, with a total of 195 loan applications approved. Commercial Bank launches “Biz Club” to empower SME customers During the year, the Bank’s Treasury Department continued to enhance its products and services offering, assigning during the year. The Bank’s Treasury department set up dedicated dealers for each product to ensure a superior customer experience. In credit cards the Bank continued to focus on security and convenience. From September 2017 onwards the Bank began utilising NFC (near field communication) technology for all cards. The Bank also introduced DCC or dynamic currency conversion – where at the point of sale, customers are presented with the choice of having their credit card transactions converted by a merchant or ATM to the currency of the country where their credit card was issued. These initiatives provide the Bank’s customers with the latest technology in credit cards. Promoting financial inclusion. In addition to customer convenience, the Bank also focused on making a positive difference to the lives and livelihoods of customers in urban centres as well as areas with a higher proportion of unbanked. During the year, the Bank provided investment opportunities as illustrated in graphs 44 and 45. Interest paid to depositors Graph – 44 Rs. Bn. 60 48 36 24 12 0 Commercial Bank has further broadened its social media presence with attractive new offerings on Viber. 78 The first of its kind in the country, Commercial Bank Biz Club will focus on bringing SME customers together in order to create new business opportunities, and to provide them support beyond lending. Commercial Bank of Ceylon PLC Annual Report 2017 2013 2014 2015 2016 2017
  80. Management Discussion and Analysis Loans disbursed Social and Network Capital Graph – 45 Rs. Bn. GRI 413 Growth of specialised deposit products Graph – 47 Rs. Mn. Divisaru 400 750 320 600 240 450 160 300 80 150 0 0 2013 2014 2015 2016 2017 Growth of specialised deposit products Deposits distribution 2017 Graph – 48 3% 3% Rs. 500,000 – 1 Mn. Above Rs.1 Mn. 11% Rs.100,000 – 500,000 2017 54% Below Rs. 5,000 29% Rs. 5,000 – 100,000 3% 3% Rs. 500,000 – 1 Mn. Above Rs.1 Mn. During the year, 500 entrepreneurs in this segment benefited from three programmes. Continuing on from the initiative taken in 2016, one of such programmes was dedicated for women which drew a participation of 200 female entrepreneurs. Commercial Bank hosts seminars for SMEs in Polonnaruwa and Gampaha 10% Udara Anagi 75 15 60 12 45 9 30 6 15 3 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2016 2016 Graph – 46 Rs. Bn. 2015 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2015 The Bank’s customer penetration rate outside Sri Lanka’s Western Province remained at 12% during the year. Specialised deposit products for women (Anagi savings accounts), senior citizens (Udara savings/ fixed deposit accounts) (graph 46), micro entrepreneurs and small scale farmers (Divisaru savings accounts), and beneficiaries of migrant workers (Remittance special savings account) (graph 47) show an upward trajectory while overall deposits are well distributed (graph 48) as the Bank continues its efforts to ensure that such groups are involved in the country’s socio-economic progress. 0 Remittance Financial literacy and capacity building. As Sri Lanka’s largest financier to the SME sector, the Bank takes its role very seriously, providing SMEs with the type of financial literacy and capacity building they need to flourish and significantly contribute to the social and economic well-being of the country. For instance, through the CommBank Biz Club we are able to segment these customers into four groups – platinum, gold, silver, and bronze – to better cater to their needs. We work hand in hand with them to move members of each tier up to the next. This is achieved by first identifying their financial and business needs and providing them with the kind of advice and services they require to increase capacity and expand their financial knowledge. The Bank then utilises its far-reaching social networks to partner with external parties, including the Central Bank, which are able to provide them with the kind of training and development they need. 2017 0 Rs.100,000 – 500,000 2017 57% Below Rs. 5,000 27% Rs. 5,000 – 100,000 An ongoing initiative of the Commercial Bank to develop entrepreneurship in the SME sector benefited 341 entrepreneurs in the Polonnaruwa and Gampaha areas, the majority of them women. Commercial Bank of Ceylon PLC Annual Report 2017 79
  81. Management Discussion and Analysis Social and Network Capital The Bank also conducted five financial literacy programmes targeting micro and agri entrepreneurs that benefited 695 participants of which 150 were females . Commercial Bank engages in knowledge sharing with Kilinochchi farmers Commercial Bank’s Kilinochchi Branch with the assistance of the Bank’s Development Credit Department organised a multifaceted seminar for 154 members of the Farmers Association in the area in collaboration with the Central Bank of Sri Lanka. Commercial Bank shares knowledge with Achchuveli’s micro entrepreneurs Commercial Bank’s Achchuveli branch and the Bank’s Development Credit Department (DCD), conducted a seminar in collaboration with the Central Bank of Sri Lanka, for 162 micro entrepreneurs in the Achchuveli area, one of the major centres of agriculture in the Jaffna peninsula. Other customer empowerment efforts include: yy Increasing wheel-chair accessible branches to 188 (72% of branches). yy Providing customers with their choice of language when operating our ATMs – Sinhala, Tamil, English and/or Bengali in Bangladesh. yy Enhancing access for differently-abled persons by enriching the corporate website with special assistive technologies for users with visual disabilities, hearing impairments, physical disabilities and age-related conditions. yy Launching the Smart Tea Card in late 2016 in collaboration with the Smart Metro Pvt Limited, – a hybrid card having the features of a debit card and data capturing card – facilitating transactions otherwise made by way of cash or cheque. 80 Expanding our footprint. Our overseas business has grown from strength to strength. Operations in Bangladesh, which began in July 2003 with the acquisition of the Bangladesh operations of Crédit Agricole Indosuez (CAI) has grown from four outlets to 19 with 20 ATMs, contributing 12% to the Bank’s bottom line. The Bank has won many awards for its operations in Bangladesh. Commercial Bank of Maldives Private Limited launched in September, 2016, began turning in profits and opened its second branch in Hulhumalé during the year under review. Customer feedback is overwhelmingly positive as we continue to grow our retail operations. The Bank established its representative office in Myanmar in June 2015 to offer advisory services for Sri Lankan and Bangladeshi businesses wishing to operate in that country. The Bank also established the CBC Myanmar Microfinance Company Limited, a fully owned subsidiary, in April 2017. The Company received the license from Myanmar Microfinance Supervisory Enterprise to carry out microfinance business operating as a non-saving deposit organisation. The Company is yet to commence operations. Commex Sri Lanka S.R.L. in Italy expanded to nine cities through agency operations covering most of northern region. Risk management Transparent service offering. We make sure customers are fully aware of the terms and conditions of the financial products and services they use. To this end we develop clear policies and procedures which are regularly monitored to ensure that transparency and integrity are maintained at all times. Sound employee training takes into account our customers’ varying levels of financial savviness as well as their preferred language. Along with the necessary literature, this ensures that our people are well-equipped to explain our products and services to customers so that they are able to make informed choices. Customers can also visit the Bank’s corporate website for the latest deposit rates, lending rates, exchange rates and tariffs, and charges. They can also contact the Bank’s newly integrated Information Centre or visit any branch for clarification. Commercial Bank of Ceylon PLC Annual Report 2017 GRI 417 We ensure customers are aware of our Complaints and Grievances Procedure by promoting it on our website and at our branches. This includes contact details of Bank officials and the Financial Ombudsman in case the customer finds the Bank’s efforts unsatisfactory. Ethical products and services. The Bank’s Product Development Committee which consists of Key Management Personnel from a wide cross section of business and service units – including the audit team – ensures that all new products and services as well as any amendments to current offerings are ethical and in line with all applicable laws and regulations. Lending responsibly. Our employees take pride in living by the Bank’s strong values and its Code of Ethics. They help school and encourage customers in ethical and conservative wealth management practices while serving varying risk appetites. Working in tandem with our lending practices, our marketing efforts focus on products that create wealth for our customers such as home loans and business loans. At the same time we generally discourage consumption-based lending. Every single business loan and industrial loan is screened by qualified employees to ensure compliance with the Bank’s Social and Environmental Management System (SEMS) to ensure compliance with the country’s environmental and labour regulations. They also take the time to educate customers on the benefits of such compliance and provide advice on remedying shortcomings. (For more information on our SEMS framework refer page 102.) please With regard to asset quality in loans and advances, including credit cards, the recovery teams are now reporting to the head of the Recoveries Division. Another unit – the Branch Credit Monitoring Unit also under the purview of the head of Recoveries Division – begin their monitoring duties from the time the loan is approved. This is an ongoing process improvement with further improvements and the elimination of duplications planned for the coming year.
  82. Management Discussion and Analysis Social and Network Capital Securing sensitive information . Taking its responsibility of ensuring the security and privacy of customer information a step further than the stipulated regulations (as outlined in the Banking Act and subsequent directives by the Central Bank of Sri Lanka), Commercial Bank has been in compliance with the ISO 27001:2013 certifications on critical functions for the past seven years. This certification covers computer servers of Bangladesh operations too. In addition the Bank continues to invest in research and technology that is designed to help it meet the rapidly evolving threats of the future. Having already introduced 3D secure enabled cards the Bank upgraded all cards, POS machines and ATMs to the EMV (EuroPay, MasterCard and Visa) standard, dramatically reducing instances of card present fraud. The Bank is working towards being compliant with PCI Security Council Standards, which makes sure customer information is not indiscriminately available. An example of this is when a customer receives his or her ATM slip or the monthly statement which no longer reveals the entire account number, providing greater security in terms of customer information. OTP or over the air pins for third party fund transfers was also launched within the year under review. With the OTP customers receive a message directly to their mobile phone while making a fund transfer. This means that even if the customer’s computer is hacked they will still be able to prevent unauthorised fund transfers. Being prepared. As always, regular drills are conducted to ensure that the Bank’s disaster recovery data centre is geared to deal with any eventualities that could affect the business and the Bank’s ability to continue providing the type of customer service that is expected of an organisation of Commercial Bank’s stature and reputation. The Bank sends progress reports on such drills regularly to the CBSL, taking prompt action to remedy any weaknesses and eliminate the possibility of repeating any lapses. GRI 205, 418 The Bank takes the following additional precautions as well: yy An oath of secrecy is taken by all employees. yy Specific restrictions are placed on disclosure of account information to third parties. yy Access to customer accounts by staff members who do not have a need for such access is being monitored. yy Investments are made to secure online privacy and protection of all customers. yy Compliance reviews and audits are conducted regularly. yy Certification on specific aspects takes place benchmarking international best practices. yy All requests containing sensitive information are routed through a dedicated officer who keeps control over the dissemination of information. yy Sensitive data such as name, identification number, address, etc., are masked in data backups. “No” to corruption. The Bank places a premium on the trust and confidence of its customers – a strength it has carefully cultivated for close to half a century. As illustrated in the Bank’s Code of Ethics this is an organisation that forbid corruption. Through onsite audits and online surveillance the Inspection Department reinforces the provisions of the Code. The scope and frequency of audits are determined using a risk-based model and this approach ensures that customers continue to benefit from the highest levels of integrity. With constant advances in technology the unlawful find new ways to profit through nefarious activities such as money laundering. It is to fight against such risks that the Bank continues to strictly enforce its Know Your Customer (KYC) policy and upgrade its systems for better monitoring. The Bank’s Anti-Money Laundering Unit, under the purview of the Compliance Officer, also centrally monitors transactions promptly reporting any irregularities or suspicious activities to the Financial Intelligence Unit (FIU) of the CBSL. Digital Leadership Preparing for the future. In addition to focusing on being future ready as a Bank we are also focused on taking our customers with us on this exciting journey. With the goal of migrating more customers towards online channels several online banking drives were conducted at branches during the financial year resulting in an increase of 22.90% of internet and mobile banking users. The Bank’s current platform offers SMEs and corporate customers Internet Banking services but with the new platform to be launched in 2018 they will also be ready to enjoy mobile banking services. As part of the channel optimisation efforts, the Bank enabled fixed deposits to be opened via online banking, providing greater convenience for customers. This feature too is increasing in popularity with 8% of fixed deposits being opened online, within a very short period after its introduction, demonstrating the trust customers have placed in the Bank. Commercial Bank unveils “COMBANK Auto Bill Pay” an automated bill payment facility This new facility enables the customers to schedule recurring payments such as monthly bills to be paid through Commercial Bank Credit Card Another feature that has customer convenience at its heart is the Commercial Bank Fast Pay. Currently being road tested at a popular café in Colombo, Fast Pay allows the customers to pay without taking their wallets out. The customer simply provides the cashier with their mobile phone number, then accepts a message for payment and has their account immediately debited. Commercial Bank of Ceylon PLC Annual Report 2017 81
  83. Management Discussion and Analysis Social and Network Capital Commercial Bank innovates with “Fast Pay” – new Mobile Payment Option Commercial Bank launched its own Mobile Payment option, enabling account holders to make instant cash-less transactions via the Bank’s existing mobile banking app, through a simple and innovative mobile payment option. The Bank has also begun integrating all four of its call centres – the Card Centre, Digital Banking, Recoveries, and regular telephone operators. This move is in anticipation of the new digital platform that will be launched next year and which will allow all customer interaction – via telephone or social media – to be addressed via a single point of contact. During the year under review the Bank launched a number of new initiatives, products, and services designed to bring greater convenience and security for the customer. These included assistive online technology for differently-abled customers, electronic fixed deposits in local and foreign currency, instant loan approval through online banking, credit facilities for fixed deposit holders through ATM for pre-registered customers, new credit card and point-of-sale (POS) technology, automated bill-payment facilities and travel-related benefits for credit cardholders, and an online platform that facilitates e-commerce for SME customers. These innovations are discussed in detail under the Review of Key Business Lines pages 61 to 65). (on Suppliers and business partners Operational excellence Building smart partnerships. The proverb, “A chain is only as strong as its weakest link,” is very apt in the context of our suppliers and business partners. Just as our partnerships with them are mutually beneficial we ensure these relationships are professional, transparent, and fair so that we may be assured of operational excellence at all times. During the financial year, payments to business partners amounted to Rs. 8.775 Bn. with over 90% of value created for local suppliers. One example of our support for local suppliers is the Passbook for account holders which used to be printed by an overseas supplier. With input and advice from the Bank’s Procurement Department local suppliers were groomed to provide the Bank with this product resulting in more value being created for our local business partners. The figure below depicts our level of dependency on business partners. It demonstrates the entire spectrum from critical to ad hoc. GRI 102-9, 204, 308, 414 Risk management Our Approach. Fair and transparent processes have been in place to ensure that the Bank’s business needs are met without compromising quality, agreed deadlines, or the Bank’s Code of Ethics. A thorough technical review, including social and environment aspects, is an essential part of every process. This goes hand in hand with a detailed financial review. Ongoing conversations and reviews help address any areas of concern on social and environment aspects. page 83 the As set out in figure 16 on Bank has established an efficient process to ensure that standards are met in line with the Bank’s evolving business needs. Signing of Memorandum of Understanding Commercial Bank of Ceylon PLC signed a Memorandum of Understanding (MoU) with ARTISAN Outfitters Ltd which is a prominent Departmental Store in Bangladesh to offer discount facility on COMBANK Debit & Credit Cards. Our business partners Figure – 15 Extending our reach yy Correspondent banks yy Franchise partners yy Exchange houses yy Business Promotions Officers yy Agents Ongoing support yy Maintenance yy Software suppliers yy Staff welfare yy Waste management yy Communication yy Human resource providers yy Asset suppliers yy Travel and transport yy Debt collection agencies Critical to operations yy Utility services providers yy Travel and transport yy Materials suppliers Infrequent engagement yy Premises providers yy Contractors yy Professional service providers 82 Commercial Bank of Ceylon PLC Annual Report 2017
  84. Management Discussion and Analysis Procurement process Social and Network Capital Figure – 16 Issue Request for Proposal (RFP) Preliminary review and shortlist Detailed review (Technical review/Financial review) Selection Customer centricity Greater accessibility. With our customers venturing further afield and an ever-widening diversity within our customer base we have continued to focus on expanding our network. Consisting of some of the world’s largest financial institutions (with some relationships spanning over 25 years), our network consists of 55 correspondent banks refer page 436 for complete (please list of correspondent banks) and franchise partners that include MasterCard, Visa, China UnionPay and Discover. Through these partners we are able to provide customers with greater connectivity to global payment platforms. Such connectivity benefits a large proportion of our customers as it facilitates trade and tourism. Commercial Bank enables point-of-sale use in Sri Lanka for UnionPay cards Procurement Operational excellence Critical support. We depend on business partners such as electricity, telecommunication, and software systems support providers for the smooth functioning of our business. Since we do not have much capacity to influence or switch a supplier easily without incurring hefty costs in the case of most services, we have taken great care to build long-standing relationships with them, ensuring that our expectations are met specially, compliance with all applicable regulations. Wherever possible, we have made stand-by arrangements and maintain a certain degree of redundancies to face any contingencies. Ongoing support. Covering a wide range of services that allow us to operate at an optimum on a day-to-day basis these suppliers provide a wide range of services. Ranging from large corporates to SMEs and individuals, they face many sustainability challenges as identified below: Business partners/Material aspects Ongoing monitoring Each RFP issued to a potential supplier includes the following to ensure the highest standards: yy Compliance with Environmental Standards. • Restriction of Hazardous Substances (RoHS) directive. • Energy star rating. yy Adherence to software piracy regulations. yy Adherence to the 10th principle of the UNGC. yy Adoption of health and safety standards for suppliers with workers at risk of injury or disease. yy Supplier Human Rights assessment The Bank works closely with suppliers wherever possible to help identify, address and resolve any areas of concern. In rare instances where material issues remain unresolved exit clauses in contracts make it possible for the Bank to terminate a relationship. Suppliers who are unable to adhere to the Bank’s requirements are disqualified from the selection process and removed from the Bank’s registered suppliers’ list. Commercial Bank has enabled point-of-sale (POS) usage for UnionPay cards, making it possible for cardholders of the world’s largest card base in circulation to pay for purchases at local retailers with these cards. Our network of exchange houses and agents totalling to 104 facilitate remittances to and from Sri Lankan and Bangladeshi citizens working overseas. We continue to be among the market leaders in this business segment. A thorough screening is conducted on all partners in accordance with defined criteria. Further, detailed agreements have been signed formalising relationships and defining mutual obligations. Performance is monitored on an ongoing basis by both parties to ensure compliance with agreed terms and conditions. Maintenance service providers Labour practices Health and safety of workers Effluents and waste Human resource providers Labour practices Human rights Travel and transport providers Emissions Material/asset suppliers Responsible sourcing Human rights of workers Debt collection agents Customer privacy Human rights Waste management service providers Effluents and waste We provide ongoing monitoring for this segment of suppliers initiating regular dialogue about areas of concern, working towards resolving identified issues and encouraging the adoption of best practices. From all supplier groups we require compliance with all applicable regulations. Commercial Bank of Ceylon PLC Annual Report 2017 83
  85. Management Discussion and Analysis Social and Network Capital Outsourced staff . We outsource noncritical functions to reputable agencies after following a rigorous and well-documented screening process that is fully compliant with the CBSL directives. Issues that apply to all outsourced firms include: yy Compliance with labour laws. yy Preservation of human rights. yy Minimum wages. Supporting policy formulation. As a leading bank in Sri Lanka, Commercial Bank is constantly working towards the social and economic betterment of the country, identifying areas of concern and exploring solutions. Undertaking studies and analysis to support recommendations made to policy makers is a role that the Bank takes very seriously. In this pursuit it backs the following organisations: yy Timely payment of wages. yy Sri Lanka Banks’ Association. yy Payment of statutory levies. yy Institute of Bankers, Sri Lanka. yy Payment of social security contributions. yy Ceylon Chamber of Commerce. yy Sufficient leave. yy National Chamber of Commerce. yy Reasonable working hours. yy Association of Banking Sector Risk Professionals, Sri Lanka. yy No forced or child labour. To ensure these standards are met the Bank’s Human Resources Department screens and provides guidance to outsourced agencies while the Bank’s Internal Audit Department provides assurance on the function of processes. The Bank also obtains the services of debt collection agents to recover its unsecured personal loans and credit card dues. Covered by an agreement which sets out rules for ethical conduct, these agencies are under continuous monitoring by the Recoveries Division of the Bank. Any violation of terms and conditions results in termination of service of such agency for which provisions are made in the agreement. Infrequent engagements. From time to time the Bank engages a range of suppliers and service providers from large scale corporates, micro entrepreneurs to individuals. Suppliers in this category are monitored less frequently. The exception is for contractors whose employees work on Bank premises. In such cases the Bank works closely with the supplier to ensure the health and safety of such workers. 84 yy The Association of Compliance Officers of Banks, Sri Lanka. The Bank is actively participating in the formulation of Sustainable Finance Initiative in Sri Lanka, comprising 11 principles. Community GRI 102-12, 102-13, 413 CSR Trust Established in 2004, the CSR Trust is an independent body that was established to ensure that the Bank’s CSR projects were effective and meaningful. As outlined in the Trust Deed, the objectives, powers of the Trustees, eligibility criteria and the Bank’s pledge to transfer up to 1% of its post-tax profit annually – all make up the formal structures and processes that ensure the proper governance of the CSR Trust. The Trust is operated by a cross section of employee volunteers from strategic business units as well as dedicated resources page 85). The Bank’s (Figure 18 on top management provides the Trust with unfettered support generating the inspiration required to make a difference for good. Over the past 10 years the Bank has contributed Rs. 513.863 Mn. to the CSR Trust. During that period the Trust has utilised Rs. 412.440 Mn. (Graph 49). How we impact communities Figure – 17 Risk management Building sustainable communities. Empowering the communities within which we operate and supporting their development is part of the ethos of the Bank. In addition to investing in such communities directly we also provide financial support through selected Corporate Social Responsibility (CSR) projects. Up to 1% of the Bank’s post tax profits are allocated for the Bank’s CSR Trust. The Trust supports altruistic activities with no expectation of financial return. Commercial Bank of Ceylon PLC Annual Report 2017 yy Social and Environmental Management page 102) System ( yy CSR Trust yy Inclusive and responsible banking page 80) ( yy Supporting policy formulation yy Supporting SMEs ( page 79)
  86. Management Discussion and Analysis Social and Network Capital Composition of CSR Trust Figure – 18 CSR Trust Deed CSR Trustees Chairman Managing Director Director Chief Financial Officer Deputy General Manager – Marketing CSR Coordinator CSR Unit CSR Trust contribution and utilisation Graph – 49 Rs. Mn. Contribution Utilisation 100 80 60 40 20 0 2013 2014 2015 2016 2017 During the year under review the Trust focused on four main pillars: Education, Community, Healthcare, and Culture and Heritage. In addition to these key focus areas the Trust also funded a few other initiatives that met with the Bank’s ethos for making an impact for good. Education for employment generation At the heart of any prosperous society lies education. It offers a new generation the chance to follow their dreams, realise their potential and make a worthwhile contribution to the world. The Trust dedicated 65% of spending, amounting to Rs. 28.57 Mn. during the year under review to education for employment generation (refer graph 50 on page 86). Digital citizens. Since its inception, the CSR Trust’s successful pilot projects under the pillar of education saw the donation of 175 IT labs and the introduction of comprehensive Learning Management Systems (LMS) to schools across Sri Lanka up to end 2017. The Bank’s recent education project “Smart Schools” is a collaboration between HeadStart (Pvt) Limited, Microsoft – Sri Lanka, Dialog Axiata PLC, and Commercial Bank under the supervision of the Department of Education – Western Province. Through the e-learning platform of Trust “www.sipnena.lk”, of HeadStart (Pvt) Limited www.guru.lk, the project aims to improve results, digital skills and employability for students in Commerce, Maths, and Science streams at the GCE Advanced Level (A/L) Examinations. It also benefits students sitting English, Maths, and Science subjects at the GCE Ordinary Level (O/L) Examinations. Another important aim is to elevate the concept of teaching through technology in schools to the level of global trends and standards. These teachers were also encouraged to create and upload their own teaching modules to the e-learning platform. So far over 10,000 learning content have been uploaded by these teachers adding to the wealth of knowledge accumulating for the use of students – totalling over 30,000 Office 365 user accounts for the year under review. Through the successful implementation of this project Microsoft - Sri Lanka noticed an increased use of their tools in Sri Lanka and engaged local teachers with Microsoft educator network, to develop themselves and get certified. These teachers have earned more than 20,000 digital badges so far. To encourage the new interest in technology Microsoft also sponsored a total of eight teachers to participate in various overseas training programmes. Commercial Bank wins four CSR and Sustainability Awards from CMO Asia Council Through this project the Bank funded the training of 195 ambassador teachers in the use of Office 365 and LMS. In turn approximately 6,000 teachers and over 90,000 students benefit from this programme. Commercial Bank received the awards for Best Use of CSR Practices in Banking and Finance, Developing Sustainability Strategies, Concern for Health, and support and Improvement in quality of education, all in the sphere of Corporate Social Responsibility. Commercial Bank of Ceylon PLC Annual Report 2017 85
  87. Management Discussion and Analysis Social and Network Capital The programme has awakened a renewed interest in technology with many alumni associations sponsoring additional interactive boards for their schools to replace black or white boards . Another benefit of this project is that it enables collaborative work. Students are able to interact with other learners and discuss their chosen fields of study. At a different level, teachers are able to do the same and have, in addition, access to resource material and teaching guides. Funded by the Bank, HeadStart (Pvt) Limited provides resources, training, support and guidance to all schools in the project while Dialog Axiata PLC ensures that they have the necessary data to work effectively. Math Lab. Is a novel concept founded by a former maths teacher, consisting of over 70 interactive mathematical games that help stimulate the mathematical and analytical skills. Started in 2015, Trust has helped setup five labs, including one in a home for differently abled children. During the year under review, a special programme was carried out by selecting 471 extremely weak students of four schools, resulting in 263 of them improving their scores in term tests evincing the effectiveness of the concept. Investment mix for education Graph – 50 % IT labs Skill development Undergraduate scholarships Regional education 100 80 60 40 20 0 86 2013 2014 2015 2016 2017 Vocational training. With Sri Lankan universities able to accommodate an annual intake of only 30,000 of students who pass their A/Ls the Trust decided to take action to support the large number of school leavers left with few options for improving their prospects. Reaching out to the Department of Technical Education and Training (DTET) under the Vocational Training Ministry, the Vocational Training Authority (VTA) and 39 technical colleges across the country the Trust began a pilot project – the establishment of six career guidance units (CGUs) in schools in remote areas around the country. The aim of the CGUs was to make students aware of alternatives to a university education. The Trust then sponsored DTET officials to speak to students about achieving National Vocational Qualification certification, explaining that level seven certification is equivalent to a university degree. To improve the success rate of this project the Trust also funded final year undergraduates from the University of Colombo to act as counsellors at the CGUs. The Trust also funded students from the six schools to attend Open Days at various technical colleges so that they gain a better understanding of the opportunities available to them, including the prospect of working abroad. The Bank signed a memorandum of understanding with Access Engineering PLC that allows students in the pilot project to be employed by the construction giant after one year of DTET training. The Trust also funded informational videos to change negative stereotypes about builders and made these available online, including the Sipnena site. With the current boom in the construction industry, for example, skilled labour is imported from countries such as Bangladesh, China and India. Hiring skilled local builders will benefit corporates such as Access Engineering PLC as well as the local labour market. Commercial Bank of Ceylon PLC Annual Report 2017 In anticipation of a new generation of professionals in various vocational fields the Bank also created awareness about its development credit loans for those who wish to set up their own businesses. Clean water. Having previously financed and supported research that identified a link between the quality of drinking water and Chronic Kidney Disease of an unknown origin (CKDu), the Trust funded the provision of clean drinking water through rainwater harvesting by providing 5,000-litre capacity water tanks for 25 households affected by the disease in Ginnoruwa in the Mahiyangana area. Following the indication from the research, the Trust has entrusted Wayamba University with conducting an in depth scientific study into the suitability of rainwater for consumption. The Trust has also commissioned an anthropological study to analyse and assess the changing perceptions of the villagers on the harvested water. The results show that there is now high demand for rainwater tanks within the community. Commercial Bank’s “Raindrops” project to combat CKDu enters Phase 2 Commercial Bank commenced the second phase of its “Raindrops” project to combat Chronic Kidney Disease of an unknown origin (CKDu) following the resounding success of the first phase in which the Bank in 2016 donated 5,000 litre storage tanks for rainwater harvesting to 25 families in Ginnoruwa in the Girandurukotte area. Seeing the success of the project, other donors have come together to provide the community with close to 100 water tanks. These included the National Water Board which provided the control group with 25 rainwater tanks.
  88. Management Discussion and Analysis Social and Network Capital The Trust also helped establish a society to give the community more control over the project . Among other things, the Society provides data for research projects and undertakes the construction of rainwater tanks – a useful source of income. Culture and heritage Puppet museum. The Trust funded the opening of Sri Lanka’s first traditional puppet museum in Balapitiya, an area that has traditionally been famous for its string puppets. The museum is run by a science graduate whose family had been puppeteers for generations. He turned his back on a promising career in his chosen field of study to revive a dying cultural art form – a tradition that has been handed down from generation to generation in Balapitiya. The Trust invested a total of Rs. 1.19 Mn. on this project to promote this traditional industry to a sustainable level. Using its contacts in the hotel industry the Bank encouraged local hotels to provide patronage to the museum. The museum also provides skits with powerful social messages to be enjoyed by visiting groups from schools. Other projects. Given below are some of the other projects the Trust carried out during the year. Donation to the Society for Welfare of Autistic Children (SWAC) yy Financial assistance for upgrading the IT lab of Employers’ Federation of Ceylon. yy Provision of furniture and equipment for Special Needs Resources Unit of the University of Peradeniya. yy Donation of over 1,400 library books to 13 rural schools. yy Financial assistance to construct a clinic for a divisional hospital in Jaffna peninsula. yy Provision of a water bowser to Caritas – Valuthayam Diocese of Mannar benefiting 382 families. The Chief Operating Officer, Mr Najith Meewanage is handing over the Cheque for the donation to Mr Anwar Hossain, Chairman of “Society for the Welfare of Autistic Children”. Mr Binoy Gopal Roy, DGM (Finance) & Mr Shakir Khusru AGM (Personal Banking) of the Bank are also seen in the picture. yy Relief for flood and landslide victims of worst-hit areas of the country. yy Financial assistance to provide National Identity Cards to over 16,000 persons in the Galle District under the “Nila Mehewara” Presidential Mobile Service concluded in January 2017. Commercial Bank celebrates ‘Avurudu’ with war heroes Commercial Bank fund Sri Lanka’s first traditional puppetry museum Ambalangoda’s rich but partly-forgotten tradition of puppetry was revived and developed with the establishment of Sri Lanka’s first puppetry museum with funding support from the Bank. The annual Sinhala and Tamil New Year celebrations of “Ranaviru Sevana,” the rehabilitation centre in Ragama for differently abled war heroes, were supported for the eighth consecutive year by Commercial Bank. Commercial Bank of Ceylon PLC Annual Report 2017 87
  89. Management Discussion and Analysis Social and Network Capital Our Contribution towards the Sustainable Development Goals 1 2 8 10 7 How we do it The Bank extends financial support through its “Micro Loan” product specifically designed to support micro entrepreneurs in income generation activities and for upgrading their living standards. We continue to enhance our footprint outside the principal province supporting financial inclusion, increasing financial literacy through target programmes and alongside a digital banking experience. Our reputation as Sri Lanka’s largest financier to the SME sector is a result of our commitment to financial inclusion. Through our Diribala Viyapara Pubuduwa programme we invest in capacity building and succession planning for the SME and Micro sectors. While our “Divisaru” product provides total financial packages, including savings schemes and micro loans facilities, we also focus on bringing banking facilities to the “unbanked”. 13 16 How we do it We are continuing with our comprehensive programme of investing in solar power in our own buildings. Our Investment Banking Unit helps finance large scale renewable energy generation projects. We also support the investments in renewable energy, waste management and pollution control systems through dedicated loan products. We are also expanding our support for SMEs, micro and agriculture sector in former conflict zones in the Northern and the Eastern Provinces to support economic development. What we did in 2017 What we did in 2017 yy Invested Rs. 85.134 Mn. in solar panels in 20 branches taking the total investment to Rs. 118.837 Mn. in 28 branches. yy 14 cases of suspicious transactions reported to the CBSL. yy Contributed Rs. 441.465 Mn. for renewable energy generation projects. yy Offset 9,500 kg of CO2 emissions by recycling 497units of e-waste. yy Disposed 151,885 kg of used paper for recycling. What we did in 2017 How we do it We provide customers with paperless banking options such as online banking, mobile banking, e-statements and e-passbook to reduce paper use. We also eliminated unproductive paper-based processes. Our waste is disposed of in a responsible manner. (More details on pages102 to 104) 12 yy Three entrepreneurship development programmes with 500 beneficiaries, out of which 200 were women. yy Five financial literacy programmes conducted targeting 695 micro and agri entrepreneurs. One of such programmes was dedicated for women with 150 participants. yy Customer penetration rate of 12% outside principal province. yy Added another Agriculture and Micro Finance Unit (AMFU) increasing the total to 16 units supporting expansion of our work in the peripheries. yy Loans to agriculture and fishing sector accounts for 9.37% of the total loan book. yy Introduced “Bank on Wheels” concept supporting financial inclusion. yy Launched CommBank Biz Club for the benefit of SMEs. (More details on 88 yy Introduced “Bank on Wheels” concept supporting financial inclusion. (More details on pages 65 and 81) yy Reduced energy consumption by 1,539 Gj. We ensure our customers benefit from favourable interest rates by participating in loan schemes supported by the Central Bank. yy Rs. 132 Bn. disbursed to SME sector and 20% of all loans. How we do it We continue to strictly enforce the “Know Your Customer” policy. Our Anti-money Laundering Unit monitors illicit financial flows allowing us to report irregularities to the relevant regulatory authorities. What we did in 2017 yy Converting the procurement process for all fixed assets to an online system. yy Increased use of e-passbook, to over 580,000 registration up from 500,000 the previous year. yy Through branch and other promotions increased registrations for online and mobile banking by 16.44% and 25.90% respectively. yy The Bank’s used electronic equipment was disposed of through Ceylon Waste Management (Pvt) Limited, an international award-winning waste management company. (More details on pages 61 to 65 and 78 to 80) Commercial Bank of Ceylon PLC Annual Report 2017 pages 102 to 104) 17 How we do it Having pioneered the adoption of sustainable practices in the industry we continue to promote sustainability practices in the country. In collaboration with 18 members of the Sri Lanka Banks’ Association, we are working to formulate a Sustainable Finance Initiative in the country. We also partner with organisations and Government authorities to implement initiatives of the CSR Trust. What we did in 2017 yy Progress has been achieved in the formulation of the Sustainable Finance Initiative. yy Collaborated with HeadStart (Pvt) Limited, Microsoft – Sri Lanka, and Dialog Axiata under the supervision of the Department of Education – Western Province to improve A/L and O/L results, digital skills and employability of students. yy Partnered with the Department of Technical Education and Training, the Vocational Training Authority, various technical colleges and large corporates such as Access Engineering PLC to launch a vocational training project for school leavers. (More details on pages 84 to 87)
  90. Management Discussion and Analysis Social and Network Capital 4 14 15 How we do it Supporting secondary education through a combination of online solutions for education , information technology infrastructure for schools, scholarships, and vocational training avenues leading to the equivalent of a university degree. What we did in 2017 yy Invested Rs. 28.57 Mn. in education through the Bank’s CSR Trust. 9 How we do it The Bank ensures that all business loans and advances are screened for Social and Environment Management System (SEMS) compliance, financing projects that do not harm the environment. 11 How we do it At present the Bank does not have a dedicated product or process aligned with these goals. With its main energies focused on Education, Community and Healthcare, and Culture and Heritage, the Trust sponsors projects on the conservation of wildlife and marine life on a case by case basis. yy Under the Smart School project: • Benefits 6,000 teachers and 90,000 students approximately • Over 10,000 learning content were uploaded to the system (More details on 3 pages 84 to 87) 6 How we do it Apart from its primary focus on education, the CSR Trust engages in activities that supports treatment facilities in Government healthcare institutions by donating necessary medical equipment. Our efforts under the healthcare pillar of the CSR Trust have benefited thousands of patients and number of beneficiaries adds on each day. What we did in 2017 yy 9,595 loan proposals were screened for SEMS compliance. yy Bank is formulating a process to identify the green component of its lending and promote green lending. (More details on page 102) 5 How we do it We take pride in being an equal opportunities employer. We have a good track record of female employees returning after maternity leave – 94.64% in 2017. Under the community and healthcare pillar of the CSR Trust our main focus has been on finding ways to prevent the spread of Chronic Kidney Disease of an unknown origin (CKDu). Our Anagi savings account is designed to support and encourage female entrepreneurship, providing benefits such as lower interest rates on loans and special discounts on health packages at selected hospitals. What we did in 2017 Dedicated capacity building and financial literacy programmes for women. yy Sponsored further research at the Girandurukotte Government Hospital. yy Commissioned two scientific researches to study the effects of CDKu on the community. yy Funded and helped establish the Gannoruwa Kidney Patients Society within the community. (More details on pages 84 to 87) What we did in 2017 yy Held a capacity building and a financial literacy programme dedicated to female entrepreneurs with participation of 200 and 150 respectively. yy Promoted nine employees to Senior Management of whom five were females, increasing the female representation in the Senior Management to 25%. (More details on page 79) Commercial Bank of Ceylon PLC Annual Report 2017 89
  91. Management Discussion and Analysis GRI 102-16 INTELLECTUAL CAPITAL The latest business trends , such as digitalisation, disruptive technologies, unorthodox competition, demographic changes, and increasing concerns about sustainability, are shaping the future at an incredible pace. These developments will undeniably challenge conventional business models, making past financial performance less relevant for any assurance about the future potential of a company. The Bank was adjudged the highest ranked private sector bank in the inaugural “Best Sri Lankan Brands in 2017” ranking announced in December 2017 by Interbrand, and was placed fourth overall among the country’s top brands with a value of Rs. 20.33 Bn. Total investment in intangible assets of the Bank stood at Rs. 2.151 Bn. refer Note 40 as at end 2017 (please on page 258 for details). While tangible assets (refer Manufactured pages 73 to 77) used to be Capital on considered the primary driver of a company’s value this view is now obsolete. Mismanaging knowledge-based intangible assets can significantly impair the Bank’s value so great care is taken to safeguard them. Intellectual Capital includes all intangibles that are of value to the Bank, providing it with a competitive advantage, future readiness, and the ability to meet stakeholder expectations. Such intangibles encompass brand, employee knowledge and skills, systems and processes, software, and good governance. The Bank’s Intellectual Capital sets it apart from the competition and impacts its total market value. In this section, prudent growth, customer centricity, operational excellence, and risk management are four of the Bank’s strategic imperatives that are explored in relation to Intellectual Capital. Prudent growth Brand values. At its heart, collaboration is a social activity that is rooted in generosity, openness and a shared sense of purpose. In addition to ensuring that all employees are aware of its strategic direction the Bank has also identified five brand values that embody all that it stands for (Figure 19). Values that support the Bank’s brand Honesty We strive to earn and retain the trust of our stakeholders through transparent actions that inspire them and align with their values. Integrity Maintaining our integrity is of paramount importance to us in ensuring that our brand value keeps growing for all stakeholders. Fairness We focus on doing the right thing by all our stakeholders so that their trust in us continues to deepen, enriching invaluable relationships. Responsible citizenship Continuing our commitment to the community we focus on making lives better and being a force for good. Accountability We live by our brand values, ready to take responsibility for our actions towards all stakeholders. 90 Commercial Bank of Ceylon PLC Annual Report 2017 Awards and ratings. The outcome of living by its values is the ability to provide a service offering that is unique and differentiated – one that is recognised locally and internally. Brand Building Ranked one of the top banks in Sri Lanka as well as in the world, Commercial Bank has been recognised over the years for its excellence. With a rating of AA (lka) from Fitch Ratings Lanka Limited, it is the highest rated private sector bank in the country. First included in 2008, it is the only Sri Lankan bank to be included in the World’s Top 1000 Banks consecutively for the past six years. With increasing regional presence, our brand is fast gaining recognition beyond our shores. Awards, Ratings and Accolades bear testimony to our brand building refer Figure 20 on initiatives. (please page 91) Figure – 19
  92. Management Discussion and Analysis Intellectual capital Awards and accolades in 2017 Figure – 20 Sri Lanka’s Most Awarded Bank in 2017 The Bank was lauded as the country’s Most Awarded Bank. Here are the highlights of our accolades for 2017. Corporate awards Best Bank in Sri Lanka (for the 18th year) – Global Finance Magazine, USA Best Domestic Bank in Sri Lanka Asiamoney Country Awards, UK Best Bank in Sri Lanka Finance Asia Magazine, UK Strongest Bank in Sri Lanka The Asian Banker, Singapore Most Responsible Bank in Sri Lanka CFI.co Magazine, UK Best Private Bank in Sri Lanka International Finance Magazine, UK Best Commercial Bank in Sri Lanka International Banker, UK Top Companies in Asia Asia Corporate Excellence and Sustainability Awards, Malaysia Gold Award for Overall Best Annual Report – Annual Report Awards, CA Sri Lanka Gold Award for Best Annual Report among Banking Institutions Annual Report Awards, CA Sri Lanka Gold Award for Management Commentary Annual Report Awards, CA Sri Lanka Sustainability and CSR Awards Digital Banking and Innovation Awards Award for Best Use of CSR Practices in Banking and Finance – CSR Leadership Awards Best Digital Bank in Sri Lanka Asiamoney Country Awards, UK Award for Developing Sustainability Strategies – CSR Leadership Awards Award for Concern for Health – CSR Leadership Awards Award for Support and Improvement in Quality of Education – CSR Leadership Awards Best Green Bank in Sri Lanka International Finance Magazine, UK Top Green Companies in Asia Asia Corporate Excellence and Sustainability Awards, Malaysia Gold Award for e-Passbook Most Admired Customer Engaged Mobile App – ACEF Customer Engagement Awards Best Internet Bank in Sri Lanka Global Banking and Finance Review, UK Best Website in the Finance Sector SLT Zero One Awards Best Innovative Bank in Sri Lanka International Banker, UK Best Digital Bank in Sri Lanka World Finance Magazine, UK Best Mobile Banking Application in Sri Lanka – World Finance Magazine, UK Commercial Bank of Ceylon PLC Annual Report 2017 91
  93. Management Discussion and Analysis Intellectual capital Customer centricity Data management . In today’s fast-paced world, understanding the customer means knowing more than just the basics that are covered by the Bank’s KYC (know your customer) policy. Used to experiences with global giants such as Apple and Amazon, customers today expect the Bank to be where they are, whenever they want it. They expect a personalised experience at each contact point with the Bank. The gap between what a customer wants and what an organisation can provide is often more of a chasm than a gap. Many organisations are unable to find the information they need, when they need it, and lack the knowledge to manage what they know in order to meet the expectations of their stakeholders. The Bank maintains effective databases that are designed to help it fulfil and exceed stakeholder expectations. These include a management information dashboard for decision-makers, credit card data analytics and a database of information on various industries to help lending officers. Overall customer profitability of its corporate portfolio is also tracked and monitored monthly. An internal wiki is also being created to capture the invaluable experience of senior employees in the Bank – including those who have recently retired. To suit the needs of today’s Millennial generation who are used to having information at their fingertips whenever they need it, this database will be eminently searchable. Customer confidence. The Bank’s goal of maintaining financial stability is just as important as its aim to maintain customer confidence. Its intellectual capital – including corporate governance, risk management frameworks, business ethics and values are the cornerstone of sustaining such continued faith in the Bank. 92 Responsive Bank. The biannual customer survey revealed that customers were keen to hear more often from their Bank. For this reason the Research and Development Department, in collaboration with the Treasury Department, began producing a monthly economic overview for top customers covering activities in global markets and local macro-economic developments. Operational excellence Strategic planning. The Bank’s Research and Development Team assists the Management Team by providing on-demand and monthly management information reports that assist in the development of strategic plans. The economic analysis and forecasts undertaken contribute towards the accurate pricing of products and the minimisation of risks. Other studies cover trends and best practices in the banking industry, contributing towards the Bank’s ethos as a forward-looking organisation and a leader in its field. Cross-functionality. With the Bank’s network expanding across businesses, time zones and space, so too has the importance of collaboration. In 2015, the Bank set up cross-functional teams to provide customers with a seamless experience. For example, personal banking account holders are able to discuss their corporate account with one person rather than having to visit multiple counters at a branch. During 2016, these teams began fine-tuning systems and processes that would facilitate ease of collaboration. With teething problems overcome, the teams achieved greater collaboration during the year under review. Communications policy. The Bank has a robust Communications Policy to ensure that the Bank’s operations continue without interruption. It contains a media policy – which identifies members of the senior management team who alone are allowed to speak to the media, including during a crisis. It also consists of a social media policy which outlines how the Bank and its employees should behave online in a manner that safeguards brand and reputation. Commercial Bank of Ceylon PLC Annual Report 2017 Filling skills gaps. Through a Qualification Matrix, skills gaps are identified and actions are taken to plug those gaps – including the recruitment of necessary people, with all new recruits provided with a formal induction programme and the Code of Ethics. Risk management Integrated audits. Long-term operational excellence is stymied when the Bank’s actions are outside the scope of regulations. During the year under review the Bank’s Audit, Compliance and Risk teams collaborated more closely with each other, adjusting their strategy so that rather than performing post-mortems of various issues they were providing business and service units with a more proactive and futureoriented service. Continuous near time and real time online monitoring by Audit was one step taken in this new direction. Others included replacing essay-type reports with check lists and symbols that underline ultra-important issues, highlighting issues that affect business performance so that business units are able to prioritise effectively, and bringing in key risk indicators which reflect the Board’s risk appetite into reports. The Audit team uses two main channels: electronic – where everything from account opening to lending can be audited through online systems, and physical – where on-site visits are necessary for checking signatory documents and other physical assets. The Audit function is also assured a seat at the table for important discussions such as new product development so that their input is received at an early stage. The Audit function is now geared to move from an assurer’s role to that of a trusted advisor. The Section on “How we Govern” on pages 106 to 117, provides a comprehensive outline of the Bank’s governance structures. Ensuring its Intellectual Capital is preserved and nurtured is a key goal for any organisation and one that the Bank takes very seriously in its quest to be future ready.
  94. Management Discussion and Analysis Intellectual capital Effective policies . Over the past half century or so the Bank has accumulated a significant amount of institutionalised tacit knowledge. It has 4,982 employees with a cumulative service period of 57,852 years. In addition to those described above, the Bank’s day-to-day operations are guided by a large number of policy documents and manuals which include the following: Policies yy Compliance yy Credit yy Investment yy Assets and liabilities management yy Risk management yy Related party transactions yy Communication and disclosure yy Human resource management yy Information security yy Outsourcing of business activities Service analysis of employees term of service and category Graph – 51 Nos. EO JEA BT OA Male 2,000 yy Social and environmental management 1,600 Manuals 1,200 1,600 1,200 800 800 400 0 A B C D E 400 16 17 A 16 17 B –Below 5 years –5 -10 years –11-15 years –16-20 years –Above 20 years Our values Integrity Commercial Bank was the highest-ranked private bank in the inaugural “Best Sri Lankan Brands 2017” ranking announced by the Interbrand, and was placed fourth overall among the country’s top brands. Interbrand assigned a value of Rs. 20.33 Bn. to the Commercial Bank brand. Female 2,000 yy Operations Commercial Bank tops private sector banks in Interbrand’s inaugural ranking of country’s best brands Graph – 52 Nos. MGT yy Anti money laundering yy Credit Service analysis of employees by gender 16 17 C 16 17 D 16 17 E 0 MGT– Corporate management EO –Executive officers JEA –Junior executive assistants and allied grades BT –Banking trainees OA –Office assistants and others A B C D E 16 17 A 16 17 B 16 17 C 16 17 D 16 17 E – Below 5 years – 5 -10 years – 11-15 years – 16-20 years – Above 20 years Figure – 21 Transparency Commercial Bank wins overall award for Best Annual Report at CA Sri Lanka Annual Report Awards Honesty Competitiveness Commercial Bank won four awards including the coveted overall award for the best annual report by a Sri Lankan company Overall Award for the best annual report among banking institutions Gold Award for management commentary Silver Award for Integrated Reporting – Best Disclosure on Capital Management. Commercial Bank of Ceylon PLC Annual Report 2017 93
  95. Management Discussion and Analysis GRI 102-8 , 405 HUMAN CAPITAL We live in an on-demand economy where advancing technology – particularly cheap computing power – and changing social habits are transforming our expectations as consumers. Given this scenario the Bank is gearing itself for a radical change in mindset; in the way it caters to the changing needs of its customers. Such change begins with its people. Analysis of full time employees by Type Graph – 54 9% 90% Outsourced Permanent 1% 2017 Contract Human Capital refers to the store of knowledge, habits, and skills accumulated by the Bank’s people over the years. 9% This section examines our employees’ ability to create value for the Bank and for its stakeholders in a fast changing environment and also how the Bank creates value for them in return. Providing customers with the kind of experience they expect from Sri Lanka’s leading private bank means having a team of people on the ground who are agile and nimble, able to understand the customers, quickly learn and adapt to new technologies and new ways of thinking in order to maintain the customers’ trust. Analysis by employment category and gender Graph – 53 Nos. Female Male 2,500 2,000 1,500 1,000 500 0 A B C D E 90% Outsourced Permanent Staff analysis by gender 1% 2016 Contract 24% 16 17 C 16 17 D 16 17 E – Corporate and senior management – Executive officers – Junior executive assistants and allied grades – Banking and executive trainees – Office assistants and others Graph – 55 Female Male 1,250 1,000 750 500 250 0 A B C D E 94 Male 2017 Winning team. Any organisation is only as strong as its weakest link as the saying goes but the Bank’s strength and success is testament to its winning team. Comprising 4,982 individuals representing diversity in gender, ethnicity and generations X, Y and Z, this is a team that upholds the brand values and works well together to achieve common goals with dignity, dedication, and mutual respect (refer graphs 53, 54, 55 and 56). Numbering 311, the Bank’s overseas cadre has increased by 11.47% over 2016 as we expand our footprint beyond Sri Lanka’s shores. Typically employee contracts are full time while a few are time-bound contracts. We also use outsourced employees for specific non-critical functions. Nos. 16 17 B Graph – 56 76% Female Analysis by age 16 17 A The Bank continues to maintain high levels of employee engagement, satisfaction and retention. With effective training and development measures, and succession planning in place the Bank promoted 447 employees during the year, helping them achieve career goals. During the year under review, a total of 243 new employees became part of our winning team, bringing fresh ideas and perspectives. At the annual long service awards ceremony, they witnessed the value created for employees by the Bank as they joined in felicitating 136 experienced employees who had completed a quarter century with Commercial Bank. Commercial Bank of Ceylon PLC Annual Report 2017 A B – 15-19 years – 20-24 years – 25-29 years – 30-34 years – 35-39 years C D F G H I E F G H – 40-44 years – 45-49 years – 50-54 years – Above 55 years I 25% 75% Female Male 2016 The 2017 A. C. Nielsen brand health study of the Banking sector shows that while other banks in Sri Lanka have declined in sectors such as branch employees’ ability to provide relevant services and advice, their ability to understand the customer’s requirements and provide exceptional service, their ability to provide quick banking services, and provide speedy service at counters, Commercial Bank has increased its scores in these categories over the previous year. These findings are a reflection of the dedication and commitment of our entire team. Within this Capital we look at four of the Bank’s strategic imperatives and how they are met – namely prudent growth, operational excellence, customer centricity and risk management.
  96. Management Discussion and Analysis Human Capital Prudent growth Governance . In addition to a winning team on the ground, the Bank owes its prudent growth to good governance practices. Assisted by the Board Human Resources and Remuneration Committee (BHRRC) the Board takes responsibility for ensuring that the Bank’s People Strategy is effectively implemented. The Bank’s approach to managing Human Capital is clearly defined in its policy framework. Its Code of Ethics page 365) is designed to ensure that (refer employees are made aware of the Bank’s high expectations of them. The implementation of the people strategy is the purview of the Human Resources (HR) Department. Continuous improvement of employee-related processes and procedures also falls within the HR domain. HR’s performance is assessed by the Board, the BHRRC, and the MD/CEO. The Bank complies with all regulatory requirements relating to its Human Capital going above and beyond base requirements. Aligning with corporate strategy. To continue to build on its strong and dependable workforce the Bank is focused on developing the skills and competencies of employees, providing adequate compensation, and rewarding and recognising them. Keenly aware of the Bank’s strategic direction its employees follow the corporate values as they gear themselves to be future ready while meeting and exceeding stakeholder needs. The Bank strives to align the goals, skills and competencies of its people with its corporate strategy to ensure that no one is left behind on this journey to a prosperous and meaningful future. GRI 401 Employee recruitment. Prudent growth is also a result of prudent recruitment practices. Employee recruitment was approved prudently. For example, while over 100 new branches were opened and business volumes have doubled over the past seven years, only 500 new employees were hired by the Bank. Despite a majority of schoolleavers going abroad for higher studies or choosing careers in Business or Marketing rather than Banking, the Bank has been able to attract the necessary talent, especially for its Banking Trainee intake. Despite changing trends in the job market the Commercial Bank brand still has a strong attraction. During the year, the Bank recruited 243 employees, of whom 40 were females (refer graphs 57, 58 and 59). The Bank’s equal opportunity policy is consistent with global best practices with selected candidates being assessed according to their suitability for the particular role and business need. The internal talent pool is always the first stop for vacancies. Even for external recruitments, first preference is always given to local talent in the countries within which the Bank operates. The Bank’s policy of secondment to other countries helps entrench its unique culture and values. Through a comprehensive induction programme, new recruits come to understand and embrace the organisation’s values, policies and procedures. 7% 68% Female – Bangladesh Male – Sri Lanka 10% Female – Sri Lanka 2017 15% Male – Bangladesh 8% 71% Female – Bangladesh Male – Sri Lanka 9% Female – Sri Lanka 2016 12% Male – Bangladesh New hires by age and gender Graph – 58 Nos. Male Female 175 140 105 70 0 16 17 A A – 18-20 years B – 21-30 years C – 31-40 years 16 17 B 16 17 C 16 17 D 16 17 E D – 41-50 years E – Above 50 years Table – 16 2017 2016 2015 2014 2013 Male 3,769 3,760 3,711 3,453 3,539 Female 1,213 1,227 1,240 1,190 1,191 Total 4,982 4,987 4,951 4,643 4,730 Senior management by gender Table – 17 2017 2016 2015 2014 2013 Male 28 37 40 41 44 Female 11 12 13 11 9 Total 39 49 53 52 53 Gender Graph – 57 35 Workforce by growth Gender New hires by geography and gender Commercial Bank of Ceylon PLC Annual Report 2017 95
  97. Management Discussion and Analysis New hires by employment category Human Capital Graph – 59 Profit per employee Profit per employee Female 250 No. of employees 5 5,000 200 4 4,000 150 3 3,000 100 2 2,000 50 1 1,000 A B C D E 16 17 A 16 17 B 16 17 C 16 17 D 0 16 17 E – Corporate and senior management – Executive officers – Junior executive assistants and allied grades – Banking and executive trainees – Office assistants and others Sales culture. Constantly in touch with what the customer wants, the Bank is aware of rapidly changing customer expectation trends in the sphere of banking. To ensure that customers receive the service they expect, the Bank is focusing on freeing up employees from operational chores so that they have more time to focus on building meaningful relationships with customers. This includes an overhaul of existing processes and automation at both the customer end as well as the employee end. Revenue per employee Revenue per employee No. of employees 25 5,000 20 4,000 15 3,000 10 2,000 5 1,000 2013 2014 2015 2016 2017 2014 2015 2016 Personnel expenses and number of employees 2017 0 Graph –62 Rs. Mn./Nos. Personnel expenses Number of employees yy Performance-based bonuses or those decided on the Collective Bargaining Agreement. yy Employee share option scheme for executive staff. yy Medical benefits including a special coverage for surgical and hospitalisation, spectacles, dentures, hearing aid for staff and immediate family, annual health check-up for employee and spouse. yy Financial support for employees with differently-abled children (to cover routine medical expenses). yy Group life cover extended for permanent employees who are not eligible for pension. 7,500 yy Reimbursement of annual subscription of professional bodies. 5,000 yy Staff loans at below-market interest rates. yy Holiday bungalows and holiday allowances 2,500 0 2013 2014 2015 2016 2017 Remuneration consists of guaranteed “fixed” pay and performance-based variable pay – the former is determined by regular market surveys conducted in Sri Lanka and Bangladesh. Performance incentives for executive officers, including Executive Directors, are provided through mutually agreed benchmarks linked to the performance appraisal system and a well-defined rewards matrix. The Collective Agreement covers all other employee categories. Commercial Bank of Ceylon PLC Annual Report 2017 yy Accommodation/house rent and/or subsidised transportation or special allowances for employees working in remote locations. yy Honorarium for successful completion of Diploma in Banking at the Institute of Bankers of Sri Lanka. 10,000 0 yy Fuel allowance, transport allowances, entertainment allowance and (for certain employee categories) reimbursement of expenses incurred in performing official duties. yy Retirement benefits and commuted pension. 12,500 Graph – 60 Nos. Rs. Mn. 2013 Remuneration and benefits. Employees are the backbone of the Bank – the key drivers of prudent growth. To ensure that they remain engaged and satisfied in their pursuit of meeting the organisation’s goals the Bank maintains an impartial remuneration structure which compensates for employee contributions and rewards performance (refer graph 62). To prudently improve growth and productivity means gearing employees to change attitudes, behaviours, and skills. It also means managing change in such a way that it empowers rather than overwhelms people (refer graphs 60 and 61). 0 A list of benefits available to full time employees is given below: yy Overtime for non-executive staff. 0 96 Graph – 61 Nos. Rs. Mn. Nos. Male GRI 202, 401 yy Insurance scheme covering critical illnesses and personal accidents. Employees seconded to the Bank’s overseas offices as Business Promotion Officers and Representative Officers receive remuneration that is commensurate with similar roles in Sri Lanka. Their pay is also supplemented by an allowance that covers expenses incurred while living abroad.
  98. Management Discussion and Analysis Human Capital Where necessary labour is outsourced through reputed third-party suppliers and the Bank ensures that they are remunerated according to regulatory requirements including the remittance of Employees ’ Provident Fund and Employees’ Trust Fund contributions. Talent inventory. A talent inventory records the skills, education and experiences of existing employees. Analysing the availability of human capital and identifying gaps in this matrix helps the Bank to meet its strategic goals and increase productivity. This is all the more vital in a period of change as the Bank continues to gear itself for the future. The talent inventory was created to help utilise employee skills effectively. Operational excellence Employee survey. Contributing to the Bank’s future direction gives employees a sense of ownership and responsibility. In turn, employee surveys help the Bank to measure and understand employees’ attitude, feedback, motivation, and satisfaction. Recent employee survey provided useful information which was taken into account for driving the future direction of the Bank and optimising operational excellence. In addition, the increasing foreign training, improving the transfer system, re-looking at the pension proposal, and increasing the number of holiday bungalows were all decisions based on employee feedback. Employee retention. The employee survey reflected high engagement levels and which are reflected in strong employee retention rates. GRI 401 Attrition analysis by age and gender Graph – 63 Nos. Male Attrition analysis by reason and gender Nos. Female Male 125 200 100 160 75 120 50 80 25 40 0 A B C D E 16 17 A 16 17 B 16 17 C 16 17 D 0 16 17 E – 18-20 years – 21-30 years – 31-40 years – 41-50 years – Above 50 years A B C D E Attrition analysis by employment Graph – 64 category and gender Nos. Male Female 100 80 60 40 20 0 A B C D E Graph – 65 16 17 A 16 17 B 16 17 C 16 17 D 16 17 E – Corporate and senior management – Executive officers – Junior executive assistants and allied grades – Banking and executive trainees – Office assistants and others Female 16 17 A 16 17 B 16 17 C 16 17 D 16 17 E –Resignations –Retirement –Deceased –Terminations – Premature retirement on medical grounds In every country that the Bank operates in, employment separation processes are fully compliant with applicable labour laws. Reasons for employee exits are tracked and monitored via exit interviews with feedback escalated to the highest levels of management. Attrition rates are highest in the under 30 age group category reflecting the high demand for young, experienced Commercial Bank employees in the market. This demand in turn feeds into the aspirations of Generation Y employees who wish to fast-track their careers by negotiating for higher posts at other banks. Employees bidding farewell to the Bank in Sri Lanka and Bangladesh numbered 219 (4.64%) and 29 (10.43%) respectively during the year (refer graphs 63, 64 and 65). Commercial Bank of Ceylon PLC Annual Report 2017 97
  99. Management Discussion and Analysis Human Capital GRI 404 High rate of returns to work from maternity leave demonstrates employees ’ willingness to continue with their careers with the Bank (refer table 18). Return to work and retention rate after maternity leave Employment category Commercial Bank honours 136 staff for 25 years of service Table – 18 2017 2016 2015 2014 2013 No. of employees – Entitled for leave 1,213 1,227 1,240 1,226 1,180 – Availed leave 52 65 53 54 65 – Due to return 57 65 53 54 64 – Returned after leave 53 62 53 54 63 – Still remain in employment 57 53 54 63 64 Return to work (%) 94.64 95.38 100.00 100.00 98.44 Return to rate (%) 91.94 100.00 100.00 100.00 100.00 Talent discussions. Employees in Executive Grades are privy to talent discussions with the Human Resources representative for their particular unit. This was implemented to ensure that each employee at that level is assured of a clear career progression path and can work towards their own personal career goals with the knowledge and support of the Bank. Employee recognition. The Bank’s annual performance evaluation process covers all employees who are appraised based on criteria mutually agreed at the beginning of the year. This tool helps the Bank to build a target driven culture, reward and develop the employees. A total of 447 employees were promoted during the year under review (refer graph 66). Long service awards were presented to 136 employees for a quarter century of service with the Bank. Employee promotions/ absorptions Graph – 66 Nos. Corporate and senior management Executive officers Junior executive assistants and allied grades Banking and executive trainees Office assistants and others 300 250 200 150 100 50 10 5 0 98 Commercial Bank of Ceylon PLC Annual Report 2017 2013 2014 2015 2016 2017 Commercial Bank felicitated 136 of its staff members in recognition of 25 years of loyal service at the Bank’s annual Seniority Awards ceremony for 2017. Leadership training. Given the great diversity of employees that a manager is called upon to oversee, sound leadership skills – in addition to technical expertise – is imperative for taking the Bank forward into a bright future. The Organisation has a history of grooming and producing its own leaders – men and women who have grown with the Bank, often progressing from trainee positions. This year too the Bank focused on providing management education, leadership development and coaching. The employee survey results illustrated that employees too appreciate the investment and trust the Bank places in them by providing such coaching. Employees started their career in the Corporate Management level were provided with external coaches – so that confidence was assured – who worked on improving their management and leadership skills. Employee development. Training and development has always been of paramount importance for the Bank. With many employees joining the Bank prior to taking their tertiary examinations the Bank understands its role as an ‘educator’ and is focused on creating a learning culture where people are encouraged to continuously acquire knowledge, competencies and develop skills. It encourages employees to better themselves via internal and external training and educational programmes
  100. Management Discussion and Analysis Human Capital (both within country and without), ensuring they gain invaluable experience, carrying out talent discussions, encouraging them to apply for financial support, and giving recognition to those who perform well at banking exams. The Bank also supports a mentorship programme to guide and groom the next level of leadership (refer graphs 67, 68 and 69). Training hours by type of training Graph – 67 25% 61% Others GRI 401, 405 Average training hours by employee category Graph – 69 Hours Corporate and senior management Executive officers Banking and executive Trainees Average for all Junior executive assistants and allied grades 100 80 60 Technical 40 3% 20 Overseas 2017 0 11% 2013 2014 2015 2016 2017 Soft skills 2% 85% Overseas Technical Equal opportunity. Committed to being an equal opportunity employer the Bank is committed to ensure that its ratio of basic salary and remuneration of women and men at all locations of operation and across all employee categories remains at 1:1. Ratio of the basic salary 2016 Soft skills Training hours by gender and investment in training Graph – 68 Hours Rs. Mn. Training hours – Male Training hours – Female 150 140 120 105 90 70 60 35 30 2013 2014 2015 2016 2015 2014 2013 Corporate and senior management 1:0.75 1:0.95 1:0.94 1:0.84 1:0.87 Executive officers 1:0.90 1:1.10 1:1.09 1:0.93 1:0.98 Junior executive and allied grades 1:0.92 1:1.08 1:1.10 1:0.91 1:0.85 Banking and executive trainees 1:0.97 1:1.01 1:1.04 1:1.00 1:0.98 Office assistants and others 1:1.05 1:1.01 1: N/A 1: N/A 1: N/A Investment 175 0 2017 Employment category 13% 2016 Table – 19 2017 0 Whilst the Bank provides training to its employees on need basis and promotions on merit, the Bank has provided such opportunities in proportion to its gender mix of employees as depicted in the table 20 below. Gender mix – Staff count/promotions/training (male:female) Table – 20 2017 2016 2015 2014 2013 Staff count 76:24 75:25 75:25 74:26 75:25 Promotions 80:20 72:28 78:22 67:33 88:12 Training 82:18 79:21 80:20 73:27 80:20 Commercial Bank of Ceylon PLC Annual Report 2017 99
  101. Management Discussion and Analysis Human Capital Customer centricity Diversity valued . To better serve customers the Bank is keen to ensure that its employee force is as diverse as its customer base and reflects the communities within which it operates. Employees in Sri Lanka now number 4,671 while those overseas number 311, an increase of 11.47% over 2016. With an abundance of diversity that spans gender, generations, geographies, ethnicities, experience, and capabilities within its employee force, the Bank is committed to drawing strength from such difference, while also providing equal opportunities irrespective of these categorisations. 243 new employees were added to the talent pool during the year, after rigorous assessment, and through effective, timetested induction programmes. All new recruits are welcomed and introduced to the culture of the Bank. Just as they learn to work together as a team to reach common goals so too does the Bank benefit from the new ideas and suggestions they bring with them driving change in the way we serve our customers. Employee communications. Effective employee communications ensure that the Bank’s people remain engaged and committed to adding value to the customer experience. To this end the Bank employs a range of effective communications channels including circulars, an intranet, various internal events, and staff TV. This year the Bank also arranged townhall meetings where employees got to spend time in discussion with the Senior Management Team in the absence of their own managers. In this open forum they were able to make suggestions for improvement as well as ask questions about the direction and strategy of the Bank. The Bank is also looking at upgrading its intranet to suit the taste of its youngest employees who appreciate information at their fingertips. GRI 403, 405 Customer expectations Figure – 22 Honesty and integrity Sheer simplicity Continuous engagement Greater privacy Contextual banking Complete transparency Fun and entertainment Mutual respect Employee communication channels yy Employee Surveys yy Employee suggestion schemes yy “Speak out” web portal yy Townhall meetings yy Managers conference yy Trade unions yy Emails yy Intranet yy Circulars yy Staff notice board yy Formal letters from HR Department yy Staff TV ComBank Sports Club Cricket Carnival Annual Staff Conference 2018 Commercial Bank of Ceylon PLC is seen handing over the Champion’s Trophy to the Winning Team during the concluding session of the Cricket Carnival arranged in Bangladesh in December 2017. 100 Engaged listening Bangladesh Management Committee during the Annual Staff Conference held in Dhaka on January 20, 2018. Commercial Bank of Ceylon PLC Annual Report 2017 Utmost trust Managing risk Health and safety. All permanent employees are covered by a comprehensive medical insurance scheme that includes inhouse medical treatment and reimbursement of outpatient medical costs. The collective agreements provide for the Bank to reimburse expense of a full medical check-up (annually) upon reaching the age of 35 years. Alarm systems, CCTV cameras and trained security personnel are employed to ensure that all Bank premises, people and customers remain secure at all times.
  102. Management Discussion and Analysis Human Capital The Bank ’s Security Department conducts training programmes for our people including fire drills and responding to various threats and has identified dedicated teams within each business/service unit of the Bank to supplement its work. Each business or service unit has a dedicated Health and Safety Champion who has received comprehensive training on how to respond to emergencies such as fire, burglaries or natural disasters. No significant health and safety issues were reported during the year. Code of Ethics. Based on the UN Global Compact principles and the Universal Declaration of Human Rights proclaimed by the UN the Bank’s Code of Ethics and its comprehensive policy framework focus on encouraging a culture of respect for human rights and values. Leaders and managers within the Bank are trained to ensure human rights are upheld at all times. Compliance with the policy framework is regularly verified by the Inspection Department. Employees are empowered by the Bank’s Whistle-Blower Charter which encourages the reporting of potential human rights violations. Any such violations are investigated swiftly with prompt disciplinary action, including dismissal, being taken against violators. The “Speak Out” web portal is another avenue for employees to voice concerns regarding working conditions, labour practices or potential violations of human rights. Regularly monitored by the HR Department, legitimate concerns are investigated and acted upon. GRI 402, 406, 407, 408, 409 The Bank’s open door policy has encouraged proactive two-way discussions enabling the early identification and resolution of issues. Freedom of association. Maintaining positive relationships with its employee associations, the Commercial Bank Executive Association (CBEA) and the Ceylon Bank Employees Union (CBEU), the Bank recognises its employees’ rights to freedom of association and collective bargaining. When formulating relevant policies and procedures the Bank has regular dialogue with these parties and giving due consideration to their feedback. The collective agreement that is in place with the Ceylon Bank Employees Union covers, among others, salaries and other perquisites, staff loans, and provision of accommodation for employees placed far from home stations. Changes to any of the terms require minimum notice periods (refer table 21). In total, 89.94% of the employee force are members of trade unions with whom the Bank enjoys positive relationships. (refer graph 70) Though the Bank does not have a similar agreement in Bangladesh, the Bank maintains a cordial relationship with its employees. Employee participation in the trade unions Graph – 70 Nos. % Total staff count Ceylon Bank Employees’ Union (CBEU) CBEU CBEA Commercial Bank Executive Association (CBEA) Total 5,000 100 4,000 80 3,000 60 2,000 40 1,000 20 0 2013 2014 2015 Minimum notice period Type of change Collective bargaining Transfers 2016 2017 Table – 21 Minimum notice period 36 weeks 2 weeks Terminations 4-12 weeks Retirements 3-4 weeks Dismissals Immediate Voluntary resignation schemes 0 As specified in scheme Commercial Bank of Ceylon PLC Annual Report 2017 101
  103. Management Discussion and Analysis NATURAL CAPITAL Encompassing natural resources including water , soil, earth, and oil, Natural Capital refers to resources that people and animals depend on to live and function. Unlike other forms of capital (such as buildings and infrastructure), which can be created or refurbished regularly, most natural resources are finite; they cannot be replenished. As a responsible organisation our focus continues to be on using Natural Capital in a sustainable manner that ensures it is preserved for future generations. Our focus on the environment goes beyond the greening of our operations. A firm believer in the importance of responsible stewardship of our planet, Commercial Bank seeks to influence its stakeholders – including customers, business partners and employees – for good. The Bank’s Social and Environment Management System (SEMS) plays a key role in its environment management framework. This section examines Natural Capital in light of three of the Bank’s strategic imperatives – namely operational excellence, customer centricity, and risk management. SEMS compliance process Customer centricity Environmentally responsible financing. At Commercial Bank, our Social and Environmental Management System is always in force when screening loans and advances for customers. This ensures that the Bank is compliant with applicable national laws and regulations on environmental and social issues at all times. This is possibly one of the Bank’s most significant contributions to sustainability because it extends beyond its own actions. Whenever any issues regarding lending decisions are identified through the SEMS policy the Bank works hand-in-hand with customers to educate, advise, and resolve such issues for them throughout the approval process, implementation stage, and beyond (refer graph 71). Through the introduction of attractive, purpose-designed loan schemes customers are also encouraged to adopt green technologies that reduce their environmental footprint. Receipt of credit application Branch review for SEMS compliance Review by SEMS coordinator Feedback, comments, and amend plans, if required Review by SEMS coordinator Approval Loan proposals subjected to SEMS screening 10,000 8,000 6,000 4,000 2,000 0 Highlights of natural capital indicators emissions offset by recycling 497 units of e-waste. yy Rs. 85.134 Mn. invested in solar panel installations at 20 more branches increasing our clean energy usage. yy Loans disbursed for renewable energy projects – Rs. 441.465 Mn. 102 Commercial Bank of Ceylon PLC Annual Report 2017 Graph – 71 Nos. The SEMS is also used to screen suppliers and influence them to maintain environmental compliance. Suppliers who do not comply are removed from the Bank’s supply chain. yy 9,500 CO2 kg Figure – 23 2014 2015 2017 2016 Figure – 24 yy Loan proposals screened under SEMS – 9,595 yy New enrolments for e-passbook – 86,662 yy Growth in Online Banking users – 16.44% yy Growth in Mobile Banking users – 25.90% yy Paper recycled 151,885 kg
  104. Management Discussion and Analysis Natural Capital GRI 302 Risk management SEMS-trained employees . Dedicated resources have also been allocated specifically to ensure that loans and advances are processed according to the Bank’s SEMS policy. Screening process for environmental compliance Figure – 25 Customer submits credit application Review of submissions by SEMS coordinator SEMS-trained credit officers evaluate clients based on the Bank’s SEMS policy Financing extended to projects that are consistent with the policy SEMS coordinator (reporting to Chief Risk Officer) evaluates SEMS compliance on credit proposals above a predetermined threshold SEMS-trained lending officers visit customers on site periodically to ensure continued compliance SEMS-trained lending officers continue to provide advice to customers as needed Customers are advised on how to comply with the policy (if not already compliant) Operational excellence Managing inputs. The Bank has implemented procedures to manage consumption in a way that leaves the environment and the organisation more “fit for the future”. Managing the following inputs in a sustainable manner while maintaining set goals for materials and energy helps the Bank better manage its cost income ratio. Materials A major part of the Bank’s consumption of materials continues to be paper and toner for printers. Reducing our environmental footprint continued to be a key focus during the year under review and included the promotion of: yy E-passbook, by migrating savings accounts holders to paperless mediums which also provided greater convenience. yy Automated banking – including an investment of Rs. 12 Mn. on six ATM machines and Rs. 289 Mn. on 92 automated cash recycler machines (CRM) – to minimise the use of paper and dispense with deposit slips and envelopes. yy Online and mobile banking at branches to migrate customers towards paperless banking. yy E-statements over paper based statements. yy Programmes for employees to reduce and reuse paper more often. The Bank only engages ethical suppliers who adhere to its Supplier Code of Conduct. This ensures the sourcing of materials that are accredited. The code guarantees that environmental and social standards are adhered to across the value chain and covers the transparent, fair and honest dealings in finances and employees in the suppliers’ respective companies. Energy During the year under review 20 more branches were powered by solar energy bringing the total number to 28. Generating 839 kWh of power these branches have contributed towards bringing the Bank’s total energy spend down. The Bank's energy consumptions in 2017 stood at 54,820 Gj, a reduction of 1,539 Gj from 56,359 Gj in 2016 (refer graph 72). All new and newly furbished branches maximise the use of natural light and are equipped with energy efficient lighting and equipment. The photocell technology used for interior and exterior branch signage also significantly reduces the Bank’s energy footprint. The Bank uses and procures IT and other equipment that is energy efficient, with “Energy Star 5” ratings that are compliant with the RoHS (Restriction of Hazardous Substances) standards. When procuring ATM machines it focuses on those that can function without air conditioning and further save energy. Electricity consumption Graph – 72 Gigajoules Total consumption Consumption per branch 57,500 225 56,000 210 54,500 195 53,000 180 51,500 165 50,000 2013 2014 2015 2016 2017 150 Energy intensity is a measure of an organisation’s energy efficiency. It is measured by the quantity of energy needed to produce a unit output or activity. The use of less energy to provide a service reflects a low energy intensity. The Bank’s energy saving measures and process efficiencies have had a positive impact on its energy intensity. Commercial Bank of Ceylon PLC Annual Report 2017 103
  105. Management Discussion and Analysis Natural Capital Commercial Bank adjudged ‘Most Responsible Bank in Sri Lanka’ by the London based print journal and online resource “Capital Finance International” This significant accolade was awarded especially in recognition of Commercial Bank’s commitment to improve Green financing – such as renewable energy projects on a large scale – by exploring the Green energy potential in the country. Effluents and waste The Bank uses waste management companies that follow international standards in disposal practices for the dispatch of e-waste and paper. These third parties are monitored by the Bank’s Services and Information Technology Departments. A total of 9,500 kg of CO2 emissions were offset, during the year under review, by recycling 497 units of e-waste. The Bank further disposed 151,885 kg of used paper for recycling. The Services Department continues to ensure employees are provided with the knowledge and awareness they need to uphold the Bank’s environmental principles as they engage with suppliers and customers. Commercial Bank wins international award for Best Sustainable Strategies Water Being part of the services industry the Bank’s water use is limited to consumption and sanitation purposes. Use of this precious resource is well regulated within the Bank and employees are regularly reminded of the importance of water conservation through awareness programmes and notices in pantries and washrooms. Managing outputs. Diligent in its responsibility towards the environment and the promise of a better future for all, the Bank is stringent in its management of outputs. Reducing waste and emissions is a priority. A strategic approach to sustainable business won Commercial Bank a prestigious award at the Global Sustainability and CSR Excellence and Leadership Awards in Mumbai, India. Emissions yy Scope 1, or direct emissions, are negligent for the Bank. They consist mostly of emissions generated from owned motor vehicles and those belonging to senior managers and such numbers are low because the Bank uses a combination of owned and rented vehicles with owned vehicles being in the minority. yy Scope 2 emissions are those generated from purchased electricity. The Bank undertakes many initiatives to reduce such emissions such as the use of natural light, LED lights and solar energy yy Scope 3 emissions are not reported as they are not applicable to the Bank’s operations. 104 Commercial Bank of Ceylon PLC Annual Report 2017 GRI 306
  106. Governance and Risk Management The Bank ’s affairs and resources are managed with the utmost intellectual honesty and diligence. As we set about achieving our strategic objectives, we ensure that due care is always given to corporate ethics and social responsibility. The Board of Directors, who collectively direct the affairs of the Bank, are completely aware of and knowledgeable about their role in ensuring the Bank’s prosperity. Having pledged to take full responsibility for its actions, the Board ensures that executive authority is passed on only to those with untarnished reputations. The Board also oversees the implementation of reporting systems and processes that are adequate and effective in providing the necessary overall control. Commercial Bank has a sound reputation for prudent governance – a track record that stretches back close to half a century. There are seven characteristics that make our governance system unique. They are: ∞ Decision making that is participatory ∞ Accountability that applies to all stakeholders ∞ Dealings that are transparent ∞ Attention to stakeholder needs that is responsive ∞ Utilisation of resources that is efficient and effective ∞ Appreciation for diversity and fairness ∞ Compliance with the rule of law in the spirit of good governance The Bank confirms that, at the date of this publication, it has fully complied with all Corporate Governance Rules set out in the Banking Act Direction No. 11 of 2007, other compliance and disclosure requirements prescribed by the Central Bank of Sri Lanka in terms of the provisions of the Banking Act No. 30 of 1988, and the Code of Best Practice on Corporate Governance issued by The ICASL Sri Lanka (please refer details in Annex 2 and Annex 3 on pages 349 to 371). Being fully compliant with all requirements set out in the Banking Act, the Colombo Stock Exchange has exempted the Bank from disclosing compliance with the Directions stipulated in Section 7.10 of the Continuing Listing Requirements on Corporate Governance. Discharging their responsibility for overseeing the risk management function of the Bank, the Board of Directors has instituted a solid risk management framework, the robustness of which is reflected in the operating results reported for the year and the above industry average asset quality. The Bank periodically reviews the principles of its governance system. This exercise is undertaken to assess the system’s effectiveness so that refinements can be made as needed to suit the ever-evolving needs of the Bank and the regulatory environment within which it operates. 106 How We Govern 154 Managing Risk: An Overview Commercial Bank of Ceylon PLC Annual Report 2017 105
  107. Governance and Risk Management HOW WE GOVERN Introduction to governance at the Bank Growing public distrust of authority , the complexity and dynamism of operations, diverse and often conflicting stakeholder demands and proliferating regulations demand that corporates adopt sound governance practices and be transparent and clear in their public disclosures. Due to the very nature of the business activities where the shareholders’ equity is substantially geared by mobilising public deposits and the resulting fiduciary duty, the application of good corporate governance practices to a bank is even more important. That is why the financial institutions are perhaps the most highly regulated institutions in the world. Stakeholders are increasingly appreciative of the importance of good corporate governance and the role it plays in ensuring that banks are run efficiently and transparently to meet strategic goals and create value for them. Annual corporate governance report The pages that follow identify the overarching principles and components of the Bank’s corporate governance framework. They also detail the governance structure and its constituent elements. This together with the extent of compliance with the applicable codes and guidelines on the pages 349 to 366 subject given on constitute the annual corporate governance report. This is required to be published as per the Banking Act Direction No. 11 of 2007 on Corporate Governance which clearly elaborates how well corporate governance is being practiced at the Bank and how the Bank measures up against external benchmarks for governance. 106 Messrs KPMG, External Auditors of the Bank reviewed the Bank’s compliance with the Banking Act Direction No. 11 of 2007 on Corporate Governance and they have provided their Assurance Statement thereon to the Central Bank of Sri Lanka. The Bank is committed to high standards of corporate governance, integrity and professionalism and has complied with all the applicable laws, rules, regulations, and codes in the spirit of good governance. Compliance with the Banking Act Direction No. 11 of 2007 and the Code of Best Practice on Corporate Governance of The ICASL is given in Annex I and II on pages 349 and 362, respectively. As the Bank is fully compliant with all requirements of the Banking Act Direction No. 11 of 2007, the CSE has exempted the Bank from disclosure of compliance with the Directions stipulated in Section 7.10 of the Continuing Listing Requirements on Corporate Governance. yy Accountability – Being answerable to the stakeholders for the decisions made yy Integrity – Acting ethically in the best interest of the Bank and the stakeholder and being able to withstand scrutiny of the stakeholders yy Transparency – having clear procedures, roles, and responsibilities for making decisions and exercising power yy Sustainability – Commitment to ensure future vitality of the Bank and create value in the short, medium and long-term for the benefit of all the stakeholders These principles guide the Bank in all its decisions relating to such aspects as yy Board oversight yy Delegation of authority yy Division of responsibilities yy Resource allocation yy Risk management yy Compliance yy Performance appraisal and compensation yy Related party transactions, and yy Financial reporting Corporate governance framework The stewardship role of the members of the Board of Directors, corporate, and senior management teams and each and every staff member in the Bank is based on a corporate governance framework which includes governance structures, processes, systems, and policy frameworks and is underpinned by the following overarching principles of good governance: yy Leadership – Steering the Bank to achieve the strategic goals and fulfil stakeholder expectations Commercial Bank of Ceylon PLC Annual Report 2017 Accordingly, the Bank conducts its affairs with the utmost intellectual honesty and diligence and with due care for the social and environmental obligations. The Bank reviews its Corporate Governance framework regularly to identify areas for improvement to ensure that all elements of the governance framework are fit for purpose, enabling value creation, and growth.
  108. Governance and Risk Management How We Govern Provisions in a number of statutory enactments , directions, determinations, circulars, and guidelines issued by the regulators under these enactments as well as codes and voluntary guidelines based on global best practice and internal rule books are relevant to the governance of the Bank as shown in the diagram below: Key regulatory requirements and voluntary codes relevant to the Bank and elements of the Corporate Governance Framework of the Bank are depicted below: Figure – 26 Banking Act No. 30 of 1988 and amendments thereto which contain provisions for preserving the rights of depositors and rights and responsibilities of regulators All Directions issued to Licensed Commercial Banks by the Central Bank of Sri Lanka (CBSL), particularly the Banking Act Direction No. 11 of 2007 on Corporate Governance and other Directions issued by the Central Banks of the countries that we operate in Inland Revenue Act No. 10 of 2006 and amendments thereto and other regulatory Acts which are applicable as a collecting agent for regulatory bodies Shop and Office Employees Act No. 19 of 1954 and amendments thereto addressing the rights and responsibilities of employees Rules applicable on the Bank share purchases/disposals by the Board of Directors of the Bank have been approved by the Board in the year 2015. The Board approved “Internal Rules applicable on the Bank share purchases/disposals by employees of the Bank” has been issued to the employees. Guidelines have also been included in the Code of Ethics given to the employees by the Bank with regard to insider dealing in securities. With the objectives of incentivising employees to achieve better performance, retaining staff for a longer period, succession Continuing Listing Requirements of the Colombo Stock Exchange (CSE) which addresses, inter alia, the rights of investors Companies Act No. 07 of 2007 which includes provisions for preserving rights of investors yy Articles of Association of the Bank yy Board Charter Code of Best Practice on Corporate Governance issued by The ICASL for the Governance Code – which seeks to address how corporates operate while fulfilling the rights of key stakeholder groups yy Organisational Structure yy Terms of Reference and Charters of Board and Management Committees yy Integrated Risk Management Framework yy Code of Ethics for all employees yy Corporate Directors’ Hand Book yy Board approved policies on all major operational aspects Code of Best Practice on Related Party Transactions (RPT) issued by the SEC and the CSE, which stipulates procedures and processes required for identifying, capturing, monitoring, and disclosing RPT planning for major shareholders and raising equity funding, the Bank has structured Employee Share Option Plans. These plans give a right to the eligible employees to buy a set number of shares at a fixed price during a given period of time. All these plans have been approved by the shareholders at Extra Ordinary General Meetings (EGMs). Governance structure The Bank has established a cohesive governance structure made up of several governance bodies with well-defined roles and responsibilities, greater accountability and clear reporting lines. These include the Board of Directors and several Board subcommittees supported by consultants where necessary with responsibility for setting strategy, risk appetite, and oversight. They also include Management and several Management committees with responsibility for executing strategy and driving performance, and business units and support functions with responsibility and accountability for conducting operations and assuming risk. Figure 26 provides an overview of the governance structure of the Bank. Commercial Bank of Ceylon PLC Annual Report 2017 107
  109. Governance and Risk Management How We Govern GRI 102-18 Governance structure Figure – 27 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 Subcommittees Executive Management Committee Other Management Committees Chairman Audit Committee Managing Director/CEO EIRMC Independent Non-Executive Directors Integrated Risk Management Committee Shareholders Non-Executive Directors Nomination Committee HR and Remuneration Committee Managing Director/CEO Related Party Transactions Review Committee Credit Committee Investment Committee Chief Operating Officer Technology Committee Business and Supporting functions ALCO Chief Operating Officer CPC Other Members of the Corporate Management BCMSC CRO ISC Compliance Officer IC AGM – Management Audit Business Units ECMN Support Functions HRSC Consultant to BAC Consultant to BTC Appointment Flow Responsibility Flow – Direct Responsibility Flow – Indirect BAC - Board Audit Committee, BTC - Board Technology Committee, CRO - Chief Risk Officer, EIRMC - Executive Integrated Risk Management Committee, ALCO - Assets and Liabilities Committee, CPC - Credit Policy Committee, ECMN - Executive Committee on Monitoring NPAs, BCMSC - Business Continuity Management Steering Committee, ISC - Information Security Council, IC - Investment Committee, HRSC - Human Resources Steering Committee 108 Commercial Bank of Ceylon PLC Annual Report 2017
  110. Governance and Risk Management How We Govern A proficient board The Board of Directors is the highest decision-making authority of the Bank and is responsible for providing leadership by setting strategic direction and risk appetite . It also takes responsibility for approving strategies in order to create sustainable value. It oversees Corporate Management who is responsible for day-to-day operations and ensures that an effective system of internal control is in place. The relationship between the Board and the Management can best be described as that of a strategic partner. The Board comprises 12 Directors of whom nine are Independent Non-Executive Directors (INEDs) who are eminent professionals in their respective fields with the skills and expertise necessary to constructively challenge management and enrich deliberations on matters set before the Board. They act in the best interest of the shareholders and avoid any conflict of interest. They understand and appreciate the dynamism and complexity of the Bank’s operations, particularly in the wake of new global developments threatening to challenge conventional business models. Profiles of Board Members are given on pages 25 to 27 together with their memberships in Board subcommittees and other significant appointments. The Board is assisted by the Company Secretary, Mrs Ranjani Gamage, Attorney-at-Law, page 27. whose profile is also given on Collectively they combine expertise in accounting, banking and finance, economics, engineering, information technology, and law, having risen to the highest echelons of Government institutions or commercial organisations, bring their independent judgement to bear on matters reserved for the Board. Bringing together banking, entrepreneurial, investor, and regulatory perspectives, our Board is able to explore matters from diverse points of view to facilitate long-term value creation. GRI 102-22 Board process The Board meets at least once a month based on a schedule of meetings agreed at the beginning of the year. Additional meetings are also convened as and when circumstances require. Directors regularly attend the meetings and actively participate in deliberations. The Chairman is responsible for determining the agenda for the meetings. This agenda is prepared with the assistance of the Company Secretary and the CEO. The Company Secretary circulates the agenda to the Directors with the accompanying Board papers one week in advance of the meetings, allowing reasonable time for Board members to study and be better prepared for productive deliberations, with urgent Board papers submitted at short notice or tabled at the meetings on an exceptional basis. Board members too can request inclusion of items in the agenda for discussion. The Chairman ensures that the Board receives all the information required to fulfil its responsibilities. Board members typically spend at least seven days a month on matters relating to the Board. Board subcommittees In order to strengthen governance, the Board has delegated authority to eight Board subcommittees. These subcommittees deal with and decide on certain subject-specific and specialised matters. The Board, however, retains responsibility for subcommittee decisions. Four out of five mandatory Subcommittees were formed as required by the provisions in the Banking Act Direction No. 11 of 2007, while the other subcommittee, the Board Related Party Transactions Review Committee was formed in 2014 by early adapting the requirements of the “Code of Best Practice on Related Party Transactions”, issued by the Securities and Exchange Commission of Sri Lanka, which became mandatory from January 01, 2016. The other three voluntary subcommittees have been established considering the business, governance and risk management needs of the Bank as permitted by the Bank’s Articles of Association. These subcommittees have been constituted with Board-approved terms of reference, hold regular meetings and report to the Board. The Board is sufficiently diverse enough to enhance dynamics and its effectiveness, promote healthy and constructive exchange of views and embrace different perspectives, leaving no room for group think. Deliberations and decisions made at the meetings are minuted in sufficient detail. In addition to the two Executive Directors, other members of the Corporate Management are invited for meetings on a need basis. Members of the Board are allowed to seek independent professional advice, if necessary, at the Bank’s expense. Directors annually declare their interests and necessary procedures are in place to ensure that there are no conflicts of interest that will compromise independence of the members. The Bank maintains a register of such interests declared. The Directors are covered by a Directors and Officers Liability Insurance Policy. Their areas of oversight and executive support together with composition and attendance at meetings are summarised in Table 22 and pages 110 to 113. Table 23 on Commercial Bank of Ceylon PLC Annual Report 2017 109
  111. Governance and Risk Management How We Govern GRI 102-22 Board and Board Subcommittees – Areas of oversight and executive support Board subcommittee Table – 22 Areas of oversight Executive support Financial reporting, internal controls, internal audit, and external audit. The Managing Director/CEO, Chief Operating Officer (COO), Chief Financial Officer, Chief Risk Officer, Compliance Officer, and the Assistant General Manager – Management Audit attend the meetings by invitation together with other relevant Key Management Personnel (KMPs). Mandatory Subcommittees Board Audit Committee (BAC) BAC Report is given on pages 124 to 126 The Committee is supported by the Inspection Department and the Assistant General Manager – Management Audit serves as the Secretary to the Committee. Board Integrated Risk Management Committee (BIRMC) Risk appetite, risk governance, risk policy frameworks, risk monitoring, and compliance, and risk management. BIRMC Report is given on pages 127 and 128 Chief Risk Officer attends meetings by invitation. The Committee is supported by the senior staff of the departments handling credit, market, and operational risks. The Chief Financial Officer serves as the Secretary to the Committee. Board Nomination Committee (BNC) Executive support is provided by the Human Resources Department Selection and appointment of Directors and KMPs, succession planning, and evaluating the whenever required. effectiveness of the Board and its subcommittees. The Company Secretary serves as the Secretary to the Committee. page 129 BNC Report is given on Board Human Resources and Remuneration Committee (BHRRC) Remuneration of Managing Director and KMPs, HR policies including Remuneration Policy, organisational structure, and HR systems including performance evaluation. The Deputy General Manager – Human Resource Management serves as the Secretary to the Committee. pages 130 and 131 BHRRC Report is given on Board Related Party Transactions Review Committee (BRPTRC) Executive support is provided by the Human Resources Department whenever required. The Assistant General Manager – Finance serves as the Secretary Related Party Transactions Policy and processes, to the Committee. market disclosures on Related Party Transactions to the Securities and Exchange Commission (SEC), and quarterly and annual disclosures of Related Party Transactions. BRPTRC Report is given on page 132 Voluntary Subcommittees Board Credit Committee (BCC) Credit policy and lending guidelines, credit risk control measures including pricing of credit risk, and performance of credit risk indicators. BCC Report is given on Board Investment Committee (BIC) Review of economic climate, capital markets activity, and economic and monetary policy direction, the Bank’s investment policy, and the review of the Bank’s investment portfolios and their performance. BIC Report is given on Board Technology Committee (BTC) page 133 The Assistant Company Secretary of the Bank serves as the Secretary to the committee. Head of Global Treasury, Chief Financial Officer, Head of Global Markets, Assistant General Manager – Corporate and Investment Banking and Chief Risk Officer attend meetings by invitation. The Committee is supported by the Head of Global Treasury who serves as the Secretary to the Committee. page 134 The Bank’s technology strategy, significant procurements of technology, and emerging trends and their potential. BTC Report is given on The Committee is supported by the Credit Risk Unit of the Integrated Risk Management Department. page 135 Deputy General Manager – Marketing and Assistant General Manager – Information Technology attend meetings by invitation. The Committee is also supported by the IT Department of the Bank. Assistant General Manager – Information Technology serves as the Secretary to the Committee. 110 Commercial Bank of Ceylon PLC Annual Report 2017
  112. Governance and Risk Management How We Govern GRI 102-22 , 405 Board and Board Subcommittees – Composition and attendance at meetings Composition of Board/Board subcommittee No. Table – 23 Name of Director Membership Status Meeting attendance DOA Eligible to attend Attended Main Board Executive Directors Non-Executive Directors Independent Directors Non-Independent Directors Male Female Mr K G D D Dheerasinghe C NED ID 20.12.2011 16 16 Mr M P Jayawardena M NED ID 28.12.2011 16 16 9 Mr J Durairatnam M ED NID 28.04.2012 16 16 3 Mr S Swarnajothi M NED ID 20.08.2012 16 16 Mr S Renganathan M ED NID 17.07.2014 16 16 Prof A K W Jayawardane M NED ID 21.04.2015 16 16 2 10 11 1 Age below 50 years Nil Mr K Dharmasiri M NED ID 21.07.2015 16 16 Age above 50 years 12 Mr L D Niyangoda M NED ID 26.08.2016 16 16 Ms N T M S Cooray M NED ID 19.09.2016 16 16 Mr G S Jadeja M NED NID 19.09.2016 16 11 Mr T L B Hurulle M NED ID 05.04.2017 11 11 Justice K Sripavan M NED ID 26.04.2017 11 11 10 Mandatory Subcommittees Board Audit Committee (the BAC) Executive Members 2 Mr S Swarnajothi C NED ID 24.08.2012 10 Non-Executive Members 5 Prof A K W Jayawardane M NED ID 29.04.2015 10 7 Independent Members 5 Mr K Dharmasiri M NED ID 28.08.2015 10 10 Non-Independent Members 2 Ms N T M S Cooray M NED ID 30.09.2016 10 8 Male 6 Justice K Sripavan M NED ID 28.04.2017 7 7 Female 1 Mr J Durairatnam I ED NID 28.04.2012 10 10 Age below 50 years Nil Mr S Renganathan I ED NID 17.07.2014 10 9 Age above 50 years 7 Board Integrated Risk Management Committee (the BIRMC) Executive Members 2 Mr M P Jayawardena C NED ID 30.12.2011 5 5 Non-Executive Members 5 Mr J Durairatnam M ED NID 28.04.2012 5 5 Independent Members 5 Mr S Swarnajothi M NED ID 24.08.2012 5 5 Non-Independent Members 2 Mr K Dharmasiri M NED ID 21.07.2015 5 5 Male 7 Mr L D Niyangoda M NED ID 30.09.2016 5 4 Female Nil Mr T L B Hurulle M NED ID 28.04.2017 4 4 Age below 50 years Nil Mr S Renganathan I ED NID 29.08.2014 5 5 Age above 50 years 7 Board Nomination Committee (the BNC) Executive Members 1 Mr K G D D Dheerasinghe C NED ID 30.12.2011 6 6 Non-Executive Members 4 Mr M P Jayawardena M NED ID 29.08.2014 6 6 Independent Members 3 Mr S Swarnajothi M NED ID 29.04.2015 6 5 Non-Independent Members 2 Mr G S Jadeja M NED NID 30.09.2016 6 5 Male 5 Mr J Durairatnam I ED NID 29.08.2014 6 6 Female Nil Age below 50 years Nil Age above 50 years 5 Commercial Bank of Ceylon PLC Annual Report 2017 111
  113. Governance and Risk Management How We Govern Composition of Board /Board subcommittee No. Name of Director Membership Status Meeting attendance DOA Eligible to attend Attended Board Human Resources and Remuneration Committee (the BHRRC) Executive Members 1 Mr K G D D Dheerasinghe C NED ID 30.12.2011 5 5 Non-Executive Members 3 Mr M P Jayawardena M NED ID 29.08.2014 5 5 Independent Members 3 Mr S Swarnajothi M NED ID 29.04.2015 5 5 Non-Independent Members 1 Mr J Durairatnam I ED NID 29.08.2014 5 5 Male 4 Female Nil Age below 50 years Nil Age above 50 years 4 Board Related Party Transactions Review Committee (the BRPTRC) Executive Members 2 Mr K G D D Dheerasinghe C NED ID 26.12.2014 4 4 Non-Executive Members 4 Mr J Durairatnam* M ED NID 26.12.2014 4 4 Independent Members 4 Mr S Swarnajothi M NED ID 26.12.2014 4 4 Non-Independent Members 2 Mr S Renganathan* M ED NID 26.12.2014 4 4 Male 6 Mr L D Niyangoda M NED ID 30.09.2016 4 4 Female Nil Justice K Sripavan M NED ID 28.04.2017 2 2 Age below 50 years Nil Age above 50 years 6 Voluntary Subcommittees Board Credit Committee (the BCC) Executive Members 2 Mr K G D D Dheerasinghe C NED ID 30.12.2011 12 12 Non-Executive Members 2 Mr J Durairatnam M ED NID 29.08.2014 12 10 Independent Members 2 Mr S Renganathan M ED NID 25.11.2014 12 10 Non-Independent Members 2 Prof A K W Jayawardane M NED ID 29.04.2015 12 12 Male 4 Female Nil Age below 50 years Nil Age above 50 years 4 Board Investment Committee (the BIC) Executive Members 2 Mr K G D D Dheerasinghe C NED ID 13.03.2013 12 12 Non-Executive Members 3 Mr J Durairatnam M ED NID 13.03.2013 12 12 Independent Members 2 Mr S Renganathan M ED NID 29.08.2014 12 12 Non-Independent Members 3 Mr K Dharmasiri M NED ID 28.08.2015 12 12 Male 5 Mr G S Jadeja M NED NID 30.09.2016 12 9 Female Nil Age below 50 years Nil Age above 50 years 5 112 Commercial Bank of Ceylon PLC Annual Report 2017
  114. Governance and Risk Management How We Govern Composition of Board /Board subcommittee No. GRI 102-22 Name of Director Membership Status Meeting attendance DOA Eligible to attend Attended Board Technology Committee (the BTC) Executive Members 2 Prof A K W Jayawardane C NED ID 29.04.2015 4 4 Non-Executive Members 3 Mr J Durairatnam M ED NID 18.06.2012 4 4 Independent Members 3 Mr S Renganathan M ED NID 29.08.2014 4 4 Non-Independent Members 2 Ms N T M S Cooray M NED ID 30.09.2016 4 2 Male 4 Mr T L B Hurulle M NED ID 28.04.2017 3 3 Female 1 Age below 50 years Nil Age above 50 years 5 Status C – Chairman, M – Member, I – By Invitation, ED – Executive Director, NED – Non-Executive Director, ID – Independent Director, NID – Non-Independent Director, DOA – Date of Appointment Notes: Mr S M A Jayasinghe (Consultant to BAC) attended 7 out of the 10 meetings held during the year. Mr D B Saparamadu (Consultant to BTC) attended 3 out of the 4 meetings held during the year. * Consequent to the reconstitution of the committee as required by the Code of Best Practices on Corporate Governance issued by the ICASL, Mr J Durairatnam and Mr S Renganathan attend meetings by invitation from January, 2018. Management Committees In addition to the Board Committees, several Management Committees have been constituted under delegated authority from the Chief Executive Officer on specific subjects to facilitate decision-making in relation to the execution of the Board-approved strategies. All the Management Committees have approved terms of reference and operate under a structure and process similar to the Board Committees. These committees undertake extensive deliberations, cooperate across departments and debate on matters considered critical for the Bank’s operations as described in the Table 24 below: Management Committees Table – 24 Management Committee Purpose and tasks Composition Executive Integrated Risk Management Committee (EIRMC) 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. CEO, COO and key members of the Risk Management, Personal Banking, Corporate Banking, Treasury, Inspection/ Internal Audit, Compliance, and Finance Departments. Assets and Liabilities Committee (ALCO) Optimises the Bank’s economic goals whilst maintaining liquidity and market risk within the Bank’s predetermined risk appetite. CEO, COO and key members of the Treasury, Corporate Banking, Personal Banking, Integrated Risk Management, and Finance Departments. Credit Policy Committee Reviews and approves credit policies and procedures (CPC) pertaining to the effective management of all credit portfolios within the lending strategy of the Bank. CEO, COO and key members of the Corporate Banking, Personal Banking, Integrated Risk Management, Inspection, Recoveries, and Branch Credit Monitoring Departments. Executive Committee on Monitoring NPAs (ECMN) 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. CEO, COO and key members of the Corporate Banking, Personal Banking, Credit Supervision and Recoveries, and Integrated Risk Management Departments. Business Continuity Management Steering Committee (BCMSC) Directs, guides, and oversees the activities of the Business Continuity Plan of the Bank in accordance with the Bank’s strategy. Key members of the Bank’s Corporate Management covering all business lines. Information Security Council (ISC) Focuses continuously on meeting the information security objectives and requirements of the Bank. Key members of the Integrated Risk Management, Information Systems Audit, Operations, and IT Departments. Investment Committee (IC) Oversees investment activities by providing guidance to the management. CEO, COO and key members of the Investment Banking, Treasury, and Finance Departments. Human Resources Steering Committee (HRSL) Setting guidelines and policies on any matter that may affect the Human Resource management of the Bank and make recommendations on policy matter to the Board Human Resources and Remuneration Committee and/or address any issues that may need review at Board level. CEO, COO, DGM-HRM, DGM-PB, DGM-CB and CFO Commercial Bank of Ceylon PLC Annual Report 2017 113
  115. Governance and Risk Management How We Govern Effective meetings Meetings provide an effective platform for discharging the oversight responsibility of the Board . The Board held 16 scheduled meetings which included one meeting devoted exclusively to strategy with all members of Corporate Management whilst 15 meetings were devoted to matters including large and material transactions, review of performance, review of policy frameworks, and strategy. During the year, the Board played an active role in strategy formulation providing clear directions to Management for the preparation of the Bank’s five-year strategic plan which was then reviewed and approved at a meeting convened for the purpose. Alternative strategies were explored and evaluated by the Board prior to approval and allocation of resources for execution of the same. The performance review in relation to the strategic plan is a regular agenda item on the monthly Board meetings with significant attention and time devoted to reviewing progress and identifying areas of concern requiring further attention of the Board. Specialised areas identified for oversight by Board subcommittees are monitored by the respective committees who report on progress made and concerns to the Board as page 110. outlined in Table 22 on Board roles and responsibilities The role of the Board and its responsibilities are set out in the Board Charter which includes a schedule of Powers Reserved for the Board as detailed below. Roles, responsibilities and powers of the Board Role of the Board yy To represent and serve interests of shareholders by overseeing and appraising the Bank’s strategies, policies and performance yy To provide leadership and guidance to the Management for the execution of strategies yy To optimise performance and build sustainable value for shareholders in accordance with the regulatory framework and internal policies yy To establish an appropriate governance framework yy To ensure regulators are apprised of the Bank’s performance and any major developments Key responsibilities yy Selecting, appointing, and evaluating the performance of the Chief Executive Officer yy Setting strategic direction and monitoring its effective implementation yy Establishing systems of risk management, internal control, and compliance yy Ensuring the integrity of the financial reporting process yy Developing a suitable corporate governance structure, policies and framework yy Strengthening the safety and soundness of the Bank yy Appointing and overseeing the External Auditors’ Responsibilities yy Approving interim and annual financial statements for publication Powers reserved for the Board yy Approving major capital expenditure, acquisitions and divestitures, and monitoring capital management yy Appointing the Board Secretary in accordance with Section 43 of the Banking Act No. 30 of 1988 yy Seeking professional advice in appropriate circumstances at the Bank’s expense yy Reviewing, amending and approving governance structures and policies A synopsis of the important matters deliberated and decided upon by the Board during the year is given below: Board highlights 2017 Annual Strategy meeting with Corporate Management Team Appointment of Directors to fill casual vacancies Review of all major policy documents Approval/recommendation of final dividend for 2016 amounting to Rs. 2.675 Bn. in the form of a scrip dividend of Rs. 2.00 per share 114 Commercial Bank of Ceylon PLC Annual Report 2017 Figure – 28 Approval of two interim dividends for 2017 of Rs. 1.50 and Rs. 3.00 per share totalling to Rs. 4.484 Bn. Review of Board and Subcommittee Charters Market visits to Strategic business locations Approval of Rights issue of Shares to strengthen regulatory capital of the Bank
  116. Governance and Risk Management How We Govern The positions of Chairman and CEO are separate in line with best practice in Corporate Governance facilitating a balance of power and authority . The Chairman is a Non-Executive Director while the CEO is an Executive Director appointed by the Board and their roles are clearly set out in the Board Charter. Board composition Role of Chairman The Role of the Chairman is distinctive with clear and effective separation of accountability and responsibility as set out in the Board Charter. The Chairman establishes good corporate governance and the highest standards of integrity and probity throughout the Group. He provides leadership to the Board, preserving order, and facilitating the effective discharge of the duties of the Board. He is also responsible for ensuring the effective participation of all Directors and maintaining open lines of communication with KMPs, acting as a sound Board on strategic and operational matters. Role of the CEO The Role of the CEO as set out in the Board Charter requires him to conduct the management functions as directed by the Board. The Board sets corporate objectives for the CEO and jointly develops his duties and responsibilities. The CEO is responsible for leading the Management in the day-to-day business operations of the Bank and implementing strategies, plans, and budgets approved by the Board. The CEO conducts the affairs of the Group upholding good corporate governance and the highest standards of integrity and probity as established by the Board. Role of Independent Non-Executive Directors Independent Non-Executive Directors are expected to complement the skills and experience of the other members of the Board by bringing an objective and independent view on matters, challenging the Board and Management constructively using their expertise and assisting in providing guidance on strategy. Figure – 29 Non-Executive and Executive Directors Non-Executive Directors 1 Executive Directors 2 Independent Non-Executive Directors 9 Chairman CEO COO Deputy Chairman Board gender composition Male Female 11 1 Tenure >1 2 2 3 3 2 4 5 6 1 7 1 Year 3 Board of Directors' industry/background experience Banking and Management Agriculture Chemical Finance, Accounting and Management Law 4 2 4 1 IT and Media Banking & Management 1 4 Commercial Bank of Ceylon PLC Annual Report 2017 115
  117. Governance and Risk Management How We Govern Role of Company Secretary The Company Secretary plays a critical role in facilitating good Corporate Governance and her responsibilities are summarised below : yy Ensure conduct of Board and General Meetings in accordance with the Articles of Association, the Board Charter, and relevant legislations; yy Maintain statutory registers; yy Communicate promptly with the regulators and shareholders and file statutory returns in time; yy Facilitate best practice on Corporate Governance including assisting the Directors with respect to their duties and responsibilities; yy Facilitate access to legal advice in consultation with the Board, where necessary. The appointment and removal of the Company Secretary is a matter for the Board as a whole. Appointment of Directors The BNC has set in place a formal and transparent procedure for nomination of candidates for appointment as Directors. The BNC evaluates the resumes of potential candidates as recommended by the Board for consideration as Non-Executive Directors and makes recommendations to the Board for nomination. Such nominations may include an interview with the candidate. This process is based on an annual assessment of the combined knowledge, experience, and diversity of the Board in relation to the Bank’s strategic plans in order to identify additional perspectives to ensure its effectiveness at all times. The process for appointing Executive Directors is similar except that candidates are selected from amongst the KMPs of the Bank. 116 Appointments of new Directors are communicated to the CSE and shareholders through press releases subsequent to obtaining approval from the CBSL. The communications typically include a brief résumé of the Director, relevant expertise, key appointments, shareholding and his status of independence. Re-election The two longest serving NEDs 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 there are more than two Directors who qualify for re-election, the Directors may decide amongst themselves or draw lots to determine the Directors who will offer themselves for re-election. If a Director has been appointed as a result of a casual vacancy that has arisen since the previous AGM, that Director will offer himself for re-election at the immediately succeeding AGM. Mr T L B Hurulle and Justice K Sripavan were appointed to the Board during the year to fill casual vacancies and are offering themselves for re-election at the AGM to be held on March 28, 2018. Induction and training of Directors On appointment, Directors are provided with access to the electronic support system for Directors which archives minutes for the past two years and an induction pack which comprises the Articles of Association, Banking Act Directions, Corporate Directors’ Handbook published by the Sri Lanka Institute of Directors, Code of Best Practice on Corporate Governance, the Bank’s organisational structure, Board Charter and the most recent Annual Report of the Bank. All Directors are encouraged to obtain membership of the Sri Lanka Institute of Directors which has a robust programme to support Directors. It is mandatory for the Directors to attend Director Forums organised by the Central Bank of Sri Lanka. Members of the Corporate Management and external experts make regular presentations with regard to the business environment in relation to the operations of the Bank. Commercial Bank of Ceylon PLC Annual Report 2017 GRI 102-35, 102-36 Directors’ and Executive Remuneration The BHRRC is responsible for making recommendations to the Board regarding the remuneration of Executive Directors. This vital committee comprises entirely of NEDs who also meet the criteria for independence as set out in the Code. They consult the Chairman and the CEO regarding the same and also seek professional advice whenever it is deemed necessary. Remuneration for NEDs is set by the Board as a whole. Remuneration for Executive Directors is set out with reference to the Remuneration and Benefit Policy. These processes ensure that no individual Director is involved in determining his or her own remuneration. The Board and the BHRRC engage the services of HR professionals on a regular basis to assist in the discharge of their duties in this regard. Remuneration and Benefits Policy The Remuneration and Benefit Policy seeks to provide a distinctive value proposition to current and prospective employees that attracts and retains people with capabilities and values in line with the business needs of the Bank. It must also provide a framework for the employer to design, administer, and evaluate effective rewards programmes to inspire and motivate desired behaviours and results. The level and make up of remuneration It is the responsibility of the BHRRC to ensure that the remuneration of both Executive Directors and NEDs is sufficient to attract eminent professionals to the Board and retain them as contributing members in driving the performance of the Bank. Remuneration and benefits of the Executive Directors and KMPs are determined in accordance with the remuneration policies of the Bank which are designed to be attractive, motivating and capable of retaining high performing, qualified, and experienced employees at the Bank. The total remuneration of KMPs is made up of three components, guaranteed remuneration being the fixed component and the annual performance bonus and
  118. Governance and Risk Management How We Govern Employee Share Option Plan (ESOP) being the variable components. The Bank makes every effort to be transparent of the basis of granting ESOPs and their features when approval is sought from the shareholders. The Executive Directors of the Bank who are employees are also eligible for these ESOPs in the capacity of employees. The BHRRC seeks the assistance of professionals in structuring the remuneration and benchmarking with market on a regular basis to ensure that total remuneration levels remain competitive in order to attract and retain key talent whilst balancing the interests of the shareholders. It also takes into consideration the views of the Bank’s two employee associations – the Association of Commercial Bank Executives and the Ceylon Bank Employees Union (CBEU) with whom they maintain a regular dialogue. Guaranteed pay includes the monthly salary and allowances which are determined with reference to the qualifications, experience, levels of competencies, skills, roles, and responsibilities of each employee. These are reviewed on an annual basis and adjusted for promotions, performance and inflation. The annual performance bonus is determined with reference to a multi-layered performance criteria matrix which is clearly communicated to the relevant categories of employees. The ESOP approved by the shareholders at the AGM held on March 31, 2015 is also part of the performance-related remuneration for Executive Officers in Grade 1A or above. NEDs are not eligible for ESOPs of the Bank. Refer Notes 53.2 and 54 to the Financial Statements on “Share-based Payment” on pages 279 and 280 for details of the ESOPs and the eligibility criteria. There are no compensation commitments in employment contracts for early terminations and there were no instances of early termination during the year that required compensation. Board and Subcommittee evaluations The Board and its Subcommittees annually appraise their own performance to ensure that they are discharging their responsibilities satisfactorily in accordance with the Board Charter which includes the responsibilities set out in the Governance Code and the Banking Act Direction No. 11 of 2007. 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 collated by the Company Secretary and submitted to the BNC and discussed at a Board meeting. Board evaluations for 2016 at the January 2017 Board Meeting. Appraisal of the CEO The Board assesses the performance of the CEO on an annual basis and this is a matter reserved for the Board as a whole. Assessment criteria are agreed with the CEO at the beginning of the year and performance is reviewed formally based on same at the end of the financial year taking into account the operating environment. The Chairman discusses the evaluation with the CEO and responses received are given due consideration prior to approval of the same which is finalised within four months of the close of the financial year. The Board is supported by the BHRRC in this process. All Shareholders are encouraged to participate at the AGMs and exercise their votes. Consequently, a total of 228 Voting and 107 Non-Voting shareholders attended the Annual General Meeting held on March 30, 2017 while a further 159 Voting shareholders exercised their right to vote through proxy. A Shareholder Communication Policy is in place to ensure that there is effective and timely communication of material matters to shareholders. Accordingly, shareholders were notified of quarterly results, dividend declarations, resignation, and appointment of Directors through announcements made to the CSE and the media. The Bank’s website also has an area dedicated to investors which includes Interim Financial Statements and Annual Reports with the most recent report being offered in both a PDF format as well as an interactive format to facilitate readability. The Interactive Report also has a tab for investor feedback. In addition to financial information, the Bank also provides Risk Management information to address the concerns of investors. Shareholder relations The Bank has 9,812 shareholders of which 5.63% are institutional shareholders holding 79.97% voting ordinary shares and the balance 94.37% are retail investors. They play a key role in the re-election of Directors and the External Auditor. They also vote on material matters including the adoption of the Annual Report and Accounts. The Bank recognises that the engagement with shareholders and potential investors is part and parcel of good corporate governance and has a structured process in place to facilitate same. Commercial Bank of Ceylon PLC Annual Report 2017 117
  119. Governance and Risk Management CORPORATE MANAGEMENT AND PROFILES 01 02 09 10 03 04 11 17 18 12 19 20 01 . Jegan Durairatnam 04. Isuru Tillakawardana 07. Mrs Sandra Walgama Managing Director/CEO Deputy General Manager – Human Resource Management Deputy General Manager – Personal Banking BSc (University of Peradeniya) 36 years in Banking 02. S Renganathan Chief Operating Officer FCMA (UK)/CGMA/Fellow of the Ifs School of Finance (UK)/FIB (SL)/Associate of the Financial Services Institute of Australia 37 years of Banking 03. Nandika Buddhipala Chief Financial Officer FCA/FCCA (UK)/FCMA/CMA (Aus)/MCISI (UK)/ SA Fin (Aus)/IMA (USA)/BSc, BAd (Special) (Sri Jayewardenepura)/PG Dip in Management (Sri Jayewardenepura)/MBA (Colombo)/MA in Financial Economics (Colombo)/MSc in Financial Mathematics (Colombo) 27 years post qualifying experience including 10 years in Banking LL.B (Colombo )/MBA (University of Sri Jayewardenepura)/Diploma in International Affairs (BCIS)/Master of Arts in International Relations – Colombo University/Fellow of the Association of HR Professionals and Graduate Sri Lanka Institute of Directors 38 years in Banking 08. Prins Perera 27 years of experience including 8 years in Banking Head of Global Markets 05. Hasrath Munasinghe FCMA (UK)/CGMA/CMA (Aus)/MA in Financial Economics (Colombo)/FIB (SL) Deputy General Manager – Marketing FCIM, FSLIM , MSc in IT (University of Moratuwa)/ MBA (University of Southern Queensland, Aus)/ Postgraduate Diploma in Marketing (CIM, UK)/CMA (ICMA, Aus)/AIB (IBSL)/PGDBFA (ICASL)/CPM (APMF, Sing), GSLID (SLID) Cert in Risk (CISI, UK) 23 years in Marketing including 6 years in Banking 06. Sanath Manatunge Deputy General Manager – Corporate Banking FCMA (UK)/CGMA/FCMA (SL)/FIB (SL)/MBA (University of Sri Jayewardenepura) Merit 28 years in Banking 118 AIB (SL)/Associate of the Institute of Administrative Accounting (UK)/Level 3 Certificate in Wealth Management (Chartered Institute for Securities and Investment – London) Commercial Bank of Ceylon PLC Annual Report 2017 28 years in Banking 09. Krishan Gamage Assistant General Manager – Information Technology BSc (Eng.) in Electronic and Telecommunication (University of Moratuwa) 19 years experience in Information Technology including 11 years in Banking 10. Prasanna Indrajith Assistant General Manager – Finance FCA/FCCA (UK)/FCMA (SL)/AIB(SL)/BSc BAd (Special) (University of Sri Jayewardenepura) 23 years experience in Finance related fields including 21 years in Banking
  120. Governance and Risk Management 05 Corporate Management and Profiles 06 07 13 21 14 22 15 08 16 23 11 . Chinthaka Dharmasena 15. Asela Wijesiriwardane 20. John Premanath Assistant General Manager – Services Head of Global Treasury Assistant General Manager – Management Audit 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 (University of Colombo)/MA-Econ/ACMA 17 years of experience in Manufacturing and supply chain Management and 6 years in Banking Assistant General Manager – Credit Supervision and Recoveries ACCA (UK)/BSc Applied Accounting (Oxford Brookes – UK)/AIB (SL)/CISA (Certified Information Systems Auditor – USA)/DISSCA (Diploma in Information Systems Security and Control Audit – ICASL)/ISO 27001:2013 ISMS Lead Auditor AIB (SL), CIMA-Finalist 27 years in Banking Assistant General Manager – Corporate and Investment Banking 37 years in Banking 21. Mrs Mithila Shamini MBA (University of Colombo)/AIB (SL)/ Humphrey Fellowship in Investment Banking (Boston University, USA) Assistant General Manager – Corporate and Trade Services 12. Naveen Sooriyarchchi 37 years in Banking 13. Selva Rajasooriyar Assistant General Manager – Compliance 21 years in Banking 16. Priyantha De Silva 17. B A H S Preena MBA (University of Colombo)/AIB (SL) 30 years in Banking 18. Delakshan Hettiarachchi FCMA (UK)/CGMA/ACMA (SL)/AIB (SL) Assistant General Manager – Personal Banking I/SME 37 years in Banking MBA/AIB (SL) 14. S Prabagar 34 years in Banking Assistant General Manager – Operations MBA (University of London), AIB (SL), BCom (Bharathidasan University, India), DISSCA (Diploma in System Security and Control Audit – ICASL) 22 years in Banking 19. Kapila Hettihamu Chief Risk Officer Assistant General Manager – Personal Banking II AIB (SL)/Dip. in Business Mgmt. (SLBDC)/ Postgraduate Dip. in Business and Financial Admin. (ICASL)/Masters in Banking and Finance – Griffith University – Aus 31 years in Banking 22. M P Dharmasiri Assistant General Manager – Planning FCA, ACMA (SL), AIB (SL), MSc Mgt. (University of Sri Jayewardenepura) MA Financial Economics (University of Colombo), BSc Busi. Admin. (Special) (University of Sri Jayewardenepura) 28 years in Banking BSc (University of Colombo)/MBA/ACI 23. Mrs Dharshanie Perera 22 years in Banking Assistant General Manager – Personal Banking III AIB (SL) 33 years in Banking Commercial Bank of Ceylon PLC Annual Report 2017 119
  121. Governance and Risk Management SENIOR MANAGEMENT PERSONAL BANKING Saman Kalansuriya Head of Leasing , Factoring & Personal Loans Thusitha Suraweera Head of Card Centre Yasmin Weerasuriya Senior Regional Manager – Greater Colombo Pradeep Banduwansa Head of Digital Banking Saneth Jayasundara Regional Manager – Central Amal Alles Regional Manager – Colombo Metro S Ganeshan Regional Manager – Colombo Inner S B Wasala Regional Manager – Colombo Outer Sanath Perera Regional Manager – Colombo North Dharshanee Keerthirathne Regional Manager – Colombo South 120 Commercial Bank of Ceylon PLC Annual Report 2017
  122. Governance and Risk Management Senior Management CORPORATE BANKING Sidath Pananwala Head of Corporate Banking Kelum Amarasinghe Mahinda Wijeratne Head of Foreign Operations & Travels Chief Manager – Off-shore Banking Centre Feroza Ameen Chief Manager – Islamic Banking Dilrukshi Nanayakkara Chief Manager – Corporate Banking Sushara Vidyasagara Chief Manager – Investment Banking Prasad Fernando Chief Manager – Imports Tamara Bernard Chief Manager – Corporate Banking Commercial Bank of Ceylon PLC Annual Report 2017 121
  123. Governance and Risk Management Senior Management SUPPORT SERVICES Vajira Thotagammana Head of Information Technology Amitha Munasinghe Head of Central Systems Support Ajith Naranpanawe Head of Inspection Sujeeva Ranasinghe Head of Human Resource Management Priyanthi Perera Head of Operations Namal Gamage Head of Legal Thayalan Gnanapragasam Chief Manager – Central Administration and Staff Advances Dr Shanthikumar Fernando Chief Manager – Research and Development Sampath Weerasuriya Chief Manager – Security and Safety Ranjani Gamage Company Secretary Nalin Samaranayake Chief Manager – Recoveries Tilak Wakista Chief Manager – Premises 122 Commercial Bank of Ceylon PLC Annual Report 2017
  124. Governance and Risk Management Senior Management BANGLADESH OPERATION Varuna Kolamunna Country Manager D Das Gupta Senior General Manager Najith Meewanage Chief Operating Officer A K Nandy Senior Deputy General Manager – Chittagong Binoy Gopal Roy Deputy General Manager – Finance and Accounts Mostafa Anowar Sohel Senior Assistant General Manager – Human Resources Shakir Khusru Assistant General Manager – Personal Banking Shakeel Imdadul Islam Assistant General Manager – Corporate Banking MALDIVIAN OPERATION Dilan Rajapakse Country Manager Commercial Bank of Ceylon PLC Annual Report 2017 123
  125. Governance and Risk Management BOARD SUBCOMMITTEE REPORTS BOARD AUDIT COMMITTEE REPORT The Committee reviewed the progress in implementation of Basel III Direction No . 01 of 2016 issued by the Central Bank of Sri Lanka which was effective from July 1, 2017. Composition of the Committee Board Audit Committee (the BAC) consists of following members whose profiles are given on pages 25 to 27. Mr S Swarnajothi* (Chairman) Prof A K W Jayawardane* (Director) Mr K Dharmasiri* (Director) Ms N T M S Cooray* (Director) Justice K Sripavan* Appointed to the Committee w.e.f. April 28, 2017 *Independent Non-Executive Director Regular Attendees by Invitation J Durairatnam (Managing Director/CEO) S Renganathan (Director/Chief Operating Officer) K D N Buddhipala (Chief Financial Officer) S K K Hettihamu (Chief Risk Officer) V S Rajasooriyar (Assistant General Manager – Compliance) J Premanath (Assistant General Manager – Management Audit) Secretary to the Committee Mr J Premanath (Assistant General Manager – Management Audit) Mr Manil Jayesinghe, a senior practicing Chartered Accountant, serves the BAC in the capacity of a Consultant and is invited to attend its meetings. Meetings Name Eligible to attend/Attended Mr S Swarnajothi Prof A K W Jayawardane Mr K Dharmasiri Ms N T M S Cooray Justice K Sripavan Mr J Durairatnam Mr S Renganathan 10/10 10/07 10/10 10/08 07/07 10/10 10/09 The Committee held ten (10) meetings during the financial year ended December 31, 2017. Proceedings of these meetings with adequate details of matters discussed are regularly reported to the Board. Representatives of the Bank’s External Auditors, Messrs KPMG also participated in nine (9) 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 a need basis. 124 Charter of the Committee The Charter of the BAC (the Committee) approved by the Board, clearly defines the Terms of Reference of the Committee and 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 in August 2017. The Committee assists the Board in discharging its responsibilities and exercises oversight over financial reporting, internal audit, internal controls and external audit. 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 “Code of Best Practice on Corporate Governance”, issued by The Institute of Chartered Accountants of Sri Lanka further regulate the composition, roles and functions of the Committee. The Committee is empowered by the Board to: yy Ensure that financial reporting system 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. yy Review the appropriateness of accounting policies and ensure adherence to statutory and regulatory compliance requirements and applicable Accounting Standards. yy 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 interests of all stakeholders. Commercial Bank of Ceylon PLC Annual Report 2017 yy 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. yy Monitor all aspects of Internal and External Audit and Inspection programmes of the Bank and review Internal and External Audit Reports for follow up with the Management on their findings and recommendations. yy Review the Interim Financial Statements 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 2017 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. 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. Progress of implementation of SLFRS 9: The Committee continuously monitored the progress of implementation of SLFRS 9 as per the requirements of Sri Lanka Accounting Standard – SLFRS 9 on “Financial Instruments” that has been issued with effective date being January 1, 2018.
  126. Governance and Risk Management Board Subcommittee Reports Implementation of Basel III : Internal audit and inspection: External audit: The Committee reviewed the progress in implementation of Basel III Direction No. 01 of 2016 issued by the Central Bank of Sri Lanka which was effective from July 1, 2017. Bank has fully complied with the requirements of the aforesaid Direction and submitted the first return under Basel III guidelines as at September 30, 2017. 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. In regard to the external audit function of the Bank, the role played by the Committee is as follows: 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 2016, as per the Section 10 of Banking Act Direction No. 01 of 2016 on “Regulatory Framework on Supervisory Review Process”. Oversight on regulatory compliance: The Committee closely scrutinised compliance with mandatory banking and other statutory requirements and the systems and procedures that are in place to ensure compliance with such requirements. The quarterly reports submitted by the 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. Identification of risks and control measures: The Bank has adopted a risk-based audit approach and the effectiveness of the internal control procedures in place to identify and manage all significant risks are being reviewed by the Committee. A Risk Grading Matrix has been adopted for assessing and measuring the risks identified during audit assignments carried out by the Inspection Function. The Committee seeks and obtains the required assurances from Business Units on the remedial action in respect of the identified risks to maintain the effectiveness of internal control procedures. The Committee approved the Programme of Inspection formulated by the Inspection Department and the Information Systems Audit Unit (ISAU) and reviewed its progress of implementation regularly. The Bank’s Inspection Department carried out, online and onsite inspections of local business units including subsidiaries and overseas operations namely Bangladesh and Maldives. With the concurrence of the Board, the Bank continued to engage the services of five (5) firms of Chartered Accountants approved by the Central Bank of Sri Lanka (CBSL) in order to supplement Bank’s Inspection Department in carrying out inspection assignments. ISAU conducted onsite/off site audits to ensure safeguarding Bank’s IT assets. The Committee reviewed the reports submitted by ISAU. Five hundred and fifty-one (551) inspection reports on Business Units and Departments including subsidiaries and overseas operations namely Bangladesh and Maldives received the attention of the Committee and the operational deficiencies, risks highlighted and the recommendations were given due attention. yy Assisting the Board in engaging External Auditors for audit services, in compliance with the provisions of the Direction and agree on their remuneration with the approval of the shareholders. yy Monitoring and evaluating the independence, objectivity and effectiveness of External Auditor. yy 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 Auditors’ independence and objectivity. yy 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. yy Discussing all relevant matters arising 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. yy Reviewing the External Auditors’ Management Letter and the Management’s responses thereto. 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. The Auditors were provided with the opportunity of meeting Non-Executive Directors separately, without any executive being present, to ensure that the Auditors had the independence to discuss and express their opinions on any matter. It provided the assurance to the Committee that the Management has fully provided all information and explanations requested by the Auditors. The Committee evaluated the Internal Audit Function covering key areas such as scope, quality of internal audits, independence and resources. At the conclusion of the audit, the Committee also met the Auditors to review the Auditors’ Management Letter before it was submitted to the Board and CBSL. Members of the Committee visited some of the branches to get a better understanding of branch operations. The members of the Committee evaluated the Bank’s External Auditor Messrs KPMG covering key areas such as scope and delivery of audit, resources and quality assurance initiatives, during the year 2017. Commercial Bank of Ceylon PLC Annual Report 2017 125
  127. Governance and Risk Management Board Subcommittee Reports Mechanism of internal controls : Sri Lanka Accounting Standards: Sections 3 (8) (ii) (b) and (c) of the Banking Act Direction No. 11 of 2007, stipulates the requirements to be complied with by the Bank to ensure reliability of the financial reporting system in place at the Bank. Committee reviewed the revised policy decisions relating to adoption of new and revised Sri Lanka Accounting Standards (SLFRS/LKAS) applicable to the Bank and made recommendation to the Board. The Committee would continue to monitor the compliance with relevant Accounting Standards and keep the Board informed at regular intervals. The Committee is assisted by the External Auditor and 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. 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 follows up procedures and the Internal Control Procedures in place to ensure that necessary control and mitigating measures are available in respect of newlyidentified risks. Ethics and Good Governance: 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. S Swarnajothi Chairman – Board Audit Committee Colombo February 23, 2018 The Committee continuously emphasised on upholding ethical values of the staff members. In this regard, a Code of Ethics and Whistle-Blower’s Charter was put in place and followed for educating and encouraging all members of staff to resort to whistle-blowing if they suspect wrong doings 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 whistle-blowing or identified through other means. The Whistle-Blower’s Charter guarantees the maintenance of strict confidentiality of the identity of the whistle-blowers. 126 Commercial Bank of Ceylon PLC Annual Report 2017 GRI 102-17
  128. Governance and Risk Management Board Subcommittee Reports BOARD INTEGRATED RISK MANAGEMENT COMMITTEE REPORT This year we evaluated the proposed material changes to the Bank ’s risk appetite arising from planned, new or increased businesses. Composition of the Committee Board Integrated Risk Management Committee (the BIRMC) consists of following Board members, whose profiles are given on pages 25 to 27. Board Members Mr M P Jayawardena* (Chairman) Mr J Durairatnam (Managing Director/CEO) Mr S Swarnajothi* (Director) Mr K Dharmasiri* (Director) Mr L D Niyangoda* (Director) Mr T L B Hurulle* (Director) Appointed with effect from April 28, 2017 *Independent Non-Executive Director Non-Board Member Mr S K K Hettihamu (Chief Risk Officer) Regular Attendees by Invitation Mr S Renganathan (Director/Chief Operating Officer) Mr V S Rajasooriyar (Compliance Officer) Secretary to the Committee Mr K D N Buddhipala (Chief Financial Officer) Meetings Name Mr M P Jayawardena Mr J Durairatnam Mr S Swarnajothi Mr K Dharmasiri Mr L D Niyangoda Mr T L B Hurulle Mr S Renganathan Eligible to attend/Attended 5/5 5/5 5/5 5/5 5/4 4/4 5/5 BIRMC held four (4) meetings on a quarterly basis and one additional meeting specifically to discuss and recommend Internal Capital Adequacy Assessment Process (ICAAP) as at December 31, 2016, during the year under review. Charter of the Committee The BIRMC was 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 compliance with the same as set out in the BIRMC Charter which was reviewed during December 2017 and clearly sets out the membership, source of authority, duties and responsibilities of the BIRMC as described in the “Managing Risk: An Overview” Section of this report on pages 154 to 158. BIRMC assists the Board of Directors in performing its oversight function in relation to myriad of risks faced by the Bank in its business operations and ensures adequacy and effectiveness of the risk management framework of the Bank. The Committee submits a risk assessment report within a week of each meeting to the Board of Directors. The 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. Activities in 2017 All key risks such as Credit, Operational, Market, Liquidity, Information Technology etc. are assessed by the Committee and tracked on a monthly basis through a set of 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. In order to discharge the above duties and responsibilities, the Committee carried out the following activities: yy 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, the Executive Committee on Monitoring NPLs, the Credit Policy Committee, Information Security Council, IT Steering Committee, Business Continuity Planning Committee, the Asset and Liability Committee, etc. yy Monitored actions initiated by the Senior Management to test the effectiveness of the measures taken by the respective committees referred to above. yy Reviewed the annual work plans, related strategies, policies and frameworks of the above committees, 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. yy Maintained a continuous dialogue with Management committees directly or indirectly dealing with specific risks, so that the BIRMC is immediately informed of any hindrance, obstacle, discouragement or constraint in the performance of their functions and/or the implementation of their decisions. yy Periodically reviewed and got involved in improving the ICAAP framework and ensured that ICAAP is subject to comprehensive internal audit oversight. yy Reviewed and improved the effectiveness of the risk-related policy framework of the Bank. yy Evaluated the proposed material changes to the Bank’s risk appetite arising from planned, new or increased businesses. Commercial Bank of Ceylon PLC Annual Report 2017 127
  129. Governance and Risk Management Board Subcommittee Reports yy Reviewed risk profiles of subsidiaries of the Bank . yy Reviewed key risk indicators in use for risk monitoring and results of stress tests to evaluate resilience and compliance with internal benchmarks. yy Reviewed the risk indicators designed to monitor the level of specific risks at any given time, with a view of determining the adequacy of such indicators to serve the intended risk management objectives and took proactive measures to control risk exposures. yy Reviewed the actual results computed monthly against each risk indicator and took prompt corrective action to mitigate the effects of specific risks, in case such risks exceeded the prudent thresholds defined by the Board of Directors. yy Approved the parameters and limits set by the Management against various categories of risk after 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. yy Initiated appropriate actions against the failures of the officers responsible for risk management function through the Management to improve the overall effectiveness of risk management at the Bank. yy 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. yy Reviewed Risk Control Self Assessment (RCSA) findings of the Bank on half yearly basis. yy Carried out the annual review of updated Business Continuity and Disaster Recovery plans and brought in required updates. During the year 2017, the BIRMC supported execution of the overall business strategy within a set of prudent risk parameters that are reinforced by an effective risk management framework. M P Jayawardena Chairman – Board Integrated Risk Management Committee Colombo February 23, 2018 yy Monitored the effectiveness and the independence of the risk management function within the Bank and ensured the adequacy of resources deployed for this purpose. 128 Commercial Bank of Ceylon PLC Annual Report 2017
  130. Governance and Risk Management Board Subcommittee Reports GRI 102-24 BOARD NOMINATION COMMITTEE REPORT Appointed two new independent Non-Executive Directors to strengthen the independent element of the Board . Composition of the Committee Board Nomination Committee (the BNC) consists of following members whose profiles are given on pages 25 to 27. Mr K G D D Dheerasinghe* (Chairman) Mr M P Jayawardena* (Director) Mr S Swarnajothi* (Director) Mr G S Jadeja (Director) *Independent Non-Executive Director The Committee shall be chaired by an Independent Director who has adequate experience in the relevant subject and be constituted with a majority of Independent Directors from the Board to ensure that the responsibilities of the Committee are discharged effectively. Authority of the Committee Regular Attendees by Invitation Mr J Durairatnam (Managing Director/CEO) Secretary to the Committee Mrs Ranjani Gamage (Company Secretary) Meetings Name Mr K G D D Dheerasinghe Mr M P Jayawardena Mr S Swarnajothi Mr G S Jadeja Mr J Durairatnam Terms of Reference of the Committee The Terms of Reference clearly states the purpose of establishing the Committee, its composition, authority and conduct and scheduling of meetings. The Board Nomination Committee was established by the Board in compliance with the Section 3 (6) (iv) of the Banking Act Direction No. 11 of 2007 (subsequently amended) on “Corporate Governance for Licensed Commercial Banks in Sri Lanka” issued by the Monetary Board of the Central Bank of Sri Lanka under Section 46 (1) of the Banking Act No. 30 of 1988, as amended, to ensure Board’s oversight and control over “Selection of Directors, Chief Executive Officer and KMP”. It also states that matters relating to KMP may be dealt with by the Human Resources Subcommittee. Eligible to attend/Attended 6/6 6/6 6/5 6/5 6/6 To hold a meeting there shall be a quorum of three members of the Committee who are Non-Executive Directors of whom at least one should be independent. The Committee shall meet as and when need arises. Six (06) Committee meetings were held during the year under review. Proceedings of the Committee meetings are regularly reported to the Board of Directors. yy The Committee has the authority 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. yy The Members of the Committee have the authority to express their independent views when making decisions. yy The Committee regularly reviews the structure, size, composition including gender representation and competencies of the Board and makes recommendations to the Board with regard to any changes. yy The Committee recommends to the Board on insurance covers to be taken in respect of all Directors and KMP including indemnity insurance covers. yy If a need arises, professionals from outside may be invited for advice on specific issues. yy Bank staff may be present at Committee meetings for advice or special assignments, on invitation. Charter of the Committee The mandate of the Committee includes inter-alia the following: yy To implement a procedure to select/ appoint new Directors including Chairman, Chief Executive Officer and KMP. yy To consider and recommend (or not recommend) the re-election of current Directors, taking into account the performance and contribution made by them towards the overall discharge of the Board’s responsibilities. yy To set the criteria such as qualifications, competencies, experience, independence, conflict of interest and key other attributes required for eligibility to be considered for appointment or promotion to the post of Chief Executive Officer and key management positions. yy To ensure that Directors, Chief Executive Officer and KMP are fit and proper persons to hold office as per the criteria set out in the Companies Act No. 07 of 2007, Direction issued by the Central Bank of Sri Lanka and other relevant statutes. yy To consider and recommend from time to time, the requirements of additional/new expertise and the succession arrangements for retiring Directors and KMP. yy To make recommendations on any other matter/s referred to the Committee by the Board of Directors. Activities in 2017 During the year, the Committee selected and recommended to the Board two candidates considering their skills and diverse experience to fill casual vacancies on the Board after considering the recommendations made by the Board at the last year. The Committee also recommended the reelection of Directors, taking into account the performance and contribution made by them towards the overall discharge of the Board’s responsibilities. 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. K G D D Dheerasinghe Chairman – Board Nomination Committee Colombo February 23, 2018 Commercial Bank of Ceylon PLC Annual Report 2017 129
  131. Governance and Risk Management Board Subcommittee Reports BOARD HUMAN RESOURCES AND REMUNERATION COMMITTEE REPORT This year we interviewed – based on the succession plan, suitable candidates to fill the vacancies in the Corporate Management and such recommendations were accordingly approved by the Board of Directors. Composition of the Committee Board Human Resources and Remuneration Committee (the BHRRC) consists of following members whose profiles are given on pages 25 to 27: Mr K G D D Dheerasinghe* (Chairman) Mr M P Jayawardena* (Director) Mr S Swarnajothi* (Director) *Independent Non-Executive Director Regular attendees by invitation Mr J Durairatnam, Managing Director/CEO participated in all deliberations, except those matters impacting his own terms and conditions of employment. Secretary to the Committee Mr U I S Tillakawardana (Deputy General Manager – Human Resource Management) Meetings Name Eligible to attend/Attended Mr K G D D Dheerasinghe Mr M P Jayawardena Mr S Swarnajothi Mr J Durairatnam 5/5 5/5 5/5 5/5 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 were regularly reported to the Board of Directors. 130 Guiding Principles The overall focus of the Committee: yy 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 and to Key Management Positions. yy 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. yy Providing guidance and policy direction for relevant matters connected to general areas of Human Resources Management of the Bank. yy 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. yy Structuring remuneration packages to ensure that a significant portion of the remuneration is linked to performance, to promote a pay for performance culture. yy 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. yy Developing a robust pipeline of raising talent capable and available to fill key positions in the Bank. Commercial Bank of Ceylon PLC Annual Report 2017 Methodology The Committee recognises rewards as one of the key drivers influencing employee behaviour, thereby impacting business results. Therefore, the reward programmes are designed to attract and retain and to motivate employees to perform by linking performance to demonstrable performance-based criteria. In this regard, the Committee evaluates the performance of the Managing Director and KMP against the pre-agreed targets and goals that balance short-term and long-term financial and strategic objectives. 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 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. 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: yy Determine compensation of the Chairman, Deputy Chairman, Managing Director 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.
  132. Governance and Risk Management Board Subcommittee Reports yy Determine compensation and benefits of the KMP and establish performance parameters in setting their individual goals and targets . yy Formulate guidelines, policies and parameters for the compensation structures for all executive staff of the Bank and oversee its implementation. yy 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. yy Evaluate the performance of Managing Director and KMP against the pre-agreed targets and goals. yy Make recommendations to Board of additional/new expertise required by the Bank. yy Assess and recommend to the Board, promotions of KMP, address succession planning and issues relating to organisational structure. yy 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. yy Ensure that all regulatory and contractual commitments relating to employees are fulfilled in a timely manner. yy Recommend/decide/give directions on disciplinary matters resulting in a significant financial loss to the Bank, caused by KMP of the Bank. yy Formulating formal and transparent procedures for developing policy on remuneration for Executives and Directors. yy Approving annual increments, bonuses, 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 are 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. Activities in 2017 The Committee held five (5) meetings during the year under review as stated in page 112 During the year, the table on the Committee interviewed – based on the succession plan, suitable candidates to fill the vacancies in the Corporate Management and such recommendations were accordingly approved by the Board of Directors. The changes that took place in the Key Management Positions during the year, and the ability of the Bank to ensure a smooth transition in each of these cases, signify the importance of and the attention paid to the talent management process of the Bank. In all promotions to the Corporate Management grade, the Committee applied previously approved leadership competency frame work to judge the suitability of the candidates. Further, the Committee determined the bonus payable for 2016 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 Collective Agreement. Performance of the members of the Corporate Management during the financial year 2016 including that of MD and COO were reviewed. At the conclusion of the review process for 2016, the Key Performance Areas and the respective KPI’s of the Corporate Management members for 2017 were carefully perused by the Committee and agreed on, subject to changes. The Committee also reviewed, suggested changes and recommended for the approval of the Board, revisions made to the Bank’s HR Policy manual. Committee also approved the nomination made by the Association of Commercial Bank Executives to the vacant position in the Board of Trustees of the Bank’s Retirement Pension Fund. In view of the need to sign a fresh Collective Agreement with the Ceylon Bank Employees Union (CBEU) for a period of three years – with effect from January 1, 2018, the Committee ascertained the salary positions in the market through a survey and recommended for the Board approval the revisions proposed by the Management after negotiations with the CBEU. K G D D Dheerasinghe Chairman – Board Human Resources and Remuneration Committee Colombo February 23, 2018 The pensions and the outdoor medical scheme for the retired staff members of the bank, who are entitled to pension under the system which prevailed before year 2000, were also reviewed by the Committee on the recommendation of the MD and the proposal was recommended for the approved of the Board. A proposal to change the policy for the Widows & Orphans of pensioners, who had not contributed to the W&OP during their tenure at the Bank, was also recommended by the Committee for the approval of the Board. Commercial Bank of Ceylon PLC Annual Report 2017 131
  133. Governance and Risk Management Board Subcommittee Reports BOARD RELATED PARTY TRANSACTIONS REVIEW COMMITTEE REPORT This year Related Party Transactions Policy was further reviewed and updated . Composition of the Committee Board Related Party Transactions Review Committee (the BRPTRC) comprised following Executive and Independent Non-Executive Directors (as stipulated by the Code of Best Practices on related party transactions issued by the Securities and Exchange Commission of Sri Lanka), whose profiles are given on pages 25 to 27. Mr K G D D Dheerasinghe* (Chairman) Mr J Durairatnam (Managing Director/CEO) Mr S Swarnajothi* (Director) Mr S Renganathan (Director/Chief Operating Officer) Mr L D Niyangoda* (Director) Justice K Sripavan* (Director) Appointed with effect from April 28, 2017 The mandate of the Committee includes inter alia the following: yy 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. *Independent Non-Executive Director yy Updating the Board of Directors on the RPT of each of the listed companies of the Group on a quarterly basis. Secretary to the Committee Mr L W P Indrajith (Assistant General Manager – Finance) Meetings Name Eligible to attend/Attended Mr K G D D Dheerasinghe Mr J Durairatnam Mr S Swarnajothi Mr S Renganathan Mr L D Niyangoda Justice K Sripavan Charter of the Committee This Committee was formed by the Board at the end of 2014 to assist the Board in reviewing all related party transactions carried out by the Bank and its listed companies in the Group by early adopting the Code of Best Practice on Related Party Transactions (RPT) as issued by the Securities and Exchange Commission of Sri Lanka (SEC) which became mandatory from January 1, 2016. 4/4 4/4 4/4 4/4 4/4 2/2 The Committee held four (4) meetings during the year under review. The proceedings of the Committee meetings which mainly included activities under its Terms of Reference were regularly reported to the Board of Directors. yy Advising the Board in making immediate market disclosures on applicable RPT as required by Section 9 of the Continuing Listing Requirements of the CSE. yy Advising the Board in making appropriate disclosures on RPT in the Annual Report as required by Section 9 of the Continuing Listing Requirements of the CSE. yy Monitoring compliance with the Code of Best Practices on Related Party Transactions issued by the SEC. yy Monitoring the systems in place to capture and feed relevant information on RPT which also includes information on KMP and CFM into the Bank’s data collection system and the accuracy of such information. Activities in 2017 During 2017, the RPT Policy was further reviewed and updated. The amended Policy was submitted to the Board and the approval of the Board of Directors was obtained in December 2017. Arrangements are being made to disseminate the amended RPT Policy among relevant stakeholders, to keep them informed of the applicable regulatory requirements relating to the reporting of RPT. Further, the composition of the BRPTRC was reconstituted to comprise only Non-Executive Directors effective from January 2018 in line with the requirements of the Code of Best Practice on Corporate Governance issued by the ICASL which was issued in December 2017. Methodology adopted by the Committee yy Monitoring the systems 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) or any changes to the position already disclosed. 132 yy Monitoring the systems 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” in the Annual Report. Commercial Bank of Ceylon PLC Annual Report 2017 K G D D Dheerasinghe Chairman – Board Related Party Transactions Review Committee Colombo February 23, 2018
  134. Governance and Risk Management Board Subcommittee Reports BOARD CREDIT COMMITTEE REPORT The Committee continued to manage lending portfolios in line with the stipulated credit risk parameters set by the Board of Directors . Composition of the Committee Board Credit Committee (the BCC) consists of following members whose profiles are given on pages 25 to 27. Mr K G D D Dheerasinghe* (Chairman) Mr J Durairatnam (Managing Director/CEO) Mr S Renganathan (Director/Chief Operating Officer) Prof A K W Jayawardane* (Director) The Committee is empowered to: yy Review and consider changes proposed from time to time to the Credit Policy and the Lending Guidelines of the Bank. *Independent Non-Executive Director Secretary to the Committee Mr R A P Rajapaksha (Assistant Company Secretary) yy Analyse and review the credit risk control measures in the lending areas, the pricing of lending proposals and ensure that credit proposals are within relevant internal policies and regulatory frameworks. Meetings Name Mr K G D D Dheerasinghe Mr J Durairatnam Mr S Renganathan Prof A K W Jayawardane Charter of the Committee The Board Credit Committee assists the Board of Directors in effectively fulfilling its responsibilities relating to the Credit Direction, Credit Policy and Lending Guidelines of the Bank in order to inculcate healthy lending standards and practices and ensure that relevant regulations are complied with. Eligible to attend/Attended 12/12 12/10 12/10 12/12 Proceedings of the Committee meetings were regularly reported to the Board of Directors. yy Evaluate, assess and make recommendations on credit propositions which will be submitted to the Board of Directors. Activities in 2017 The Committee approved credit proposals above a predetermined limit and 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. K G D D Dheerasinghe Chairman – Board Credit Committee Colombo February 23, 2018 yy Evaluate and recommend sector exposures and cross boarder exposures. yy Monitor and evaluate special reports called for by the Board of Directors. yy Set lending directions based on the current economic climate and risk appetite of the Bank. Commercial Bank of Ceylon PLC Annual Report 2017 133
  135. Governance and Risk Management Board Subcommittee Reports BOARD INVESTMENT COMMITTEE REPORT Our investments have mainly been in Government Securities and debt instruments with strategy focused on maintaining liquidity . Composition of the Committee Board Investment Committee (the BIC) consists of the following members whose profiles are given on pages 25 to 27. Mr K G D D Dheerasinghe* (Chairman) Mr J Durairatnam (Managing Director/CEO) Mr S Renganathan (Director/Chief Operating Officer) Mr K Dharmasiri* (Director) Mr G S Jadeja (Director) *Independent Non-Executive Director Regular Attendees by Invitation: Mr K D N Buddhipala (Chief Financial Officer) Mr K A P Perera (Head of Global Markets) Mr A N P Sooriyaarachchi (Assistant General Manager – Corporate and Investment Banking) Mr S K K Hettihamu (Chief Risk Officer) Secretary to the Committee Mr A Wijesiriwardane (Head of Global Treasury) Meetings Name Eligible to attend/Attended Mr K G D D Dheerasinghe Mr J Durairatnam Mr S Renganathan Mr K Dharmasiri Mr G S Jadeja The Committee meets once a month. Charter of the Committee The Committee is responsible for the investment-related decisions of the Bank. Hence the Committee will oversee investment activities by providing assistance and guidance, evaluate strategic relevance and financial viability of various investment proposals, monitoring, the Bank’s various investment activities, in accordance with investment policies of the Bank. Within this framework, the Committee performs the following duties: yy Approve investment proposals, borrowings and execution of agreements. 12/12 12/12 12/09 yy Review and recommend significant investment decisions to be undertaken by the Bank to the Board of Directors. yy Review, amend and approve investment policies and operational parameters relating to investments of the Bank. Methodology Adopted by the Committee The Committee meets monthly and reviews progress of strategic and significant investments, liquidity situation of the Bank, market developments and the country’s economic outlook. The Committee also reviews the monthly performance of Treasury and Investment Banking Division, where the interest rate risk, repricing risk and other market risks are discussed. The Committee also from time to time would issue instructions to executive officers of the Bank on investment-related activities. 134 yy Borrowing of Foreign Currency under repurchase agreement against Sri Lanka Sovereign Bonds held by the Bank. yy Investment in long and medium-term Sri Lanka Government Debt. yy Adoption of hedge accounting by the Bank and partial hedging of floating rate USD borrowing cost against increasing LIBOR through interest rate swaps. yy Medium-term FCY borrowing up to USD 200.0 Mn. from various counterparties. yy Review existing investment portfolio performance, monitor adherence to investment policies and decisions of the Investment Committee. 12/12 12/12 Activities in 2017 Commercial Bank of Ceylon PLC Annual Report 2017 K G D D Dheerasinghe Chairman – Board Investment Committee Colombo February 23, 2018
  136. Governance and Risk Management Board Subcommittee Reports BOARD TECHNOLOGY COMMITTEE REPORT This year we implemented a centralised automated reconciliation system to minimise disputes and increase efficiency . Composition of the Committee The Board Technology Committee (the BTC) consists of following members whose profiles are given on pages 25 to 27. yy Review significant technology procurements, prior to them being sent to the Board of Directors for approval. *Independent Non-Executive Director yy Analyse emerging technology and its potential use to drive corporate IT strategy. Regular Attendees by Invitation: Mr L H Munasinghe (Deputy General Manager – Marketing) Mr U K P Banduwansa (Head of Digital Banking) Mr D B Saparamadu (Consultant) Activities in 2017 Committee focused to improve the following areas which will be key components that will drive Bank to digital era. Secretary to the Committee Mr K S A Gamage (Assistant General Manager – Information Technology) Meetings Prof A K W Jayawardane Mr J Durairatnam Mr S Renganathan Ms N T M S Cooray Mr T L B Hurulle The Committee has been empowered to: yy Set the overall technology strategy and track progress of the objectives to meet the strategy. Prof A K W Jayawardane* (Chairman) Mr J Durairatnam (Managing Director/CEO) Mr S Renganathan (Director/Chief Operating Officer) Ms N T M S Cooray* (Director) Mr T L B Hurulle * (Director) Appointed with effect from April 28, 2017 Name Charter of the Committee The Committee was established by the Board of Directors in recognition of the degree of reliance of the Bank on technology and the growing demands of IT Governance. Eligible to attend/Attended 4/4 4/4 4/4 4/2 3/3 Improve customer convenience to attract more customers towards Bank. While it is always challenging to cater for ever increasing customer demands, Committee was able to monitor and ensure that the Bank delivers best products and services such as follows. yy Online Loan Approval facility to make customer convenience. yy Expanded Cash Recycler machine network to cover 100 locations. yy Extended mobile platform with more functionalities. yy Email Cloud Solution to improve functionality and efficiency. yy Implementing a centralized automated reconciliation system to minimize disputes and increase efficiency. Enhancing and Improving IT infrastructure to match with the demand, is one of the key determining factors. With the ever increasing customer demands and emerging use of technology, it is required to improve sustainable infrastructure with the aim of catering for high performance needs and availability. Following key projects were planned and are being implemented to cater for these requirements. yy Enterprise Integrator to ensure future third party integrations are smooth and faster than ever. yy Virtual Server Infrastructure to increase availability and operational efficiency. Protect customer data is a foremost challenging requirement of the Bank. Committee steers the Bank to ensure that all necessary preventive actions are in place and regularly reviews the status of projects that are related to security. The Committee also reviewed significant items for procurement and recommended them for approval by the Board of Directors. yy Enhanced Call Centre with Customer Relationship Management. yy Automated Savings Account Opening facility. yy Opex model initiatives such as Digital Banking (Flash) and iPOS. yy Expanded card network with China Union Pay (CUP). yy Agent Banking Solution for Maldives. Business Process Reengineering and Automation to improve productivity and save cost/time. With the direction of the BTC, initiatives have already been started to drive process automation in a strategic way. Following projects are being implemented under the guidance of the BTC. Prof A K W Jayawardane Chairman – Board Technology Committee Colombo February 23, 2018 Commercial Bank of Ceylon PLC Annual Report 2017 135
  137. Governance and Risk Management ANNUAL REPORT OF THE BOARD OF DIRECTORS Annual Report of the Board of Directors on the Affairs of the Company and Statement of Compliance of the Contents of the Annual Report as Required by Section 168 of the Companies Act No . 07 of 2007 1. General The Directors have pleasure in presenting to the shareholders 49th Annual Report of your Company together with the Audited Financial Statements of the Group and the Bank for the year ended December 31, 2017 and the Independent Auditors’ Report on those Financial Statements conforming to all relevant statutory requirements. This Report provides the information as required by the Companies Act No. 07 of 2007, Banking Act No. 30 of 1988 and amendments thereto and the Directions issued thereunder including the Banking Act Direction No. 11 of 2007 on “Corporate Governance for Licensed Commercial Banks in Sri Lanka” and subsequent amendments thereto, the Listing Rules of the Colombo Stock Exchange (the CSE) and the recommended best practices. This Report was approved by the Board of Directors on February 23, 2018. 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 within the statutory deadlines. Commercial Bank of Ceylon PLC (the Bank) is a licensed commercial bank registered under the Banking Act No. 30 of 1988 and was incorporated as a public limited liability company in Sri Lanka on June 25, 1969 under the Companies Ordinance No. 51 of 1938 and was re-registered as per the requirements of the Companies Act No. 07 of 2007 on January 23, 2008, under Registration No. PQ 116. The registered office of the Bank is at No. 21, “Commercial House”, Sir Razik Fareed Mawatha, Colombo 01, Sri Lanka, where the Bank’s Head Office too is situated. The ordinary shares (both voting and non-voting) of the Bank are quoted on the Main Board of the CSE since March 1970. The unsecured subordinated redeemable debentures issued by the Bank are also listed on the CSE. Fitch Ratings Lanka Ltd. has re-affirmed the Bank’s national long-term rating at “AA(lka)” with a stable outlook and subordinated debentures at “AA-(lka)”. As required by the Section 168 of the Companies Act No. 07 of 2007, the following information is disclosed in this Report prepared for the year ended December 31, 2017: Information required to be disclosed as per the Companies Act No. 07 of 2007 Reference to the Companies Act Annual Report page reference for compliance and necessary disclosures (i) The nature of the business of the Group and the Bank together with any changes thereof during the accounting period. Section 168 (1) (a) Refer Section 1.3 on “Principal Business Activities, Nature of Operations of the Group and Ownership by the Bank in its Subsidiaries and Associates” on pages 173 and 174. (ii) Signed Financial Statements of the Group and the Bank for the accounting period completed in accordance with Section 152. Section 168 (1) (b) The Financial Statements of the Group and the Bank for the year ended December 31, 2017 have been prepared in accordance with the requirements of the Sri Lanka Accounting Standards (SLFRSs and LKASs) and comply with the requirements of the Companies Act No. 07 of 2007 and the Banking Act No. 30 of 1988 and which were duly certified by the Chief Financial Officer (the person responsible for the preparation of the Financial Statements) and were approved by three members of the Board and the Company Secretary as appearing on pages 165 to 332 form an integral part of this Report. (iii) Auditors’ Report on the Financial Statements of the Group and the Bank. Section 168 (1) (c) (iv) Accounting Policies of the Group and the Bank and any changes therein. Section 168 (1) (d) Refer page 162 for the Independent Auditors’ Report. Significant Accounting Policies adopted in the preparation of the Financial Statements of the Group and the Bank are given on pages 173 to 194. There were no changes to the Accounting Policies used by the Group and the Bank during the year, except the application of hedge accounting principles for an Interest Rate Swap entered into by the Bank in March 2017. 136 Commercial Bank of Ceylon PLC Annual Report 2017
  138. Governance and Risk Management Annual Report of the Board of Directors Information required to be disclosed as per the Companies Act No . 07 of 2007 Reference to the Companies Act Annual Report page reference for compliance and necessary disclosures (v) Particulars of the entries made in the Interests Register of the Bank and its Subsidiaries during the accounting period. Section 168 (1) (e) The Bank and all its Subsidiaries maintain Interests Registers. All Directors have made declarations as required by Sections 192 (1) and (2) of the Companies Act aforesaid 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 Section 119 (1) (d) of the Companies Act No. 07 of 2007. (vi) Remuneration and other benefits paid to Directors of the Bank and its Subsidiaries during the accounting period. Section 168 (1) (f) (vii) Total amount of donations made by the Bank and its Subsidiaries during the accounting period. Section 168 (1) (g) Refer Note 21 to the Financial Statements on page 205. (viii) Information on Directorate of the Bank and its Subsidiaries during and at the end of the accounting period. Section 168 (1) (h) Refer Items 12.1 and 12.2 on pages 141 and 142. (ix) Separate disclosure on amounts payable to the Auditors as audit fees and fees for other services rendered during the accounting period by the Bank and its Subsidiaries. Section 168 (1) (i) Refer Note 21 to the Financial Statements on page 205. (x) Auditors’ relationship or any interest with the Bank and its Subsidiaries. Section 168 (1) (j) Auditors do not have any other relationship or interest in contracts with the Bank, or any of its Subsidiaries or Associates other than being the Auditors for the Bank, Subsidiaries and Associates. Refer Note 21 to the Financial Statements on page 205. Also refer the “Board Human Resources and Remuneration Committee Report” on pages 130 and 131. Refer Item 22 on page 144. (xi) Acknowledgement of the contents of this Report/Signatures on behalf of the Board of Directors. 2. Review of business 2.1 Vision, mission and corporate conduct The Bank’s vision and mission statements page 3 of the are exhibited on Annual Report. 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. 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. Section 168 (1) (k) Refer Item 33 on page 145. 2.2 Review of operations of the Group and the Bank The Bank has established delivery points across all districts of the country. During the year under review, six (6) new delivery points were added [nine (9) in 2016], bringing the total number of delivery points in Sri Lanka to 261 at the end of 2017 (255 at the end of 2016). The Bank’s ATM network is the single largest ATM network in the country. During 2017, the Bank installed 98 new ATMs (36 in 2016) bringing the total number of ATMs in Sri Lanka to 755 by the end of 2017 (657 at the end of 2016). In addition to the branch network in Sri Lanka, the Bank also has 19 delivery points and 20 ATMs at the end of 2017 (19 and 20 respectively, in 2016) in Bangladesh. The Bank’s Bangladesh Operation was set up in 2003 with the acquisition of Bangladesh Operation of Crédit Agricole Indosuez. Commercial Bank of Maldives Private Limited (CBM), the foreign subsidiary of the Bank, which is a fully-fledged Tier 1 Bank incorporated in the Republic of Maldives in which the Bank holds a stake of 55% (the remaining stake of 45% being held by a leading Maldivian group of companies) continued to expand its operations and was able to break-even and report profits during the year. The CBM which commenced commercial operations in September 2016 opened its second branch in Hulhumalé in the Republic of Maldives in December 2017. Commercial Bank of Ceylon PLC Annual Report 2017 137
  139. Governance and Risk Management Annual Report of the Board of Directors Commex Sri Lanka S .R.L., the fully-owned foreign Subsidiary of the Bank, which was incorporated and registered in Italy under the supervision of the Bank of Italy to engage in fund transfers on its own market commenced commercial operations in November 2016. This Company too continued to expand its operations and was able to break-even and reports profits during the year. The Bank expects over time, to open branches in other Italian cities which have high potential for money transfer services to both Sri Lanka and Bangladesh. The Bank also has a Representative Office in Yangon, Myanmar and incorporated CBC Myanmar Microfinance Company Limited, our third foreign subsidiary in December 2017. Besides Bangladesh, Maldives, Italy, and Myanmar, the Bank also has placed its own Business Promotion Officers (BPOs) in key markets around the world where a significant number of Sri Lankans are employed to provide money transfer facilities via the Bank’s e-Exchange remittance service. The local operations of the Bank have been segmented into Personal Banking, Corporate Banking and Treasury Operations in order to provide personalised customer experience and for better strategy formulation, implementation and also for carrying out performance evaluations more effectively. pages 16 to The “Chairman’s Message” on 19 and the “Managing Director’s Review” on pages 20 to 22 provide an overall review of business performance and the state of affairs of the Group and the Bank while the “Management Discussion and Analysis” pages 49 to 104, together with the on Audited Financial Statements provide a comprehensive review on the performance of key business units and the state of affairs of the Group and the Bank together with important events that took place during the year as required by Section 168 of the Companies Act No. 07 of 2007 and the recommended best accounting practices. 138 The details of the segment wise contribution to the Group’s revenue, results, assets and liabilities are disclosed in Note 63 to the pages 291 to 293. Financial Statements on 2.3 Directors’ responsibility for financial reporting In terms of Sections 150 (1), 151, 152 and 153 (1) and (2) of the Companies Act No. 07 of 2007, the Board of Directors of the Bank are responsible for the preparation of 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 regard, the Board of Directors wish to confirm that the Income Statement, Statement of Comprehensive Income, Statement of Financial Position, Statement of Changes in Equity, Statement of Cash Flows, Significant Accounting Policies and Notes pages 165 to 332 thereto appearing on have been prepared in conformity with the requirements of the SLFRSs and LKASs as mandated by the Sri Lanka Accounting and Auditing Standards Act No. 15 of 1995 and the Companies Act No. 07 of 2007. Further, these Financial Statements also comply with the requirements of the Banking Act No. 30 of 1988 and amendments thereto and the Listing Rules of the Colombo Stock Exchange. The “Statement of Directors’ Responsibility” pages 146 and 147 forms appearing on an integral part of this Report. 3. Future developments In line with the vision, the Bank intends expanding its network of delivery channels both in Sri Lanka and overseas by employing customer centric strategy with effective management of its capital, liquidity, and risks. Towards this, the Bank will continue to focus on its customer-centric model for doing business with the objective of bringing more convenience and delighting its customers. The Bank endeavours to capitalise online Commercial Bank of Ceylon PLC Annual Report 2017 and Mobile banking facilities enabling customers to easily access to most banking services 24/7. In line with our theme “Banking on the Future”, we will continue to focus on evolving customer aspirations and invest on state-of-the-art technology to serve our customers while strengthening our risk and compliance framework. The sections on “Chairman’s Message”, pages “Managing Director’s Review” on 16 to 22 and “Management Discussion and pages 49 to 104 describe Analysis” on the specific initiatives taken in this regard. 4. Gross income The gross income of the Group for 2017 was Rs. 116.842 Bn. (Rs. 93.726 Bn. in 2016) while the Bank’s gross income was Rs. 115.594 Bn. (Rs. 93.143 Bn. in 2016). The sources of external operating income, net operating profit and asset allocation of the Group among main business segments, namely, Personal Banking, Corporate Banking, International Operations, Investment Banking, and Dealing/Treasury together with their proportions are given in Note 63 to the pages 291 to 293. Financial Statements on 5. Results and appropriations 5.1 Performance of the Group and the Bank and transfers to reserves The net profit before tax of the Group and the Bank amounted to Rs. 23.280 Bn. and Rs. 23.183 Bn., respectively in 2017 (Rs. 20.115 Bn. and Rs. 20.051 Bn. in 2016) and this was an increase of 15.74% and 15.62%, (17.38% and 16.96%, respectively in 2016). Further, the net profit after tax of the Group and the Bank amounted to Rs. 16.627 Bn. and Rs. 16.581 Bn., respectively in 2017 (Rs. 14.466 Bn., and Rs. 14.513 Bn., respectively in 2016) and this was an increase of 14.93% and 14.25% (21.98% and 21.92%, respectively, in 2016).
  140. Governance and Risk Management Annual Report of the Board of Directors Details of appropriation of profit of the Bank are given below : Profit for the year after payment of all expenses of management, provision for depreciation, impairment on loans and advances, VAT on financial services and contingencies 2017 2016 23,182,944 20,051,183 Less: Provision for taxation (6,601,700) (5,538,672) Net profit after taxation 16,581,244 14,512,511 Balance brought forward from previous year 4,226 Net actuarial gains/(losses) on defined benefit plans (529,902) Dividend paid in respect of prior years 3,883 139,762 (2,279) Realised revaluation gain on disposal of freehold land and buildings – 36,940 Profit available for appropriation 16,090,229 – 14,656,156 Less: Appropriations Transfer to the statutory reserve fund Transfer to the general reserve (829,062) (725,626) (8,780,000) (8,130,525) Dividends on ordinary shares 1st interim dividend paid – Rs. 1.50 per share in cash (Rs. 1.50 in 2016) (1,493,719) (1,335,928) 2nd interim dividend paid – Rs. 3.00 per share in cash (Rs. 3.00 in 2016) (2,989,996) (2,674,799) (1,993,401) (1,785,052) Final dividend proposed/paid – Rs. 2.00 per share in shares (Rs. 2.00 in 2016) Balance carried forward 4,051 On this basis, the cash dividend payout ratio amounts to 27.04% of the profit after tax of 2017, compared to 27.64% for 2016, while total dividend payout ratio amounts to 39.06% for 2017, compared to 39.94% for 2016. This is well above the minimum dividend payout ratio of 10% (10% in 2016) stipulated in the Deemed Dividend Tax Rule. The Board of Directors provided the Statements of Solvency to the Auditors and obtained Certificates of Solvency from the Auditors in respect of each dividend payment in terms of Section 56 (2) of the Companies Act No. 07 of 2007. 5.2 Dividends on ordinary shares 5.3 Reserves Details of information on dividends paid/proposed are given in Note 24 to page 209. the Financial Statements on A summary of the Group’s reserves is given below: Two cash interim dividends of Rs. 1.50 per share (on November 20, 2017) and Rs. 3.00 per share (on February 20, 2018) were paid out of the profits of the Bank, hence, were subjected to a 10% withholding tax. Statutory reserve fund The Directors recommend to pay a final dividend of Rs. 2.00/- per share which will be paid partly out of dividends received and partly out of exempt/taxable profits of the Bank. Further, the aforesaid final dividend is proposed to be satisfied by issue and allotment of new shares, subject to a 10% withholding tax. Available-for-sale reserve Revaluation reserve General reserve Foreign currency translation reserve Employee share option reserve Hedging reserve Retained earnings Total 4,226 The Board of Directors also fulfilled the requirement of the Solvency Test in terms of Section 56 (3) of the Companies Act No. 07 of 2007 immediately after the payment of interim dividends and will ensure the compliance of Solvency Test after the payment of aforesaid final dividend proposed to be paid in April 2018. 2017 Rs. ’000 2016 Rs. ’000 6,492,552 5,647,993 7,834,003 6,250,554 52,270,003 43,490,003 348,976 (1,707,486) 529,817 860,502 (7,208,805) 420,282 (3,212) – 5,086,609 4,553,778 70,851,259 54,014,307 Information on the movement of reserves is given in the Statement of Changes in Equity on pages 282 to 285. pages 168 to 171 and in Notes 55 to 57 to the Financial Statements on Commercial Bank of Ceylon PLC Annual Report 2017 139
  141. Governance and Risk Management Annual Report of the Board of Directors 6 . Corporate social responsibility (CSR) The Bank established a CSR Trust in 2004 and this Trust is annually funded by the Bank which undertakes most of the CSR initiatives and activities of the Bank. The Trust manages a range of initiatives that strengthen one of the Bank’s key principle of acting responsibly towards its stakeholders while generating measurable and sustainable social dividends for different segments of society, in particular those which require empowerment. The details of the CSR initiatives of the Bank are found under “Social and Network Capital” in the section on “Capital Management” in the Chapter on “Management Discussion and Analysis” on pages 78 to 89. 7. Property, plant and equipment, intangible assets and leasehold property Information on property, plant and equipment, intangible assets and leasehold property of the Group and the Bank are given in Notes 39, 40 and 41 to the Financial pages 245, 258 and 260, Statements on respectively. Investment properties of any group company when significantly occupied by the other companies in the Group are classified under property, plant and equipment in the Consolidated Financial Statements in accordance with the Sri Lanka Accounting Standard – LKAS 40 on “Investment Property”. Bank of Sri Lanka (CBSL) and recognised the revaluation gain/(loss) in the Financial Statements. Specific information on extent, location, valuations of the land and buildings held by the Bank are given in Note 39.5 (a) and (b) pages 251 to the Financial Statements on to 256. Details of market value (revalued amounts) of freehold properties of the Bank are given in Note 39.5 (b) to the Financial Statements pages 252 to 256. on The details of capital expenditure approved and contracted for are given in Note 59.3 to page 287. the Financial Statements on 8. Market value of properties The Bank carried out a revaluation of all its freehold land and buildings as at December 31, 2017 as required by Section 7.1 (b) of the Direction No. 01 of 2014 on “Valuation of Immovable Property of Licensed Commercial Banks” issued by the Central The revaluation of the land and buildings of the Bank was carried out by professionally qualified independent valuers as per the aforesaid Direction. Freehold land and buildings of the Bank are revalued by independent professional valuers every three years or more frequently if the fair values are substantially different from carrying amounts to ensure that the carrying amounts do not differ from the fair values as at the reporting date. The next revaluation exercise on the freehold land and buildings of the Bank will be carried out on or before December 31, 2020. 9. Issue of shares and debentures 9.1 Issue of shares and debentures by the Bank Details of the shares issued by the Bank are given in the table below: 2017 Non-voting ordinary shares Voting ordinary shares Non-voting ordinary shares Number of shares issued 84,649,465 5,811,601 N/A N/A Consideration (Rs. ’000) 9,616,179 527,693 N/A N/A Number of shares issued 10,521,802 903,357 11,818,040 912,967 Consideration (Rs. ’000) 1,503,566 102,983 1,477,179 101,415 Number of shares issued 3,278,537 N/A 1,136,732 N/A 386,311 N/A 135,582 N/A 28,806 N/A 9,222 N/A Details of the share issue Rights issue of ordinary shares Part of final dividend for 2016 amounting to Rs. 2.00/- per share (Rs. 2.00/- per share in 2015) satisfied in the form of issue and allotment of new shares Exercise of options by employees under the Employee Share Option Plans Consideration received (Rs. ’000) Amount transferred from Employee Share Option Reserve upon exercise (Rs. ’000) 140 Commercial Bank of Ceylon PLC Annual Report 2017 2016 Voting ordinary shares Reason for the issue
  142. Governance and Risk Management Annual Report of the Board of Directors The Bank made a rights issue of ordinary shares (for both voting ordinary and non-voting ordinary shareholders) in June 2017 on the basis of one new ordinary share for every ten (10) ordinary shares held and raised Rs. 10.144 Bn. The issue price of a voting ordinary share was Rs. 113.60 and that of a non-voting share was Rs. 90.80. These funds were utilised to finance the lending portfolio of the Bank. All shares are listed on the CSE. 9.2 Issue of shares and debentures by the subsidiaries and associates During the year 2017, Serendib Finance Limited issued 22,624,434 shares (9,128,252 shares in 2016) at Rs. 22.10 per share (Rs. 21.91 per share in 2016) for a total consideration of Rs. 500 Mn. (Rs. 200 Mn. in 2016) to the Bank in order to raise required funds for the expansion of lending activities. During the year under review, CBC Myanmar Microfinance Company Limited too issued 420,000 ordinary shares at USD 1 per share for a total consideration of Rs. 64.512 Mn. to the Bank, upon formation of that company as a fully owned subsidiary of the Bank. Except for the above share issues, the other Subsidiaries and Associates of the Bank did not make any share or debenture issues during the year. 9.3 Stated capital and debentures The details of the Stated capital are given in Note 53 to the Financial Statements on pages 278 to 280. The details of debentures including the redemptions during the year are given in Note 52 to the Financial pages 276 and 277. Statements on 10. Share information 10.1 Distribution schedule of shareholdings Information on the distribution of shareholding and the respective percentages are given in the section on “Investor pages 339 to 341. Relations” on 10.2 Information on earnings, dividend, net assets and market value Information relating to earnings, dividend, net assets and market value per share is page 10 given in “Financial Highlights” on Information on the shares traded and movement in the number of shares represented by the stated capital of the Bank is given in the section on “Investor Relations” pages 334 to 348. on 10.3 Substantial shareholdings Names of the twenty largest shareholders for both Voting and Non-voting Ordinary shares, percentages of their respective holdings and percentage holding of the public, etc., are given in the section on “Investor Relations” pages 340 and 341. on 11. Equitable treatment to shareholders The Bank has at all times ensured that all shareholders are treated equitably. 12. Information on the Directors of the Group and the Bank 12.1. Information on Directors as at December 31, 2017 The Board of Directors of the Bank as at December 31, 2017 consisted of 12 Directors (10 Directors as at December 31, 2016) with wide knowledge and experience on economic, banking and financial, commercial, engineering, and legal as detailed in the “Profiles of Board pages 25 to 27. Members” on Names of the Directors of the Bank during and as at the end of 2017, as required by Section 168 (1) (h) of the Companies Act No. 07 of 2007 are given below: Name of the Director Executive/ Non-Executive status Independent/ Non-Independent status Mr K G D D Dheerasinghe (Chairman) Non-Executive Independent Mr M P Jayawardena (Deputy Chairman) Non-Executive Independent Mr J Durairatnam (Managing Director/CEO) Executive Non-Independent Mr S Swarnajothi Non-Executive Independent Mr S Renganathan Executive Non-Independent Prof A K W Jayawardane Non-Executive Independent Mr K Dharmasiri Non-Executive Independent Mr L D Niyangoda Non-Executive Independent Ms N T M S Cooray Non-Executive Independent Mr G S Jadeja Non-Executive Non-Independent Mr T L B Hurulle (Appointed with effect from April 05, 2017) Non-Executive Independent Justice K Sripavan (Appointed with effect from April 26, 2017) Non-Executive Independent New Appointments made during 2017 Resignations/Cessations during 2017 – None Names of the Directors of all Subsidiaries and Associates are given in “Group Structure” on page 438. Commercial Bank of Ceylon PLC Annual Report 2017 141
  143. Governance and Risk Management Annual Report of the Board of Directors 12 .2 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 of the following Directors, after considering the contents of the affidavits and declarations submitted by them and all other related issues: (a) Directors to retire by rotation Mr S Swarnajothi Mr K Dharmasiri (b) Directors appointed to fill casual vacancies Mr T L B Hurulle Justice K Sripavan (iii)Directors who served on the Board for over 9 years. [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) shall not exceed nine years]. None 12.3 Directors’ meetings early adopting the Code of Best Practice on Related Party Transactions as issued by the Securities and Exchange Commission of Sri Lanka (the SEC) which became mandatory from January 1, 2016. The Board of Directors also has formed three other voluntary Board Subcommittees to assist the Board. These Subcommittees play a critical role in order to ensure that the activities of the Bank at all times are conducted with the highest ethical standards and in the best interest of all its stakeholders. The Terms of Reference of these Subcommittees conform to the recommendations made by various regulatory bodies, such as the CBSL, The Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka), the SEC, and the CSE. The composition of both mandatory and voluntary Board Subcommittees, as at December 31, 2017 and the details of the attendance by Directors at meetings are pages 111 and 113 while the tabulated on Reports of these subcommittees are found pages 124 to 135. on The Board formed a Related Party Transactions Review Committee in 2014 to assist the Board in reviewing all related party transactions carried out by the Bank and its listed Subsidiaries in the Group by 142 During the year 2016, Mr S Renganathan purchased 20,000 debentures of the Bank and as at December 31, 2017, he held 20,000 debentures. Except Mr S Renganathan there were no debentures registered in the name of any other Director as at the beginning and at the end of the year. 14. Employee share option plans and profit sharing plans The Bank implemented an Employee Share Option Plan (ESOP) for the Corporate Management and the Executive Officers in Grade III and above in 2008, based on the Bank achieving certain predetermined performance criteria. The approval of the shareholders was obtained for this scheme to offer share options up to 3% of the ordinary voting shares of the Bank. 13.1 Directors’ interests in ordinary voting and non-voting shares of the Bank Individual Ordinary Voting and Non-voting shareholdings of persons who were Directors of the Bank at any time during the financial year are as follows: Ordinary Voting shares As at December 31, The Board of Directors of the Bank formed four mandatory Board Subcommittees (namely, Board Nomination Committee, Board Human Resources and Remuneration Committee, Board Integrated Risk Management Committee and Board Audit Committee) as required by the Banking Act Direction No. 11 of 2007 on “Corporate Governance for Licensed Commercial Banks in Sri Lanka” issued by the CBSL. 13.2 Directors’ interests in debentures 13. Disclosure of Directors’ dealing in shares and debentures Details of the meetings of the Board of page 111. Directors are presented on 12.4 Board Subcommittees Directors’ shareholdings in ordinary voting shares and ordinary non-voting shares have not changed subsequently to the date of the Statement of Financial Position up to February 06, 2018, the date being one month prior to the date of Notice of the Annual General Meeting. Mr K G D D Dheerasinghe (Chairman) Mr M P Jayawardena (Deputy Chairman) Mr J Durairatnam (Managing Director/CEO) Ordinary Non-voting shares 2017 2016 2017 23,567 21,159 Nil Nil Nil Nil Nil Nil 616,800 470,770 Nil Nil 2016 Nil Nil 10,762 8,738 319,792 197,647 11,718 10,488 Prof A K W Jayawardane Nil Nil Nil Nil Mr K Dharmasiri Nil Nil Nil Nil Mr L D Niyangoda Nil Nil Nil Nil Ms N T M S Cooray Nil Nil 49,731 Nil Mr G S Jadeja Nil Nil Nil Nil Mr T L B Hurulle (Appointed with effect from April 05, 2017) Nil N/A Nil N/A Justice K Sripavan (Appointed with effect from April 26, 2017) Nil N/A Nil N/A Mr S Swarnajothi Mr S Renganathan Commercial Bank of Ceylon PLC Annual Report 2017
  144. Governance and Risk Management Annual Report of the Board of Directors The Bank also obtained the approval of the shareholders to introduce another ESOP for all Executive Officers in Grade 1A and above in 2015 , based on the Bank achieving certain predetermined performance criteria. The approval of the shareholders was obtained for this scheme to offer share options up to 2% of the Ordinary Voting shares of the Bank. 1st and 2nd Tranches of this ESOP were vested on September 30, 2016 and September 30, 2017. The details of the ESOPs are given in Notes 53.2 and 54 to the Financial Statements pages 279 to 281 The Group and the on Bank do not have any employee profit sharing plans, except the variable bonus scheme. 15. Directors’ interests in contracts or proposed contracts Directors’ interests in contracts or proposed contracts with the Bank, both direct and pages 152 indirect are disclosed on and 153. The Directors have also disclosed transactions, if any, that could be classified as Related Party Transactions in terms of the Sri Lanka Accounting Standard – LKAS 24 on “Related Party Disclosures”. Please refer Note 64 to the Financial Statements pages 294 to 300 for those on transactions disclosed by the Directors. These interests have been declared quarterly at Board meetings. 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. There are no arrangements enabling 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. Tabulated below are the details of Options Available/Exercised by the Executive Directors under the ESOPs. 2017 As at December 31, 2016 Mr J Durairatnam Mr S Renganathan Mr J Durairatnam Mr S Renganathan Total options available to exercise as at January 1, Options vested during the year 156,397 153,362 163,457 140,162 47,979 37,933 45,721 36,148 Additional options granted due to the rights issue 2,423 2,014 Nil Nil Options exercised during the year 83,609 94,323 52,781 22,948 Nil Nil Nil Nil 123,190 98,986 156,397 153,362 Options expired during the year Total options available to exercise as at December 31, Directors’ remuneration and other benefits in respect of the Group and the Bank for the financial year ended December 31, 2017 are given in Note 21 to the Financial Statements page 205. on As per Section 217 of the Companies Act No. 07 of 2007, 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 regulations. 16. Directors’ and officers’ insurance 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. 17. Environmental protection 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 given on pages 102 to 104. 18. Statutory payments The Directors, to the best of their knowledge and belief are satisfied that all statutory payments (including all taxes, duties and levies payable by the Bank and its Subsidiaries) due to the Government, other regulatory institutions and related to the employees have been made on time or where relevant provided for. 19. Events after the reporting period No event of material significance that requires adjustments to the Financial Statements, has occurred subsequent to the reporting period, other than those disclosed in Note 70 to the Financial Statements on page 332. 20. Going concern The Directors have made an assessment of the Bank’s 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 Directors are not aware of any material uncertainties that may cast significant doubt upon the Bank’s ability to continue as a going concern, such as restrictions or plans to curtail operations. Commercial Bank of Ceylon PLC Annual Report 2017 143
  145. Governance and Risk Management Annual Report of the Board of Directors 21 . Appointment of auditors and their remuneration 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 KPMG were appointed as Auditors of the Bank at the Annual General Meeting held in March 2012 to carry out the audit of the Bank for the year ended December 31, 2012. Thereafter, they were reappointed as Auditors of the Bank at the Annual General Meetings held in March 2013, 2014, 2015 and 2016 to carry out the audits of the Bank for the years ended December 31, 2013, 2014, 2015 and 2016. However, the Board with the recommendation of the Board Audit Committee resolved to extend the period of service of Messrs KPMG by an additional one year, subject to terms and conditions of the Banking Act Directions, since the Bank has sought the services of Messrs KPMG to assist in carrying out a gap analysis and assist in the implementation of the requirements under the Sri Lanka Accounting Standard – SLFRS 9 on “Financial Instruments”. 22. Lead auditor’s independence Independence confirmation has been provided by Messrs KPMG as required by Section 163 (3) of the Companies Act No. 07 of 2007, in connection with the audit for the year ended December 31, 2017 confirming that KPMG is not aware of any relationship with or interest in the Bank or any Subsidiaries audited by KPMG 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 the ICASL, applicable as at the reporting date. The Directors are now proposing to adopt Messrs Ernst & Young be appointed as Auditors of the Bank, subject to the approval of shareholders, from the conclusion of the next Annual General Meeting of the Bank. Messrs Ernst & Young, on their appointment, with shareholders’ approval, will serve for a maximum period of 5 years consecutively, subject to them being re-elected by the shareholders, upon a recommendation of the Board of Directors, annually. 23. Information on ratios, market prices of shares and credit ratings Information that requires disclosures as per Rule 7.6 (xi) of the Listing Rules of the CSE are given in the section on “Investor pages 334 to 348. Relations” on 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 Annual General Meeting to be held on March 28, 2018 for Shareholder approval. The retiring Auditors, Messrs KPMG have advised the Bank that they would not offer themselves for re-election on conclusion of the next Annual General Meeting. Expenses incurred in respect of audit fees and fees for other services rendered during the accounting period are given in Note 21 page 205. to the Financial Statements on 144 No prohibited non-audit services have been provided by Messrs KPMG as per the Direction issued by the Central Bank of Sri Lanka on “Guidelines for External Auditors relating to their Statutory Duties”. The Directors are satisfied because the Board Audit Committee has assessed each service, having regard to auditor 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 KPMG. 24. Risk management and system of internal controls The Bank has an ongoing process in place to identify, evaluate, and manage the risks that are faced by the Bank. The Directors continuously review this process through the Board Integrated Risk Management Committee. Specific steps taken by the Bank in managing both banking and non-banking risks are detailed in the section on “Managing Risk: An Overview” on pages 154 to 158 in the “Board Integrated Risk Management Committee pages 127 and 128 in Note Report” on 69 to the Financial Statements on “Financial pages 303 to 332. Risk Review” on Commercial Bank of Ceylon PLC Annual Report 2017 An effective and comprehensive system of internal controls is in place in the Bank comprising internal checks, internal audit, and financial and other controls required to carry out the business of banking in an orderly manner and to safeguard the assets. The Directors’ Statement on Internal Control and the Independent Auditors’ Report pages 148 to 150. thereon are given on 25. Corporate governance Directors’ declarations 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. 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) all endeavours have been made to ensure that shareholders in each category have been treated equitably in accordance with the original Terms of Issue; (d) 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 Associates are prepared based on the going concern assumption; (e) the Bank has complied with the Cord of Best Practice on Related Party Transactions and has made the disclosures in the Financial Statements and to the market when applicable; and (f) 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.
  146. Governance and Risk Management Annual Report of the Board of Directors The measures taken and the extent to which the Bank has complied with the Code of Best Practice on Corporate Governance 2017 issued by the ICASL , the CSE and the CBSL are given in the section on “How We pages 106 to 117. Govern” on 30. Operational excellence 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. 26. Focus on new regulations The Directors have taken necessary steps to assess the implications of the new Inland Revenue Act which will become effective from April 1, 2018. 31. Outstanding litigation In the opinion of the Directors and in consultation with the Bank’s lawyers, litigation currently pending against the Group and the Bank will not have a material impact on the reported financial results or future operations. Details of litigation pending against the Group and the Bank are given in Note 61 to the Financial page 288. Statements on The Bank has evaluated the implications on adoption of the Sri Lanka Accounting Standard – SLFRS 9 on “Financial Instruments” effective from January 1, 2018 and developed the required financial models to assess the impairment on financial assets under the new framework. 27. Sustainability 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 and details of which are pages 418 to 420. presented on 28. Human resources 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 “Board Human Resources and Remuneration Committee Report” appearing pages 130 and 131. on 29. Technology 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 nature of the business is more heavily intertwined with technology than ever before. Key achievements in this regard during the year are detailed in the “Board Technology Committee Report” appearing page 135. on 32. Annual general meeting and the notice of meeting The 49th Annual General Meeting of the Bank will be held at Galadari Hotel, “Grand Ballroom”, No. 64, Lotus Road, Colombo 01, on Wednesday, March 28, 2018 at 2.00 p.m. Notice relating to the 49th Annual General Meeting of the Bank is enclosed at the end of the Annual Report. 33. Acknowledgement of the contents of the report As required by Section 168 (1) (k) of the Companies Act No. 07 of 2007, the Board of Directors does hereby acknowledge the contents of this Annual Report. Signed in accordance with a resolution adopted by the Directors. K G D D Dheerasinghe Chairman M P Jayawardena Deputy Chairman J Durairatnam Managing Director/CEO S Swarnajothi S Renganathan Prof A K W Jayawardane Director DirectorDirector K Dharmasiri L D Niyangoda Ms N T M S Cooray Director DirectorDirector G S Jadeja T L B Hurulle Justice K Sripavan Director DirectorDirector Mrs J R Gamage Company Secretary Colombo February 23, 2018 Commercial Bank of Ceylon PLC Annual Report 2017 145
  147. Governance and Risk Management STATEMENT OF DIRECTORS ’ RESPONSIBILITY 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 (the Group). The responsibilities of the External Auditors in relation to the Financial Statements are set out in the “Independent Auditors’ Report” page 162. given on In terms of Sections 150 (1), 151, 152 and 153 (1) and (2) of the Companies Act No. 07 of 2007, the Board of Directors of the Bank are 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 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 the Statement of Financial Position as at December 31, 2017, 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. Accordingly, the Board of Directors confirm 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, 2017; 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 165 to 332 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; 146 (b) the Financial Statements for the year 2017, 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: yy Sri Lanka Accounting Standards; yy Companies Act No. 07 of 2007 (Companies Act); yy Sri Lanka Accounting and Auditing Standards Act No. 15 of 1995; yy Banking Act No. 30 of 1988 and amendments thereto; yy Listing Rules of the Colombo Stock Exchange (CSE), and yy 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 Central Bank of Sri Lanka for the preparation of annual financial statements of licensed commercial banks; (d) proper accounting records which correctly record and explain 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 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 Board Audit Committee, the Report of the pages said Committee is given on 124 to 126. The Board of Directors also approves the Interim Financial Statements prior to their release, following a review and recommendation by the Board Audit Committee; (f) they accept responsibility for the integrity and objectivity of the Financial Statements presented in this Annual Report; Commercial Bank of Ceylon PLC Annual Report 2017 (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 have instituted an effective and comprehensive system of internal controls comprising 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” is given pages 148 and 149; on (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 61 to the Financial Statements on “Litigation against the page 288. Bank” on (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 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 or to other shareholders a soft copy each in a CD containing the Annual Report within the stipulated period of time as required by the Rule No. 7.5 (a) and (b) on Continuing Listing Requirements of the Listing Rules of the CSE;
  148. Governance and Risk Management Statement of Directors ’ Responsibility (k) that all shareholders in each category have been treated equitably in accordance with the original terms of issue; Accordingly, the Board of Directors are of the view that they have discharged their responsibilities as set out in this Statement. (l) that the Bank and its quoted Subsidiary have met all the requirements under the Section 07 on Continuing Listing Requirements of the Listing Rules of the CSE, where applicable; By Order of the Board, (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 have 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; Mrs J R Gamage Company Secretary Colombo February 23, 2018 (n) the Financial Statements of the Group and the Bank have been certified by the Bank’s 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 23, 2018 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 KPMG 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, 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 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 which appears as reported by them on page 162; Commercial Bank of Ceylon PLC Annual Report 2017 147
  149. Governance and Risk Management DIRECTORS ’ STATEMENT ON INTERNAL CONTROL Responsibility In line with the Section 3 (8) (ii) (b) of the Banking Act Direction No. 11 of 2007, and principle D.1.5 of Code of Best Practice on Corporate Governance 2017 (Code), issued by The Institute of Chartered Accountants of Sri Lanka (ICASL) the Board of Directors presents this Report on Internal Control. The Board of Directors (the Board) is responsible for the adequacy and effectiveness of the system of internal controls in place at Commercial Bank of Ceylon PLC (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 the policies and business objectives of the Bank. Accordingly, the system of internal controls can only provide reasonable but not absolute assurance against material misstatement 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 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 the ICASL. The Board has assessed the internal control 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 risk and control by identifying and assessing the risks faced, and in the design, operation, and monitoring of suitable internal controls to mitigate and control these risks. 148 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: yy Various appointed committees are established by the Board to assist the Board in ensuring the effectiveness of the Bank’s daily operations and that the Bank’s operations are in accordance with the corporate objectives, strategies, and the annual budget as well as the policies and business directions that have been approved. yy The BAC of the Bank reviews internal control issues identified by the Internal Audit Department, Regulatory Authorities, External Auditors and 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 functions with particular emphasis on the scope, quality of internal audits, independence, and 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 of the Bank are set out in the “Board Audit Committee Report” pages 124 to 126. which appears on yy Policies/Charters are developed covering all functional areas of the Bank and these are approved by the Board or Board approved subcommittees. Such policies and Charters are reviewed and approved periodically. yy 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 of the Bank continued to verify the suitability of design and effectiveness of these procedures and controls on an ongoing basis. The assessment included subsidiaries and the Bangladesh operations of the Bank as well. yy The Inspection/Internal Audit Department of the Bank checks for compliance with policies and procedures and the effectiveness of the internal control systems on an ongoing basis using samples and rotational procedures and highlight significant findings in respect of any non-compliance. Audits are carried out on all departments, branches, subsidiaries and overseas operations in accordance with the annual audit plan reviewed and approved by the Board Audit Committee (BAC). The frequency of audits of branches is determined by the level of risk assessed, to provide an independent and objective report. Findings of the internal audit are submitted to the BAC for review at their periodic meetings. Initiative taken by Inspection/Internal Audit Department to audit certain selected areas of the business “online” during the year 2016 on a limited scope, was enhanced to cover all branches in Sri Lanka and Bangladesh, Digital Banking Unit, Card Centre, Treasury and Finance during 2017. 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 random sample basis. The findings were tabled at the BAC meeting for review. The “Online Auditing” initiative has further strengthened the review of the design and effectiveness of the internal control system of the Bank by BAC. Commercial Bank of Ceylon PLC Annual Report 2017 Since the adoption of new Sri Lanka Accounting Standards comprising SLFRSs and LKASs in 2012, processes that are required to comply with new requirements of recognition, measurement, presentation and disclosures were introduced and implemented in 2013. 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 new 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. Automating the processes relating to various computations required under SLFRSs and LKASs including loan impairments are in progress. The Banks’ Internal Audit Department commenced testing these processes since first quarter 2013 and continued to do so in 2017 as well. The Board also has taken into consideration the requirements of the Sri Lanka Accounting Standard – SLFRS 9 on “Financial Instruments” that has been issued
  150. Governance and Risk Management Directors ’ Statement on Internal Control with effective date being January 1, 2018, as it is expected to have a significant impact on the calculation of impairment of financial instruments on an “expected credit loss model” compared to the “incurred credit loss model” that is currently being applied under the Sri Lanka Accounting Standard – LKAS 39 on “Financial Instruments – Recognition and Measurement”. With the assistance of an external consultant Messrs KPMG a Gap Analysis has been carried out to identify areas expected to have a potentially higher impact on amounts already reported in Financial Statements consequent to adoption of SLFRS 9. Subsequent to that and as per the Implementation Plan of the working committee formed, Bank has developed statistical models to compute the expected credit loss as required by SLFRS 9. The Bank has completed the preliminary high level assessment of the potential impact on its Financial Statements for the year ended December 31, 2016 resulting from the application of SLFRS 9 with the assistance of Messrs KPMG. The above assessment is yet to be validated and the Bank is in the process of assessing the additional loan loss provision impact on the Financial Statements for the year ended December 31, 2017, resulting from the application of SLFRS 9. The progress of the implementation of SLFRS 9 in the Bank is monitored by the BAC on an ongoing basis. 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. Review of the Statement by External Auditors The External Auditors, Messrs KPMG, have reviewed the above Directors’ Statement on Internal Control included in this Annual Report of the Bank for the year ended December 31, 2017 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” is page 150 of this Annual Report. given on By Order of the Board, The comments made by the External auditors in connection with the internal control system during the financial year 2016 were taken into consideration and appropriate steps have been taken to incorporate them where appropriate. K G D D Dheerasinghe Chairman The Assurance Report of the External Auditors in connection with internal control over financial reporting is appearing on page 150. M P Jayawardena Deputy Chairman J Durairatnam Managing Director/CEO Colombo February 23, 2018 Commercial Bank of Ceylon PLC Annual Report 2017 149
  151. Governance and Risk Management ASSURANCE REPORT ON INTERNAL CONTROL KPMG (Chartered Accountants) 32A, Sir Mohamed Macan Markar Mawatha, P. O. Box 186, Colombo 00300, Sri Lanka. To the Board of Directors of Commercial Bank of Ceylon PLC We were engaged by the Board of Directors of Commercial Bank of Ceylon PLC (“the Company”) to provide assurance on the Directors’ Statement on Internal Control (“Statement”) included in the Annual Report for the year ended December 31, 2017. Management’s responsibility for the Statement on Internal Control 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 the Section 3 (8) (ii) (b) of the Banking Act Direction No. 11 of 2007, by The Institute of Chartered Accountants of Sri Lanka. Scope of the engagement in compliance with SLSAE 3050 Our responsibility is to issue a report to the Board on the Statement based on the work performed. We conducted our engagement in accordance with Sri Lanka Standard on Assurance Engagements SLSAE 3050 – Assurance Report for Banks on Directors’ Statement on Internal Control issued by The Institute of Chartered Accountants of Sri Lanka. Summary of work performed Our engagement has been conducted to assess whether the Statement is both supported by the documentation prepared Internet : : : : : +94 - 11 542 6426 +94 - 11 244 5872 +94 - 11 244 6058 +94 - 11 254 1249 www.kpmg.com/lk by or for Directors and appropriately reflects the process the Directors have adopted in reviewing the system of internal control for the Company. To achieve this objective, appropriate evidence has been obtained by performing the following procedures: (a) Enquired the Directors to obtain an understanding of the process defined by the Board of Directors for their review of the design and effectiveness of internal control and compared their understanding to the Statement made by the Directors in the Annual Report. (b) Reviewed the documentation prepared by the Directors to support their Statement made. (c) Related the Statement made by the Directors to our knowledge of the Company obtained during the audit of the Financial Statements. (d) Reviewed the minutes of the meetings of the Board of Directors and of relevant Board Committees. (e) Attended meetings of the Audit Committee at which the Annual Report, including the Statement on Internal Control is considered and approved for submission to the Board of Directors. (f) Considered whether the Directors’ Statement on Internal Control covers the year under review and that adequate processes are in place to identify any significant matters arising. KPMG, a Sri Lankan partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. 150 Tel Fax Commercial Bank of Ceylon PLC Annual Report 2017 (g) Obtained written representations from Directors on matters material to the Statement on Internal Control where other sufficient appropriate audit evidence cannot reasonably be expected to exist. SLSAE 3050 does not require us to consider whether the Statement covers all risks and controls, or to form an opinion on the effectiveness of the Company’s risk and control procedures. SLSAE 3050 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. 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 have adopted in the review of the design and effectiveness of internal control system over the financial reporting of the Company. Chartered Accountants Colombo February 23, 2018 M.R . Mihular F C A T.J.S. Rajakarier FCA Ms. S.M.B. Jayasekara ACA G.A.U. Karunaratne FCA R.H. Rajan ACA P.Y.S. Perera FCA W.W.J.C. Perera FCA W.K.D.C Abeyrathne FCA R.M.D.B. Rajapakse FCA C.P. Jayatilake FCA Ms. S. Joseph FCA S.T.D.L. Perera FCA Ms. B.K.D.T.N. Rodrigo FCA Principals -S.R.I. Perera FCMA(UK), LLB, Attorney-at-Law, H.S. Goonewardene ACA Ms. C.T.K.N. Perera ACA
  152. Governance and Risk Management MANAGING DIRECTOR ’S AND 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 (the Group) as at December 31, 2017 are prepared and presented in conformity with the requirements of the following: yy Sri Lanka Accounting Standards issued by the ICASL, yy Companies Act No. 07 of 2007, yy Sri Lanka Accounting and Auditing Standards Act No. 15 of 1995, yy Banking Act No. 30 of 1988 and amendments thereto and the Directions, Determinations and Guidelines issued by the Central Bank of Sri Lanka (CBSL), yy Listing Rules of the Colombo Stock Exchange (CSE), and yy Code of Best Practice on Corporate Governance 2017 issued by the ICASL. The formats used in the preparation of the Financial Statements and disclosures made 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 Board Audit Committee (BAC) and Bank’s External Auditors. Comparative information has been amended to comply with the current presentation, where applicable. 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. 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 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 KPMG, Chartered Accountants and their Report is given on page 162. The BAC pre-approves the audit and non-audit services provided by Messrs KPMG, in order to ensure that the provision of such services does not contravene with the guidelines issued by the CBSL on permitted non-audit services or impair KPMG’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 “Board Audit Committee Report” appearing on pages 124 to 126. The Bank engaged the services of five 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: yy The Bank and the Group have complied with all applicable laws and regulations and guidelines and there is no material litigation against the Group/Bank other than those disclosed in Note 61 on page 288 of the Financial Statements. yy All taxes, duties, levies and all statutory payments payable by the Group/Bank and all contributions, levies and taxes payable on behalf of and in respect of the employees of the Bank/Group as at December 31, 2017 have been paid, or where relevant provided for. J Durairatnam Managing Director/CEO K D N Buddhipala Chief Financial Officer Colombo February 23, 2018 Commercial Bank of Ceylon PLC Annual Report 2017 151
  153. Governance and Risk Management DIRECTORS ’ INTEREST IN CONTRACTS WITH THE BANK Related party disclosures as per the Sri Lanka Accounting Standard – LKRS 24 on “Related Party Disclosures” is disclosed in Note 64 to the pages 294 to 300 of this Annual Report. In addition, the Bank carries out transactions in the ordinary course of Financial Statements on 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. The results of such transactions at the Reporting date is given below: Director/company Accommodation granted/deposits Current limit Balance/outstanding 31.12.2017 31.12.2017 31.12.2016 Rs. ’000 Rs. ’000 Rs. ’000 9,984 557 92,160 – (a) Mr M P Jayawardena Cal Exports Lanka (Pvt) Limited Loans and advances Off-balance sheet accommodations Deposits Chemanex Exports (Pvt) Limited – Loans and advances 10,000 45 Off-balance sheet accommodations 29,000 5,000 Deposits CIC Holdings PLC – Loans and advances Combined Off-balance sheet accommodations Limits Deposits CIC Vetcare (Pvt) Limited 68,525 – 6,828 20,539 19,327 756,640 6,640 831,804 1,512,000 356,919 303,124 33,991 12,980 Loans and advances Combined 100,000 – 161,218 102,107 Off-balance sheet accommodations Limits 152,000 13,005 51,903 Deposits CIC Poultry Farms Limited 1,961 – 2,246 – 444 465 Loans and advances 600,000 355,146 734,945 Off-balance sheet accommodations 100,000 100 3,304 Deposits – 25 25 Rainforest Ecolodge (Pvt) Limited Deposits – 9 – (b) Prof A K W Jayawardane Sierra Cables PLC Loans and advances Combined Off-balance sheet accommodations Limits Deposits 1,220,528 588,169 950,702 690,000 1,215,861 811,597 22,915 48,135 – (c) Ms N T M S Cooray The Solutions Group (Pvt) Limited Off-balance sheet accommodations Deposits Ceylon Tea Brokers PLC Loans and advances 600 1,759 – 2,658 27,798 145,417 189,617 150,000 Deposits – Jetwing Hotels Limited Loans and advances – Deposits – Negombo Hotels Limited Loans and advances – Deposits – The Lighthouse Hotel PLC Loans and advances – Deposits – Jetwing Travels (Pvt) Limited 6,880 – 1,819 – 2,187 – 1,786 14,154 1,581 49,553 2,067 129,487 7,168 1,996 Loans and advances 49,797 17,824 23,334 Off-balance sheet accommodations 45,708 37,413 31,100 1,061,490 893,499 Deposits 152 – Commercial Bank of Ceylon PLC Annual Report 2017 –
  154. Governance and Risk Management Director /company Jetwing Air (Pvt) Limited Directors’ Interest in Contracts with the Bank Accommodation granted/deposits Current limit Balance/outstanding 31.12.2017 31.12.2017 31.12.2016 Rs. ’000 Rs. ’000 Rs. ’000 Loans and advances 20,000 Off-balance sheet accommodations 38,119 – – 30,608 38,193 Deposits – 34,918 52,824 Jetwing Hotel Management Services (Pvt) Limited Deposits – 127 130 Jetwing Real Estate (Pvt) Limited Loans and advances 157,120 141,304 169,253 Jetwing Events (Pvt) Limited Off-balance sheet accommodations 100 100 1,511 19,786 18,304 Deposits Go Vacation Lanka Co. (Pvt) Limited – Off-balance sheet accommodations 100 600 Deposits 600 – 7,548 4,697 N.J. Cooray Builders (Pvt) Limited Deposits – 1,319 498 Yarl Hotels (Pvt) Limited Deposits – 118 1,809 Jetwing Symphony Limited Deposits – 1,105 Capital Alliance Holdings Limited Deposits – 97 100 – (d) Mr L D Niyangoda A Baur & Company (Pvt) Limited Baur Life Science (Pvt) Limited Loans and advances Combined 7,959,524 5,748,724 5,501,731 Off-balance sheet accommodations Limits 5,890,000 3,532,959 3,057,700 Deposits – 5,870,859 5,233,872 Off-balance sheet accommodations – 11,509 29,754 Deposits – 3,640 7,829 16,781 N/A (e) Mr T L B Hurulle (Appointed to the Board of the Bank with effect from 05.04.2017) Kanrich Finance Limited Loans and advances 19,245 Off-balance sheet accommodations – Deposits – – N/A 11,489 N/A 16,987 N/A (f) Mr S Renganathan (Appointed as a Director of the Chamber with effect from 23.10.2017) International Chamber of Commerce – Sri Lanka Deposits 16,987 Commercial Bank of Ceylon PLC Annual Report 2017 153
  155. Governance and Risk Management GRI 102-15 MANAGING RISK : AN OVERVIEW Managing risk The risks that the Bank is exposed to can broadly be classified into internal risks which are within the control of the Bank and external risks which are beyond the control of the Bank, both of which are managed through a robust risk management framework. In addition, certain recent global mega trends have emerged with potential to disrupt conventional business models. Banks will not be exempt from such disruption. These emerging risks and uncertainties require strategic responses. to be different, execution gaps in internal processes etc., while external factors may include adverse movements in the overall economic or market conditions, political instability, changes in fiscal and monetary policies of the Government, regulatory developments and growing stakeholder pressures. Banks are susceptible to these external developments since they could impact customer spending patterns, demand for loans, prepayment frequency, funding mix, macro-economic variables etc., all leading to erratic fluctuations in results of operations, financial position and cash flows. Conventional risks Internal and external risks that the Bank is exposed to include conventional risks such as credit, market, operational, reputational and legal. Changes in the overall risk profile of the Bank may occur due to changes in these internal and external factors. Internal factors may include lapses in implementing the risk management framework, assumptions about macro-economic variables turning out A detailed discussion of conventional risks is pages 372 to 417 of this Report. given on Emerging risks and uncertainties In addition to the conventional risks referred to above, banks (similar to players in many other industries) are now beset with certain emerging risks and uncertainties too, arising from the unprecedented pace of developments in information and communication technology, digitalisation, exponential technologies, demographic changes, unorthodox competition and the like. These have made the operating environment even more volatile and unpredictable to financial services institutions, resulting in some of the long standing assumptions about markets, competition and even business fundamentals to be less valid today. The Bank has identified these emerging risks and uncertainties. Being aware of their potentially disruptive nature, the Bank is following up on them with a high degree of enthusiasm. Accordingly, the Bank is aligning its strategies with these developments by leveraging the existing database through analytics. This allows the Bank to better understand the customer and deliver on their expectations while achieving execution excellence in internal processes and thereby reducing costs of operations. The Bank firmly believes that these strategies will help it to differentiate its offering and convert them into opportunities for future growth. A summary of emerging risks and uncertainties and risk mitigation strategies of the Bank is given below: Emerging risks and uncertainties Risk/uncertainty Figure – 30 Risk mitigation Changing customer behaviour: The need for financial services and how such services are availed of are changing rapidly. Customer expectations are high as is the demand for a superior customer experience. The expectations of millennials are now defined by the level of service they receive from innovative tech giants. The Bank is cognisant of these demographic changes and is developing its offering to satisfy the user experience that customers, millennials in particular, are demanding. Understanding the customer better, simplifying the customer onboarding process, providing a contextual banking experience with real time information, and innovative new products are some of these initiatives. Talent recruitment and retention: With their values, beliefs, expectations and priorities focused on experiences rather than achievements, millennials no longer find the shine in a career in financial services industry. This coupled with potential stagnation in hierarchical structures, banks are finding it difficult to attract and retain new talent for growth and succession. Some of the initiatives in this regard include conducting career guidance programmes and offering internship programmes for advanced level students, appreciating the educational/professional qualifications of employees, and actively promoting staff to enrol and obtain such educational/ professional qualifications. Digitalisation: Banks continue to invest substantial resources in their efforts to digitalise their operations to provide customers with an enhanced experience and achieve execution excellence. Yet, most banks fail to achieve desired levels of integration due to legacy issues. 154 Commercial Bank of Ceylon PLC Annual Report 2017 Expanding the use of technology and mobile platforms is a must to optimise user experience. With integrated thinking permeating across the organisation, the Bank is making a conscious effort to integrate its offering in all respects – be it software systems, information, customer service standards, channel optimisation, marketing communication, single client view or regulatory reporting.
  156. Governance and Risk Management Managing Risk : An Overview Risk/uncertainty Risk mitigation Cyber threat: As reliance on digital technologies is increasing day by day, cyber attacks on financial institutions are also increasing in frequency and intensity. Common incidents include phishing, ransomware, distributed denial of service, data breaches and payment system hacking. With due focus and attention on information security, the Bank has made significant investments in systems and processes to protect customer databases and ICT infrastructure from cyber attacks. At the same time, the Bank is leveraging the capabilities of its technology partners to enhance information and cyber security. Raising awareness among employees and customers too is an important step in this regard. Unorthodox competition: Innovative fintechs and telcos are responding to increasing customer expectations for speedier, cost effective and contextual digital banking services, posing a challenge to the conventional business models of banks. Given the strengths of its capital base, customer relationships, insights from the databases and lower cost of funds, the Bank is in a strong position to overcome any such challenges. At the same time, depending on mutuality of benefits, the Bank may explore avenues to integrate new technology offerings, strategically collaborating or entering into partnerships with such competition. Financial disintermediation: Growth in capital markets and electronic exchanges and other developments such as the Internet, crowd funding, fintechs, cryptocurrencies, insurance companies, and auto makers are challenging the financial intermediation role of banks in the spheres such as lending and payment services. The Bank will expand the use of technology and mobile platforms to offer lowcost solutions to customers that are simple to access and easy to use. Anybody can be a stakeholder: The proliferation of the Internet and social media has shifted the communicating power to individuals and communities, making it easier than ever before for anyone to voice their opinion. As a result, anybody can be a stakeholder today and exercise significant influence over the Bank, with potential to damage reputation. These developments have made the operating environment very complex and dynamic and risk management very challenging. Nevertheless, the effective management of these risks and uncertainties is a sine qua non to the execution of the Bank’s strategy, creating sustainable value for all its stakeholders and making the Bank future ready. Hence, issues relating to risk management are at an all time high in the agenda at all Board and Management Committee meetings of the Bank. The Bank has a Board-approved Communication Policy that promotes open and honest communication between the Bank and its various stakeholders, both internal and external. It ensures the flow of accurate, timely and relevant information. In addition, the Bank also has a formal Customer Complaints Handling Policy. The Bank is actively present in all mainstream social media. Risk management framework Risk management is no longer a compliance issue. Hence, as an integral part of the strategy design and execution, the Bank has developed an effective Risk Management Framework (RMF) based on the Three Lines of Defence model. RMF takes into account plausible risks and uncertainties the Bank is exposed to and is underpinned by rigorous organisational structures, systems, processes, procedures and practices. The Three Lines of Defence model, which is the international standard, enables unique perspectives and specific skills for managing risk. RMF guides the Bank in its day-to-day operations. Commercial Bank of Ceylon PLC Annual Report 2017 155
  157. Governance and Risk Management Managing Risk : An Overview Three lines of defence Figure – 31 line defence line defence Business lines/Corporate functions yy Owns and manages associated risks yy Evaluates risk using informed judgment yy Ensures that risks accepted are within the Bank’s risk appetite and risk management policies yy Comprises a robust system of internal controls and an organisation culture of risk awareness which is nurtured with regular training Risk management and control yy Independently monitors effective implementation of risk management framework yy Facilitates high levels of risk awareness throughout the organisation and implementation of risk management framework yy Maintains a sound risk management policy framework line defence Assurance yy Comprises internal audit, external audit and regulatory reviews providing independent assurance to the Board over the first and second lines of defence yy Facilitates high standards of governance and control systems yy Carries out timely reporting of findings to Management and Board Audit Committee yy Carries out measurement, monitoring and reporting to Management and Board Integrated Risk Management Committee yy Objectively challenges first line of defence Line Management/Business Units Risk/Compliance Departments Inspection/Audit The components of the Bank’s RMF include risk governance, well-defined risk capacity, appetite and tolerance levels, risk control selfassessment, infrastructure, and risk culture. Risk management framework Figure – 32 Risk governance An independent, accountable governance structure with adequate segregation of duties for the oversight and management of Group-wide risks Capacity, appetite and tolerance Capacity is the maximum amount of risk the Bank can assume given the resources at its disposal. Appetite is the types and amounts of risk that the Bank is willing to assume to achieve the strategic goals while tolerance is the types and amounts of risk the Bank is prepared to tolerate. Risk Control Self-Assessment (RCSA) This is the process of identifying, assessing, measuring and recording potential risks and related controls to monitor, mitigate and manage risks within the Bank’s risk appetite and tolerance. Infrastructure Encompasses both physical and human resources including tools, databases, policies and procedures, and competencies etc. that aid effective risk management. Risk culture Starting with the “tone at the top”, this encompasses values, beliefs, knowledge, attitudes and understanding of the employees about risk. RMF is reviewed at least annually or more frequently if the circumstances make it necessary, taking into account changes in the regulatory and operating environments. 156 Commercial Bank of Ceylon PLC Annual Report 2017
  158. Governance and Risk Management Managing Risk : An Overview Risk governance Risk governance is essentially the application of the principles of good governance to the identification, assessment, treatment, monitoring, reviewing and reporting of risks. It comprises the organisational structure, culture, processes and best practice by which authority is exercised and decisions are made and implemented. It facilitates oversight of and accountability for risk at all levels and across all risk types, enabling a disciplined approach to managing risk. The organisation of the Bank’s risk governance in terms of the Board of Directors, Board committees, executive functions and executive committees is given in Figure 33 below. Given the highly specialised nature, decisionmaking on risk management is centralised to a greater extent in several risk management committees. Board of Directors Board subcommittees The overall responsibility of understanding the risks assumed by the Bank as well as the Group and ensuring that they are appropriately managed is vested with the Board of Directors. The Board discharges this responsibility by exercising its oversight on establishing an integrated risk management framework, facilitating the development of policies and procedures relating to risk in line with the Bank’s strategy, determining the overall risk appetite, approving the capital plan, creating risk awareness and monitoring the risk profile against the risk appetite on an ongoing basis. Apart from the Bank, the Board of Directors gives more emphasis to the three financial services subsidiaries of the Group, Serendib Finance Limited, Commercial Bank of Maldives Limited and Commex Sri Lanka S.R.L. Italy. The Board is assisted in its oversight of risk by three Board subcommittees as detailed below. The Board has appointed three Board subcommittees with Board-approved terms of reference for assisting it in discharging its oversight responsibility for risk management. They are: Risk governance framework yy Board Audit Committee yy Board Integrated Risk Management Committee yy Board Credit Committee Details relating to composition, terms of reference, authority, meetings held and attendance etc., of each of these committees are given in the section on “How We Govern” pages 124 to 128 and 133. on Figure – 33 Board of Directors Managing Director/CEO Board Subcommittees Executive Functions Executive Committees Board Integrated Risk Management Committee (BIRMC) Chief Risk Officer (CRO) Executive Integrated Risk Management Committee (EIRMC) Board Credit Committee (BCC) Market Risk Asset and Liability Committee (ALCO) Credit Risk Board Audit Committee (BAC) Credit Policy Committee (CPC) ICAAP Credit Risk Review Operational Risk Information Technology Risk Social and Environmental Risk Executive Committee on Monitoring NPAs (ECMN) Business Continuity Management Steering Committee (BCMSC) Information Security Council (ISC) Treasury Middle Office Commercial Bank of Ceylon PLC Annual Report 2017 157
  159. Governance and Risk Management Managing Risk : An Overview Executive committees Executive management executes the approved strategies and plans in accordance with the Board’s mandate on risk taking. Aided by a number of committees (listed below) on specific aspects of risk, these efforts are spearheaded by the Executive Integrated Risk Management Committee. EIRMC co-ordinates communication with the BIRMC and ensures that risk is managed within the defined risk appetite. Details relating to composition of each of these committees are given in the section on “How page 130. We Govern” on yy Asset and Liability Committee Risk appetite Aspect Table – 25 Measure Credit risk – Asset quality downgrade Gross NPA ratio Operational risk Operational loss tolerance limit (as a % of last three years average gross income) Foreign exchange Exchange rate shock of 100 bps. risk Liquidity risk Statutory liquid asset ratio to be more than Interest rate risk Repricing gaps up to one year For one month bucket Beyond one month bucket yy Credit Policy Committee Risk Appetite 2017 Risk Appetite 2016 4% – 5% 4% – 5% √ Performance within risk appetite 3% – 5% 3% – 5% √ Maximum of Rs. 200 Mn. Maximum of Rs. 150 Mn. √ 22% 22% √ <2.5 times <1.5 times – 1.5 times √ √ yy Executive Committee on Monitoring Non-Performing Advances yy Business Continuity Management Steering Committee yy Information Security Council Integrated Risk Management Department, provides the risk perspective for these committees to carry out independent risk evaluations and share their findings with the Line Managers and Senior Management to ensure effective communication of material issues and initiate deliberations and necessary action. Risk appetite Risk appetite is the types of risk and the aggregate amount of risk that the Bank is prepared to be exposed to at any given point in time. Taking into account the regulatory requirements, capital, funding and liquidity position, strategic objectives and the risk management framework, the Bank has put in place a Risk Appetite Statement which clearly defines the Bank’s risk appetite and the strategic focus. Risk appetite of the Bank for 2017 and 2016 are given on Table 25. 158 Risk profile Risk profile is the actual risk exposures of the Bank across all the risk categories. Aided by a rigorous risk management framework and keeping in mind that it can change under stressed economic conditions, the Bank monitors the risk profile on an ongoing basis to ensure that it is kept within the risk appetite of the Bank. The Bank’s risk profile is characterised by a portfolio of assets and liabilities diversified in terms of geographies, sectors, products and tenors. Its strong capital adequacy and liquidity position define the capacity to assume risk. Stress testing As an integral part of the capital, funding and liquidity planning process, the Bank conducts stress tests of its lending portfolio, deposit base and market risk exposures for severe but plausible conditions. Stress scenarios themselves are periodically reviewed and modified to take into account the volatilities in the economic and financial market conditions. Stress testing enables the Bank to assess the potential impact on its income, capital and liquidity. The Bank’s stress testing framework encompasses a multitude of risks to ascertain resilience levels proactively and enabling the Bank to formulate strategies to overcome plausible threats. Credit Risk being the more prominent risk exposure of a bank, risk associated with high concentration levels to a business segment or a few counterparts could stress income sources due to adverse market movements. In addition, the risk of fall in value of collaterals could take away the buffer in absorbing losses arising out of defaults. The above risks and the downgrading of asset quality in general are considered major stressors that a bank Commercial Bank of Ceylon PLC Annual Report 2017 needs to withstand and such parameters, though not limited to same, are being tested with varying degrees of risk to ascertain the ability of the Bank to meet the negative impacts associated with such events. During the year under review, none of the identified credit risk-related stress factors reached a high level of risk (an impact that could result in capital adequacy ratio falling below the threshold level of 11.75% in 2017). Bank-specific market risk stressors mainly revolve around foreign exchange (FX) rate movements and interest rate movements inherent in the balance sheet structure with the changing dynamics of the market rates. Liquidity stressors are given more prominence under different scenarios stressing substantially on the cash inflows and outflows through severe demand for liquidity. During 2017, none of these stress scenarios also resulted in a high level of risk. Operational risk scenarios are more or less idiosyncratic in nature. Developed by the Bank, such scenarios run across different risk dimensions such as credit, market and operational pillars. The aggregated results of such stresses indicated manageable levels of risk where the high risk levels were never breached. Thus the Bank demonstrated overall high resilience under various stress levels during the year under review. For more details on capital planning, please refer the Section on Capital Management on pages 54 to 72. Further details on the risk management infrastructure, types of risk, risk management framework and risk mitigation measures are given in Risk Management Report on pages 372 to 417.
  160. Financial Reports Notes to the Financial Statements Financial Reports The Financial Statements together with accounting policies , and accompanying notes provide a true and fair view of our results of operations, financial position, changes in equity, and cash flows as opined in the Auditors’ Report. 161 162 163 164 165 166 167 168 170 172 173 Financial Calender – 2017 Independent Auditors’ Report Financial Statements Highlights – Bank Financial Statements – Table of Content 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 The Financial Statements are in compliance with all applicable accounting standards and are free from material misstatement. Our Auditors have expressed their unqualified opinion on these Financial Statements, as shown in their report to the shareholders. Commercial Bank of Ceylon PLC Annual Report 2017 159
  161. Financial Reports 160 Notes to the Financial Statements Commercial Bank of Ceylon PLC Annual Report 2017
  162. Financial Reports FINANCIAL CALENDAR – 2017 Dividend Calendar 2017 2018 On April 11, 2017 On April 9, 2018 On November 20, 2017 On February 20, 2018 In the second half 2018 On March 28, 2018 In March 2019 On April 9, 2018 In April 2019 2017 2018 On February 23, 2018 In February 2019 On March 28, 2018 In March 2019 Final dividend for the previous year paid/payable Interim dividends for the year paid/payable Final dividend for the year to be proposed Final dividend for the year to be paid Annual General Meeting (AGM) Calendar Annual Report and Accounts for the year signed/to be signed Annual General Meeting to be held 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) 2017 Submitted on May 15, 2017 May 15, 2018 August 14, 2017 August 15, 2018 November 13, 2017 November 15, 2018 February 23, 2018 February 28, 2019 For the three months ended/ending March 31, (unaudited) For the six months ended/ending June 30, (audited) For the nine months ended/ending September 30, (unaudited) 2018 To be submitted on or before For the year ended/ending December 31, (audited) Interim Financial Statements Calendar – Publication in the Newspapers (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) 2017 Published on/to be published on or before For the three months ended/ending March 31, (unaudited) For the six months ended/ending June 30, (audited) For the nine months ended/ending September 30, (unaudited) For the year ended/ending December 31, (audited) 2018 To be published on or before English Sinhala Tamil In all three languages May 19, 2017 May 27, 2017 May 27, 2017 May 31, 2018 August 18, 2017 August 25, 2017 August 28, 2017 August 31, 2018 November 17, 2017 November 24, 2017 November 25, 2017 November 30, 2018 March 31, 2018 March 31, 2018 March 31, 2018 March 31, 2019 Commercial Bank of Ceylon PLC Annual Report 2017 161
  163. Financial Reports INDEPENDENT AUDITORS ’ REPORT KPMG (Chartered Accountants) 32A, Sir Mohamed Macan Markar Mawatha, P. O. Box 186, Colombo 00300, Sri Lanka. Tel Fax Internet : : : : : +94 - 11 542 6426 +94 - 11 244 5872 +94 - 11 244 6058 +94 - 11 254 1249 www.kpmg.com/lk To the Shareholders of COMMERCIAL BANK OF CEYLON PLC Report on the Financial Statements An audit involves performing procedures to We have audited the accompanying Financial obtain audit evidence about the amounts and disclosures in the Financial Statements. Statements of Commercial Bank of Ceylon The procedures selected depend on the PLC, (“the Company”), and the Consolidated Financial Statements of the Company and its auditors’ judgment, including the assessment of the risks of material misstatement of the subsidiaries (“Group”), which comprise the Financial Statements, whether due to fraud statement of financial position as at or error. In making those risk assessments, December 31, 2017, and the income the auditor considers internal control relevant statement, statements of profit or loss and to the entity’s preparation of the Financial other comprehensive income, changes in Statements that give a true and fair view in equity and cash flows for the year then order to design audit procedures that are ended, and notes, comprising a summary appropriate in the circumstances, but not of significant accounting policies and other for the purpose of expressing an opinion explanatory information set out on pages on the effectiveness of the entity’s internal 165 to 332 of the Annual Report. control. An audit also includes evaluating the appropriateness of accounting policies Board’s Responsibility for the used and the reasonableness of accounting Financial Statements estimates made by Board, as well as The Board of Directors (“Board”) is evaluating the overall presentation of the responsible for the preparation of these Financial Statements. Financial Statements that give a true and fair view in accordance with Sri Lanka We believe that the audit evidence we have Accounting Standards, and for such internal obtained is sufficient and appropriate to control as Board determines is necessary provide a basis for our audit opinion. to enable the preparation of Financial Statements that are free from material Opinion misstatement, whether due to fraud or error. In our opinion, the Consolidated Financial Statements give a true and fair view of Auditors’ Responsibility the financial position of the Group as at Our responsibility is to express an opinion December 31, 2017, and of its financial on these Financial Statements based on our performance and cash flows for the year audit. We conducted our audit in accordance then ended in accordance with Sri Lanka with Sri Lanka Auditing Standards. Those Accounting Standards. standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the Financial Statements are free from material misstatement. KPMG, a Sri Lankan partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. 162 Commercial Bank of Ceylon PLC Annual Report 2017 Report on Other Legal and Regulatory Requirements As required by Section 163 (2) of the Companies Act No. 07 of 2007, we state the following: (a) The basis of opinion and scope and limitations of the audit are as stated above (b) In our opinion: yy 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 Company, yy The Financial Statements of the Company give a true and fair view of its financial position as at December 31, 2017, and of its financial performance and cash flows for the year then ended in accordance with Sri Lanka Accounting Standards. yy The Financial Statements of the Company, and the Group comply with the requirements of Sections 151 and 153 of the Companies Act No. 07 of 2007. Chartered Accountants Colombo February 23, 2018 M.R . Mihular F C A T.J.S. Rajakarier FCA Ms. S.M.B. Jayasekara ACA G.A.U. Karunaratne FCA R.H. Rajan ACA P.Y.S. Perera FCA W.W.J.C. Perera FCA W.K.D.C Abeyrathne FCA R.M.D.B. Rajapakse FCA C.P. Jayatilake FCA Ms. S. Joseph FCA S.T.D.L. Perera FCA Ms. B.K.D.T.N. Rodrigo FCA Principals -S.R.I. Perera FCMA(UK), LLB, Attorney-at-Law, H.S. Goonewardene ACA Ms. C.T.K.N. Perera ACA
  164. Financial Reports FINANCIAL STATEMENTS HIGHLIGHTS – BANK Gross income Net interest income (NII) Rs. Bn. Rs. Bn. Net fee and commission income Rs. Bn. 125 40 10 100 32 8 75 24 6 50 24.10% 25 2017: Rs. 115.594 Bn. 8 2016: Rs. 93.143 Bn. 0 0 2016 2017 16 18.89% 4 22.62% 2017: Rs. 39.023 Bn. 2 2017: Rs. 8.602 Bn. 2016: Rs. 32.824 Bn. 2016 2016: Rs. 7.016 Bn. 0 2017 2016 2017 Profit before tax Profit after tax Basic earnings per share Rs. Bn. Rs. Bn. Rs. 25 20 20 20 16 16 15 12 12 10 5 15.62% 8 14.25% 8 9.17% 2017: Rs. 23.183 Bn. 4 2017: Rs. 16.581 Bn. 4 2017: Rs. 17.26 2016: Rs. 20.051 Bn. 0 2016 2017 Total assets 0 2016: Rs. 14.513 Bn. 2016 2016: Rs. 15.81 0 2017 2016 2017 Loans and receivables to other customers Due to other customers Deposits from customers Rs. Bn. Rs. Bn. 1,250 750 1,000 1,000 600 800 750 450 600 Rs. Bn. 500 12.96% 300 19.71% 400 14.95% 250 2017: Rs. 1,143.374 Bn. 150 2017: Rs. 737.447 Bn. 200 2017: Rs. 850.128 Bn. 0 2016: Rs. 1,012.201 Bn. 2016 2017 0 2016: Rs. 616.018 Bn. 2016 2017 0 2016: Rs. 739.563 Bn. 2016 2017 Commercial Bank of Ceylon PLC Annual Report 2017 163
  165. Financial Reports FINANCIAL STATEMENTS – TABLE OF CONTENT Page No. Primary Financial Statements Income Statement 165 Page No. 29. Placements with Banks 221 30. Derivative Financial Assets 221 31. Other Financial Instruments – Held for Trading 222 Statement of Profit or Loss and Other Comprehensive Income 166 32. Loans and Receivables to Banks 225 Statement of Financial Position 167 33. Loans and Receivables to Other Customers 226 Statement of Changes in Equity – Group 168 34. Financial Investments – Available for Sale 232 Statement of Changes in Equity – Bank 170 35. Financial Investments – Held to Maturity 238 Statement of Cash Flows 172 36. Financial Investments – Loans and Receivables 239 37. Investments in Subsidiaries 241 38. Investments in Associates 243 39. Property, Plant and Equipment 245 40. Intangible Assets 258 41. Leasehold Property 260 42. Other Assets 261 Notes to the Financial Statements – General 1. Reporting Entity 173 2. Basis of Accounting 174 3. Financial Risk Management 177 4. Fair Value Measurement 180 5. Changes in Accounting Policies 181 6. Significant Accounting Policies – General 182 7. Significant Accounting Policies – Recognition of Assets and Liabilities Notes to the Financial Statements – Statement of Financial Position: Liabilities and Equity 183 43. Due to Banks 261 44. Derivative Financial Liabilities 262 45. Due to Other Customers/Deposits from Customers 263 46. Other Borrowings 265 47. Current Tax Liabilities 265 48. Deferred Tax Assets and Liabilities 265 49. Other Provisions 267 50. Other Liabilities 268 51. Due to Subsidiaries 276 52. Subordinated Liabilities 276 53. Stated Capital 278 54. Share-based Payment 280 55. Statutory Reserves 282 56. Retained Earnings 282 57. Other Reserves 283 58. Non-Controlling Interest 285 8. Significant Accounting Policies – Recognition of Income and Expense 9. Significant Accounting Policies – Income Tax Expense 10. Significant Accounting Policies – Statement of Cash Flows 11. New Accounting Standards Issued But Not Yet Effective 191 192 192 193 Notes to the Financial Statements – Income Statement 12. Gross Income 195 13. Net Interest Income 195 14. Net Fee and Commission Income 198 15. Net Gains/(Losses) from Trading 199 16. Net Gains/(Losses) from Financial Investments 199 17. 200 Other Income (Net) 18. Impairment Charges for Loans and Other Losses 201 19. Personnel Expenses 203 20. Depreciation and Amortisation Notes to the Financial Statements – Other Disclosures 203 21. Other Operating Expenses 205 59. Contingent Liabilities and Commitments 285 22. Income Tax Expense 205 60. Net Assets Value per Ordinary Share 287 23. Earnings Per Share (EPS) 207 61. Litigation Against the Bank 288 24. Dividends 209 62. Maturity Analysis 289 63. Operating Segments 291 Notes to the Financial Statements – Statement of Financial Position: Assets 64. Related Party Disclosures 294 65. Non-Cash Items Included in Profit Before Tax 301 25. Classification of Financial Assets and Financial Liabilities 66. Change in Operating Assets 301 210 67. Change in Operating Liabilities 302 26. Fair Value Measurement 214 68. Operating Leases 302 27. Cash and Cash Equivalents 219 69. Financial Risk Review 303 28. Balances with Central Banks 219 70. Events After the Reporting Period 332 164 Commercial Bank of Ceylon PLC Annual Report 2017
  166. Financial Reports INCOME STATEMENT GROUP Note Page No . 2017 Rs. ’000 For the year ended December 31, Gross income BANK  2016 Rs. ’000 Change % 2017 Rs. ’000 2016 Rs. ’000 Change %  12 195 116,841,755 93,725,535 24.66 115,593,948 93,142,610 24.10 Interest income 13.1 196 104,049,102 81,314,607 27.96 103,034,386 80,738,176 27.62 Less: Interest expense 13.2 196 64,481,804 48,186,331 33.82 64,010,991 47,914,573 33.59 Net interest income 13 195 39,567,298 33,128,276 19.44 39,023,395 32,823,603 18.89 Fee and commission income 14.1 198 10,510,800 8,230,131 27.71 10,169,211 8,143,041 24.88 Less: Fee and commission expense 14.2 199 1,586,334 1,140,954 39.04 1,566,851 1,127,536 38.96 Net fee and commission income 14 198 8,924,466 7,089,177 25.89 8,602,360 7,015,505 22.62 Net gains/(losses) from trading 15 199 233,956 (1,466,711) 115.95 233,956 (1,466,711) 115.95 Net gains/(losses) from financial instruments designated at fair value through profit or loss – – – – – – Net gains/(losses) from financial investments 16 199 129,210 110,759 129,030 110,701 Other income (net) 17 200 1,918,687 5,536,749 (65.35) 2,027,365 5,617,403 (63.91) 50,773,617 44,398,250 14.36 50,016,106 44,100,501 13.41 Total operating income Less: Impairment charges for loans and other losses 18 201 Net operating income 16.66 16.56 2,225,914 1,583,326 40.58 1,914,241 1,529,814 25.13 48,547,703 42,814,924 13.39 48,101,865 42,570,687 12.99 Less: Expenses Personnel expenses 19 203 11,338,517 10,913,088 3.90 11,268,016 10,794,307 4.39 Depreciation and amortisation 20 203 1,416,927 1,268,330 11.72 1,307,804 1,189,493 9.95 Other operating expenses 21 205 7,618,993 6,809,435 11.89 7,461,964 6,832,345 9.22 Total operating expenses 20,374,437 18,990,853 7.29 20,037,784 18,816,145 6.49 Operating profit before Value Added Tax (VAT) and Nation Building Tax (NBT) 28,173,266 23,824,071 18.26 28,064,081 23,754,542 18.14 4,896,620 3,715,941 31.77 4,881,137 3,703,359 31.80 23,276,646 20,108,130 15.76 23,182,944 20,051,183 15.62 Less: Value Added Tax (VAT) on financial services and Nation Building Tax (NBT) Operating profit after Value Added Tax (VAT) and Nation Building Tax (NBT) Share of profits of associates, net of tax 38.1 244 Profit before tax Less: Income tax expense 22 205 Profit for the year 3,678 6,454 23,280,324 20,114,584 15.74 23,182,944 20,051,183 15.62 6,653,817 5,648,160 17.81 6,601,700 5,538,672 19.19 16,626,507 14,466,424 14.93 16,581,244 14,512,511 14.25 16,605,963 14,510,333 14.44 16,581,244 14,512,511 14.25 (43.01) – – – Profit attributable to: Equity holders of the Bank Non-controlling interest 20,544 Profit for the year (43,909) 146.79 – – – 16,626,507 14,466,424 14.93 16,581,244 14,512,511 14.25 Earnings per share Basic earnings per ordinary share (Rs.) 23.1 208 17.28 15.80 9.37 17.26 15.81 9.17 Diluted earnings per ordinary share (Rs.) 23.2 208 17.27 15.77 9.51 17.24 15.77 9.32 The Notes appearing on pages 173 to 332 form an integral part of these Financial Statements. Commercial Bank of Ceylon PLC Annual Report 2017 165
  167. Financial Reports STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME GROUP For the year ended December 31 , Note Page No. Profit for the year BANK  2017 Rs. ’000 2016 Rs. ’000 Change % 2017 Rs. ’000 2016 Rs. ’000 Change %  16,626,507 14,466,424 14.93 16,581,244 14,512,511 14.25 Other comprehensive income, net of tax Items that will never be reclassified to profit or loss Net actuarial gains/(losses) on defined benefit plans (536,508) 140,826 (480.97) (529,902) 139,763 (479.14) Gains/(losses) on remeasurement of defined benefit liability/asset (718,572) 164,225 (537.55) (709,396) 162,748 (535.89) Less: Deferred tax charge/(reversal) on actuarial gains/(losses) (182,064) 23,399 (878.08) (179,494) 22,985 (880.92) Net change in revaluation surplus 1,636,524 – – 1,396,663 – – Changes in revaluation surplus/(deficit) 3,845,981 – – 3,542,214 – – Less: Deferred tax charge/(reversal) on revaluation surplus 2,209,457 – – 2,145,551 – – Items that are or may be reclassified to profit or loss Net gains/(losses) arising from translating the Financial Statements of the foreign operations 57.4 284 Net fair value gains/(losses) on remeasuring financial investments – available for sale 57.3 284 Government securities Fair value gains/(losses) that arose during the year, net of tax Fair value gains/(losses) realised to the Income Statement on disposal, net of tax Fair value gains/(losses) recycled to the Income Statement on reclassification, net of tax Equity securities Fair value gains/(losses) that arose during the year, net of tax Fair value gains/(losses) realised and recycled to the Income Statement on disposal Cash flow hedges – effective portion of changes in fair value, net of tax (503,140) 57.6 Other comprehensive income for the year, net of tax Total comprehensive income for the year 285 (214.72) (525,093) 414,578 (226.66) 5,501,319 (3,253,429) 269.09 5,501,302 (3,253,429) 269.09 5,407,140 (3,263,598) 265.68 5,407,123 (3,263,598) 265.68 5,434,372 (3,479,504) 256.18 5,434,355 (3,479,504) 256.18 (65,413) (27,425) 38,181 243,331 94,179 10,169 94,179 10,169 – Share of other comprehensive income of associates, net of tax 438,565 (3,212) 3,526 (65,413) (27,425) 38,181 243,331 826.14 94,179 10,169 826.14 826.14 94,179 10,169 826.14 (138.52) (84.31) – – – – 3,807 (7.38) – (3,212) – (138.52) (84.31) – – – – – – 6,098,509 (2,670,231) 328.39 5,839,758 (2,699,088) 316.36 22,725,016 11,796,193 92.65 22,421,002 11,813,423 89.79 22,682,515 11,829,508 91.75 22,421,002 11,813,423 89.79 Attributable to: Equity holders of the Bank Non-controlling interest Total comprehensive income for the year 166 Commercial Bank of Ceylon PLC Annual Report 2017 42,501 22,725,016 (33,315) 11,796,193 227.57 92.65 – 22,421,002 – 11,813,423 – 89.79
  168. Financial Reports 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 Other financial instruments – Held for trading Loans and receivables to banks Loans and receivables to other customers Financial investments – Available for sale Financial investments – Held to maturity Financial investments – Loans and receivables Investments in subsidiaries Investments in associates Property, plant and equipment Intangible assets Leasehold property Deferred tax assets Other assets Total assets Liabilities Due to banks Derivative financial liabilities Securities sold under repurchase agreements Other financial liabilities – Held for trading Due to other customers/deposits from customers Other borrowings Current tax liabilities Deferred tax liabilities Other provisions 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  2017 Rs. ’000 2016 Rs. ’000 34,673,424 45,546,349 17,633,269 – 2,334,536 4,410,913 640,512 742,444,130 154,913,643 69,365,796 48,712,477 – 32,924,227 43,935,258 11,718,499 – 1,052,829 4,987,798 624,458 620,129,488 160,092,522 63,626,598 51,824,026 – 5.31 3.67 50.47 – 121.74 (11.57) 2.57 19.72 (3.23) 9.02 (6.00) – 0.90 41.03 10.47 (1.37) – 5.34 13.21 Change % 2017 Rs. ’000 2016 Rs. ’000 Change %  33,224,619 44,801,446 17,633,269 – 2,334,536 4,410,913 640,512 737,446,567 154,714,132 63,562,752 48,712,477 3,065,935 30,193,589 43,873,205 11,718,499 – 1,052,829 4,987,798 624,458 616,018,228 160,023,471 60,981,298 51,824,026 2,435,392 10.04 2.12 50.47 – 121.74 (11.57) 2.57 19.71 (3.32) 4.23 (6.00) 25.89 44,331 44,331 14,634,710 10,307,825 776,810 640,645 72,594 73,536 – 963,935 17,298,162 16,438,166 1,143,373,765 1,012,201,231 – 41.98 21.25 (1.28) – 5.23 12.96 Note Page No. 27 28 29 219 219 221 30 31 32 33 34 35 36 37 221 222 225 226 232 238 239 241 38 39 40 41 48 42 243 245 258 260 265 261 109,844 108,859 16,317,044 11,569,666 1,251,226 1,132,669 104,516 105,968 – 668,150 17,362,977 16,482,559 1,155,820,656 1,020,983,574 43 44 261 262 45 46 47 48 49 50 51 52 263 265 265 265 267 268 276 276 60,244,892 3,678,494 49,532,385 – 857,269,981 23,786,094 4,202,850 3,565,215 – 19,508,115 – 25,165,924 1,046,953,950 53 55 56 57 278 282 282 283 58 285 59 285 565,277,821 498,568,500 13.38 564,794,885 498,304,527 13.34 60 287 108.44 88.68 22.28 107.54 87.97 22.25 71,098,391 1,515,035 69,628,961 – 743,310,613 9,270,154 3,464,682 – 1,874 18,028,902 – 24,849,539 941,168,151 37,143,541 24,978,003 6,492,552 5,647,993 5,086,609 4,553,778 59,272,098 43,812,536 107,994,800 78,992,310 871,906 823,113 108,866,706 79,815,423 1,155,820,656 1,020,983,574 (15.27) 142.80 (28.86) – 15.33 156.59 21.31 – – 8.20 – 1.27 11.24 48.71 14.95 11.70 35.29 36.72 5.93 36.40 13.21 57,120,991 3,678,494 49,676,767 – 850,127,511 23,786,094 4,143,911 3,274,826 – 19,225,364 74,523 25,165,924 1,036,274,405 67,608,811 1,515,035 69,867,469 – 739,563,494 9,270,154 3,440,736 – 1,874 17,710,394 20,061 24,849,539 933,847,567 37,143,541 24,978,003 6,476,952 5,647,890 4,987,446 4,464,077 58,491,421 43,263,694 107,099,360 78,353,664 – – 107,099,360 78,353,664 1,143,373,765 1,012,201,231 (15.51) 142.80 (28.90) – 14.95 156.59 20.44 – – 8.55 271.48 1.27 10.97 48.71 14.68 11.72 35.20 36.69 – 36.69 12.96 The Notes appearing on pages 173 to 332 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 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, K G D D Dheerasinghe Chairman February 23, 2018 Colombo M P Jayawardena Deputy Chairman J Durairatnam Managing Director Mrs J R Gamage Company Secretary Commercial Bank of Ceylon PLC Annual Report 2017 167
  169. Financial Reports STATEMENT OF CHANGES IN EQUITY – GROUP Note Balance as at January 1, 2016 Total comprehensive income for the year 2016 Profit for the year Other comprehensive income, net of tax Net actuarial gains/(losses) on defined benefit plans Share of other comprehensive income of associates, net of tax Net fair value gains/(losses) on remeasuring financial investments – Available for sale Net gains/(losses) arising from translating the Financial Statements of foreign operations Total comprehensive income for the year 2016 Transactions with owners, recognised directly in equity, contributions and distributions to owners Issue of ordinary shares under Employee Share Option Plan Dividends to equity holders Final cash dividend for 2015 Final dividend for 2015 satisfied in the form of issue and allotment of new shares First interim dividend for 2016 Share-based payment transactions (net) Write back of unclaimed dividends Derecognition of revaluation reserve to the retained earnings Profit due to change in ownership Movement due to change in ownership Incorporation of a subsidiary with non-controlling interest Transfers during the year Total transactions with equity holders Balance as at January 1, 2017 Total comprehensive income for the year 2017 Profit for the year Other comprehensive income, net of tax Net actuarial gains/(losses) on defined benefit plans Share of other comprehensive income of associates, net of tax Net change in revaluation surplus Net fair value gains/(losses) on remeasuring financial investments – Available for sale 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 38.1 53 Page No. 244 278 The Notes appearing on pages 173 to 332 form an integral part of these Financial Statements. 168 Commercial Bank of Ceylon PLC Annual Report 2017 Statutory reserve fund Retained earnings Rs. ’000 Rs. ’000 Rs. ’000 23,254,605 4,922,367 4,467,807 – – 14,510,333 – – 144,591 – – 140,784 – – 3,807 – – – – – – 144,804 – 1,578,594 – 53 278 24 209 57.5 285 38.1 244 53 24 278 209 53 278 24 209 57.5 285 – 14,654,924 – (5,720,913) (2,630,991) – (1,753,994) – – (1,335,928) – – – – – 624 – – 5,628 – – 3,047 – – (1,188) – – – 725,626 (8,856,151) 1,723,398 725,626 (14,568,953) 24,978,003 5,647,993 4,553,778 – – – – (532,590) – – (536,116) – – – – – – – – – – – – – – – 16,605,963 3,526 – 16,073,373 10,143,872 – 415,117 – 1,606,549 – (5,955,851) – – (2,674,799) – – 1,606,549 – – – – (1,785,054) – – (2,279) – – (1,493,719) – – – – – – – – 5,262 – – (2,334) – 55 & 57 282 & 283 – – 1,578,594 – 55 & 57 282 & 283 Total comprehensive income for the year 2017 Transactions with owners, recognised directly in equity, contributions and distributions to owners Proceeds from Rights issue of ordinary shares Issue of ordinary shares under Employee Share Option Plans Dividends to equity holders Second interim dividend for 2016 Final cash dividend for 2016 Final dividend for 2016 satisfied in the form of issue and allotment of new shares Dividend paid in respect of previous years First interim dividend for 2017 Share-based payment transactions (net) Derecognition of revaluation reserve to the retained earnings Profit due to change in ownership Movement due to change in ownership Revaluation gain on disposal of freehold land and building Transfers during the year Total transactions with equity holders Balance as at December 31, 2017 Stated capital – – 36,940 844,559 (9,624,559) 12,165,538 844,559 (15,540,542) 37,143,541 6,492,552 5,086,609
  170. Financial Reports Statement of Changes in Equity – Group Other reserves Revaluation reserve Availablefor-sale reserve Foreign currency translation reserve Hedging reserve General reserve Employee share option reserve Shareholders’ funds Non-controlling interest Total equity Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 35,359,478 223,330 70,963,639 50,208 71,013,847 6,258,939 – – (3,955,376) – (3,253,429) 432,489 – 428,013 – – – – 14,510,333 (43,909) 14,466,424 – – – (2,680,825) 10,594 (2,670,231) – – – – – – 140,784 – – – – – – 3,807 – – – – – – – (3,253,429) – (3,253,429) (3,253,429) 428,013 – – – 428,013 428,013 – – – 11,829,508 140,826 – – 10,552 (33,315) 438,565 11,796,193 – – – – – – – – – – – (4,142,319) (3,432) (4,145,751) – – – – – – (2,630,991) (2,059) (2,633,050) – – – – – – (175,400) – – – – – – (1,335,928) – – – – – – – – – – – 624 38 – – – – – – – – – – – – 3,047 – – – – – (3,945) – – – – – (5,628) – (2,757) – – (8,385) 6,250,554 – 1,622,567 – 662 – – 3,047 3,945 805,669 – 805,669 – 8,130,525 – 8,130,525 196,952 (3,800,837) 806,220 (2,994,617) – 43,490,003 420,282 78,992,310 823,113 79,815,423 – 5,501,319 – (511,529) – (3,212) – 16,605,963 20,544 16,626,507 – 6,076,555 21,955 6,098,510 – – – – – – – – 3,526 – – – – – 1,622,567 – – – – 5,501,319 – – – (511,529) (3,212) – – (3,212) (3,212) – – 22,682,518 5,501,319 – – – 5,501,319 (511,529) – (511,529) – – – – – – – 1,622,567 196,952 – – – – (175,400) (1,337,301) – – 1,622,567 (1,373) – 860,502 – – 144,804 – (7,208,805) – 196,952 – 3,807 (3,253,429) – 196,952 144,804 42 (536,116) (392) (536,508) – 13,958 – 8,389 3,526 1,636,525 5,501,319 (503,140) – 42,499 (3,212) 22,725,017 – – – – – – 10,143,872 – – – – – – – 415,117 – – – – – – – (4,349,302) (3,690) (4,352,992) – – – – – – (2,674,799) (1,845) (2,676,644) – – – – – – – – – – – – – – – – – – (2,279) – – – – – – (1,493,719) – – – – – – – – – – – – – – – – – 5,262 (7,650) – – – – – (9,984) (31,468) – – – – – 5,472 – – – 8,780,000 – – – 8,780,000 109,535 6,319,972 6,294 6,326,266 52,270,003 529,817 107,994,800 871,906 108,866,706 – (39,118) 7,834,003 (1,707,486) 348,973 (3,212) 109,535 – – (178,505) 109,535 – – 10,143,872 415,117 (369) – (369) (178,505) – (1,476) – (2,279) (1,495,195) 109,535 – – – 5,262 9,984 – – 5,472 – – Commercial Bank of Ceylon PLC Annual Report 2017 169
  171. Financial Reports STATEMENT OF CHANGES IN EQUITY – BANK Note Page No. Balance as at January 1, 2016 Total comprehensive income for the year 2016 Profit for the year Other comprehensive income, net of tax Net actuarial gains/(losses) on defined benefit plans Net fair value gains/(losses) on remeasuring financial investments – Available for sale Net gains/(losses) arising from translating the Financial Statements of the foreign operation Total comprehensive income for the year 2016 Transactions with owners, recognised directly in equity, contributions and distributions to owners Issue of ordinary shares under Employee Share Option Plan Dividends to equity holders Final cash dividend for 2015 Final dividend for 2015 satisfied in the form of issue and allotment of new shares First interim dividend for 2016 Share-based payment transactions (net) Transfers during the year Total transactions with equity holders Balance as at January 1, 2017 53 278 Balance as at December 31, 2017 The Notes appearing on pages 173 to 332 form an integral part of these Financial Statements. 170 Commercial Bank of Ceylon PLC Annual Report 2017 Statutory reserve fund Retained earnings Rs. ’000 Rs. ’000 Rs. ’000 23,254,605 4,922,264 4,388,867 – – – – 139,763 – – 139,763 – – – – – – – (5,720,913) – (2,630,991) – (1,753,994) (1,335,928) 24 209 – – 57.5 285 – – 55 & 57 282 & 283 – 24 209 53 278 24 209 57.5 285 55 & 57 282 & 283 – 14,652,274 – – 278 – 144,804 278 53 14,512,511 1,578,594 53 Total comprehensive income for the year 2017 Profit for the year Other comprehensive income, net of tax Net actuarial gains/(losses) on defined benefit plans Net change in revaluation surplus Net fair value gains/(losses) on remeasuring financial investments – Available for sale Net gains/(losses) arising from translating the Financial Statements of the foreign operation Cash flow hedges – effective portion of changes in fair value, net of tax Total comprehensive income for the year 2017 Transactions with owners, recognised directly in equity, contributions and distributions to owners Proceeds from Rights issue of ordinary shares Issue of ordinary shares under Employee Share Option Plans Dividends to equity holders Second interim dividend for 2016 Final cash dividend for 2016 Final dividend for 2016 satisfied in the form of issue and allotment of new shares Dividend paid in respect of previous years First interim dividend for 2017 Share-based payment transactions (net) Revaluation gain on disposal of freehold land and building Transfers during the year Total transactions with equity holders Stated capital 1,578,594 – – 725,626 (8,856,151) 1,723,398 725,626 (14,577,064) 24,978,003 5,647,890 4,464,077 – – – – 16,581,244 (529,902) – – (529,902) – – – – – – – – – – – – – – 16,051,342 10,143,872 – 415,117 – 1,606,549 – (5,955,851) – – (2,674,799) – – 1,606,549 – – – – (1,785,054) – – (2,279) – – (1,493,719) – – – – – – 36,940 829,062 (9,609,062) 12,165,538 829,062 (15,527,973) 37,143,541 6,476,952 4,987,446
  172. Financial Reports Statement of Changes in Equity – Bank Other reserves Revaluation reserve Availablefor-sale reserve Foreign currency translation reserve Hedging reserve General reserve Employee share option reserve Total equity Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 35,359,478 223,330 70,340,804 5,722,859 – – – – – – (3,955,367) – (3,253,429) – (3,253,429) – (3,253,429) – – – – – – – – – – – – – – 5,722,859 – 1,396,663 – 1,396,663 – – – – – – 14,512,511 – – – (2,699,088) – – – – – – – – 414,578 – – – 414,578 414,578 – – – 11,813,423 414,578 – – – – – (4,142,319) – – – – (2,630,991) – – – – (175,400) – – – – – (1,335,928) – – – – (7,208,796) – 5,501,302 – 139,763 (3,253,429) – – – – 839,346 – (525,093) 144,804 196,952 8,130,525 – 8,130,525 196,952 (3,800,563) – 43,490,003 420,282 78,353,664 – (3,212) – 196,952 – – – – 16,581,244 – – 5,839,758 – – – – – – – – – – 1,396,663 – – – – 5,501,302 – – – (3,212) – – (3,212) – – 22,421,002 10,143,872 5,501,302 – – – – 1,396,663 424,768 5,501,302 (525,093) – (525,093) (529,902) (525,093) (3,212) – – – – – – – – – – – – – – – – – – (4,349,302) – – – – – – (2,674,799) – – – – – – – – – – – – – – – – – – (2,279) – – – – – – (1,493,719) – (31,468) – (31,468) 7,088,054 415,117 – (178,505) – – – – – – – – – – – 8,780,000 – – – 8,780,000 109,535 6,324,694 52,270,003 529,817 107,099,360 (1,707,494) 314,253 (3,212) 109,535 – 109,535 5,472 – – Commercial Bank of Ceylon PLC Annual Report 2017 171
  173. Financial Reports STATEMENT OF CASH FLOWS GROUP Note BANK   2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 23,280,324 20,114,584 23,182,944 20,051,183 2,315,139 2,754,851 1,882,763 2,588,922 For the year ended December 31, Page No. Cash flows from operating activities Profit before income tax Adjustments for: Non-cash items included in profit before tax 65 301 Change in operating assets 66 301 (126,726,469) (131,928,935) Change in operating liabilities 67 302 100,265,879 (Gains)/losses on sale of property, plant and equipment 117,122,450 17 200 18,774 (10,395) 38.1 244 (3,678) (6,454) 17 200 Interest expense on subordinated liabilities 13.2 196 Net unrealised gains/(losses) arising from translating the Financial Statements of foreign operations 57.4 284 17 200 47 265 Share of profits in associates, net of tax Dividend income from subsidiaries and associates Profit due to change in ownership Benefits paid on defined benefit plans Income tax paid Net cash from (used in) operating activities – 2,377,694 (503,140) – – 1,535,349 438,565 – (121,579,535) (126,756,110) 97,246,867 35,018 – (100,443) 2,377,694 (525,093) (5,262) 111,259,187 (1,705) – (85,579) 1,533,934 414,578 (3,047) (184,464) (110,800) (179,855) (109,329) (3,810,701) (4,014,741) (3,753,679) (3,966,831) (2,970,642) 5,894,474 (1,418,581) 4,925,203 (2,163,733) (1,501,070) (1,959,075) (1,369,729) Cash flows from investing activities Net purchase of property, plant and equipment Proceeds from sale of property, plant and equipment 58,032 Purchase of financial investments (179,751) Proceeds from sale and maturity of financial investments 3,530,785 Net purchase of intangible assets (352,329) Proceeds due to change in ownership 7,803 Net cash flow from investment in subsidiaries and associates Dividends received from investments in subsidiaries and associates – 17 4,111 200 Net cash from (used in) investing activities 904,918 32,168 (514,043) 1,628,487 (422,175) 4,294 – 5,808 (766,531) 41,408 (179,751) 3,530,785 (346,360) 7,803 (564,253) 100,443 631,000 11,958 (514,043) 1,628,487 (340,351) 4,294 (1,184,707) 85,579 (1,678,512) Cash flows from financing activities Proceeds from rights issue of ordinary shares 10,143,872 53 278 Proceeds from issue of subordinated liabilities 52 276 – Redemption of subordinated liabilities 52 276 – Dividend paid to non-controlling interest 58 285 Capital contribution from non-controlling interest of a newly incorporated subsidiary 58 285 Net proceeds from issue of ordinary voting shares 386,311 Interest paid on subordinated liabilities Dividend paid to shareholders of the Bank – 135,582 13,179,430 (987,660) (2,362,270) (1,298,062) (3,690) (3,432) – 805,669 10,143,872 386,311 – – (2,362,270) – 135,582 13,179,430 (972,660) (1,296,647) – – – – (4,349,302) (4,142,319) (4,349,302) Net cash from/(used in) financing activities 3,814,921 7,689,208 3,818,611 6,903,386 Net increase/(decrease) in cash and cash equivalents 1,749,197 12,817,151 3,031,030 10,150,077 Cash and cash equivalents as at January 1, Cash and cash equivalents as at December 31, 27 219 32,924,227 20,107,076 30,193,589 20,043,512 34,673,424 32,924,227 33,224,619 30,193,589 The Notes appearing on pages 173 to 332 form an integral part of these Financial Statements. 172 Commercial Bank of Ceylon PLC Annual Report 2017 (4,142,319)
  174. Financial Reports Notes to the Financial Statements NOTES TO THE FINANCIAL STATEMENTS 1 . Reporting Entity 1.2 Consolidated Financial Statements 1.1.Corporate information The ordinary shares of the Bank have a primary listing on the CSE. The Consolidated Financial Statements as at and for the year ended December 31, 2017, 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 Associates. The staff strength of the Bank as at December 31, 2017 was 4,982 (4,987 as at December 31, 2016). The Bank does not have an identifiable parent of its own. The Bank is the Ultimate Parent of the Group. registered office of the Bank is situated at “Commercial House”, No. 21, Sir Razik Fareed Mawatha, Colombo 01, Sri Lanka. 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. 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 Corporate information is presented in the inner back cover of this Annual Report. 1.3 principal business activities, nature of operations of the Group and ownership by the Bank in its subsidiaries and associates Group structure Commercial Bank of Ceylon PLC Local Subsidiaries Foreign Subsidiaries Commercial Development Company PLC ONEzero Company Limited Serendib Finance Limited Commex Sri Lanka S.R.L. Commercial Bank of Maldives Private Limited CBC Myanmar Microfinanace Company Limited Sri Lanka Sri Lanka Sri Lanka Italy Maldives Myanmar 2017 92.97% 2016 93.85% 2017 100% 2016 100% 2017 100% 2016 100% 2017 100% 2016 100% 2017 55% 2016 55% 2017 100% Associates 20% Commercial Insurance Brokers (Pvt) Limited Equity Investments Lanka Limited Sri Lanka Sri Lanka 2017 18.59% Subsidiaries Associates 2016 18.77% Direct holdings 2017 22.92% 2016 22.92% Indirect holdings Commercial Bank of Ceylon PLC Annual Report 2017 173
  175. Financial Reports Notes to the Financial Statements Commercial Bank of Ceylon PLC Commex Sri Lanka S .R.L. 2. Basis of Accounting The principal business activities of the Bank are providing a comprehensive range of financial services encompassing accepting deposits, personal banking, trade financing, offshore banking, resident and non-resident foreign currency operations, travel-related services, corporate and retail credit, syndicated financing, project financing, development banking, lease financing, hire purchase financing, rural credit, issuing of local and international debit and credit cards, tele-banking, 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, e-Banking services, bancassurance and Islamic banking products and services, etc. Commex Sri Lanka S.R.L. inaugurated its money transfer operation during 2016 following the grant of a Money Transfer License from the Bank of Italy. 2.1 Statement of compliance Commercial Development Company PLC (CDC) Principal business activities of CDC are property development, related ancillary services and outsourcing of staff for non-critical functions of the Bank. The principal activities include offering of an extensive range of banking and related financial services. During 2015, the Board of Directors of the Bank resolved to reduce the shareholding of CDC, (in which the Bank had a stake of 94.55%) to comply with the requirements of the Listing Rule No. 7.13 of the CSE on Minimum Public Holding. Accordingly, the Bank disposed a part of shares through the CSE and reduced the shareholding in CDC to 92.97% by December 31, 2017 (93.85% by December 31, 2016) and is in the process of taking steps to dispose the required number of shares to adhere to the requirements of the Listing Rules. CBC Myanmar Microfinanace Company Limited was incorporated in Myanmar on April 4, 2017 as a fully owned subsidiary of the Bank. CDC, holds a 20% stake of Commercial Insurance Brokers (Pvt) Limited (CIB). The Bank has a significant influence over financial and operating activities of CIB though it effectively holds only 18.59% as at December 31, 2017 (18.77% as at December 31, 2016). Equity Investments Lanka Limited ONEzero Company Limited The principal business activities being providing IT – related services. Serendib Finance Limited Principal business activities being providing financial services including leasing, hire purchase, loans, etc. 174 It operates as an agent to the Bank for opening of accounts, providing money transfer services, issuance and encashment of foreign currencies and travellers cheques, collecting applications for credit facilities and handling of ATM cards, etc. Commercial Bank of Maldives Private Limited Commercial Bank of Maldives Private Limited, a fully-fledged Tier 1 Bank, inaugurated its banking operations in the Maldives on September 26, 2016. This is a Subsidiary of the Bank partnering with Treetop Investments Maldives. CBC Myanmar Microfinanace Company Limited The principle business activities include engaging in microfinance business. A licence was issued by the Myanmar Microfinance Supervisory Enterprise for the Company to operate as a non-saving deposit organisation. The Company is yet to commence its commercial operations. The principal activities include investment services, risk capital and venture capital management. Commercial Insurance Brokers (Pvt) Limited (CIB) CIB, a private limited liability company is an insurance broker registered with the Ministry of Finance in terms of legislation. There were no significant changes in the nature of the principal business activities of the Bank and the Group during the financial year under review. Commercial Bank of Ceylon PLC Annual Report 2017 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 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. These SLFRSs and LKASs are available at www.casrilanka.com 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 182 to 192. The formats used in the preparation of the Financial Statements and the disclosures made therein also comply with the specified formats prescribed by the CBSL for the preparation, presentation and publication of Annual Audited Financial Statements of Licensed Commercial Banks. 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 No. 07 of 2007 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” and the certification on the Statement of Financial Position on pages 136, 146 and 167, respectively.
  176. Financial Reports Notes to the Financial Statements These Financial Statements include the following components : yy an Income Statement and a Statement of Profit or Loss and Other Comprehensive Income providing the information on the financial performance of the Group and the Bank for the year under review. Refer pages 165 and 166; yy a Statement of Financial Position providing the information on the financial position of the Group and the Bank as at the year end. Refer page 167; yy a Statement of Changes in Equity depicting all changes in shareholders’ funds during the year under review of the Group and the Bank. Refer pages 168 to 171; yy a Statement of Cash Flows providing the information to the users, on the ability of the Group and the Bank to generate cash and cash equivalents and utilisation of those cash flows. Refer page 172; yy Notes to the Financial Statements comprising Significant Accounting Policies and other explanatory information. Refer pages 173 to 332. 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, 2017 (including comparatives for 2016), were approved and authorised for issue by the Board of Directors in accordance with Resolution of the Directors on February 23, 2018. 2.4 Basis of measurement 2.5 Going concern basis of accounting 2.7 Presentation of Financial Statements 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. The assets and liabilities of the Group presented in the Statement of Financial Position are grouped by nature and listed in an order that reflects their relative liquidity and maturity pattern. 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. 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. The information presented in US Dollars in the Section on “Supplementary Information” on pages 434 and 435 does not form part of the Financial Statements and is made available solely for the information of stakeholders. The Financial Statements of the Group have been prepared on the historical cost basis except for the following material items stated in the Statement of Financial Position. No adjustments have been made for inflationary factors affecting the Financial Statements. An analysis on recovery or settlement within 12 months and after more than 12 months from the Reporting date is presented in Note 62 on “Maturity Analysis”on pages 289 and 290. 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”. 2.9 Offsetting Financial assets and financial liabilities are offset and the net amount reported in the Statement of Financial Position, 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 International Financial Reporting Interpretations Committee and Standard Interpretations Committee) and as specifically disclosed in the Significant Accounting Policies of the Bank. Items Basis of measurement Note No./s Held-for-trading financial instruments including financial derivatives Fair value Financial investments – Available for sale Fair value 34 232 Land and buildings Measured at cost at the time of acquisition and subsequently at revalued amounts which are the fair values at the date of revaluation 39 245 Defined benefit obligation Net liability for defined benefit obligations 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 50 268 Equity settled share-based payment arrangements Fair Value on grant date 54 280 30 & 31 Page/s 221 & 222 Commercial Bank of Ceylon PLC Annual Report 2017 175
  177. Financial Reports Notes to the Financial Statements 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 Sri Lanka Accounting Standard – LKAS 1 on “Presentation of Financial Statements” 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. 2.11 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 judgements 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. Significant areas of critical judgements, assumptions and estimation uncertainty, in applying Accounting Policies that have most significant effects on the amounts recognised in the Financial Statements of the Group are as follows: 176 A. Judgement Information about judgements made in applying Accounting Policies that have the most significant effects on the amounts recognised in these Financial Statements is included in the following notes. 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 241 indicates that the Group controls the investees. 2.12.2 Classification of financial assets and liabilities The Significant Accounting Policies of the Group provide scope for assets to be classified at inception into different accounting categories under certain circumstances. yy In classifying financial assets or liabilities at “Fair value through profit or loss” (FVTPL), the Group has determined that it has met the criteria for this designation set out in Notes 30 and 31 on pages 221 to 222. yy In classifying financial assets as “Held to maturity” (HTM), the Group has determined that it has both the positive intention and ability to hold the assets until their maturity date as required by Note 35 on page 238. yy In classifying financial assets as “Available for sale” (AFS), the Group has determined that all non-derivative financial assets that are designated as AFS or those financial assets not classified as loans and receivables, FVTPL or HTM be classified as AFS as set out in Note 34 on page 232. B. Assumptions and estimation uncertainties Information about assumptions and estimation uncertainties that have a significant risk of resulting in material adjustments for the year ended December 31, 2017 are included in the following Notes. 2.12.3 Fair Value of financial instruments The fair values of financial assets and financial liabilities recognised on the Statement of Financial Position, 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 Commercial Bank of Ceylon PLC Annual Report 2017 reflects the significance of input used in making measurements. Methodologies used for valuation of financial instruments and fair value hierarchy are stated in Note 26 on pages 214 to 219. 2.12.4 Impairment losses on loans and receivables The Group reviews its individually significant loans and advances at each Reporting date to assess whether an impairment loss should be provided 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. These estimates are based on assumptions about a number of factors and hence actual results may differ, resulting in future changes to the provisions made. The individual impairment provision applies to financial assets evaluated individually for impairment and is based on Management’s best estimate of the present value of the future cash flows that are expected to be received. 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. A collective impairment provision is established for: yy groups of homogeneous loans and advances that are not considered individually significant; and yy groups of assets that are individually significant but that were not found to be individually impaired. The collective provision for groups of homogeneous loans is established using statistical methods (such as, net flow rate methodology, risk migration analysis) or, a formula approach based on historical loss rate experience, using the statistical analysis of historical data on delinquency to estimate the amount of loss. Management applies judgement to ensure that the estimate of loss arrived at, on the basis of historical information is appropriately adjusted to reflect the economic conditions and portfolio
  178. Financial Reports Notes to the Financial Statements factors as at the Reporting date . The loss rates are regularly reviewed against actual loss experience. In assessing the need for collective impairment, Management considers factors such as credit quality (for example, loan to collateral ratio, level of restructured performing loans), portfolio size, concentrations and economic factors. To estimate the required allowance, assumptions are made to define how inherent losses are modelled and to determine the required input parameters, based on historical experience and current economic conditions (including policy rates, inflation, growth in Gross Domestic Product, sovereign rating, etc.). The accuracy of the provision depends on the model assumptions and parameters used in determining the collective provision. Refer Note 18 on page 201 for details. 2.12.5 Impairment of financial investments – available for sale The Group reviews the debt securities classified as AFS investments at each Reporting date to assess whether they are impaired. This requires similar judgements as applied on the individual assessment of loans and advances. The Group also records impairment charges on AFS equity investments when there has been a significant or prolonged decline in the fair value below their cost along with the historical share price movements, duration and extent up to which the fair value of an investment is less than its cost. Refer Note 7.1.11.2 on page 187 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” of such individual assets or the CGUs. Estimating “Value in use” 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 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 7.5 on page 188 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 Other Comprehensive Income (OCI). The Group engages independent professional valuers to assess fair value of land and buildings. The key assumptions used to determine the fair value of the land and building and sensitivity analyses are provided in Note 39.5 (b) and 39.5 (c) on pages 252 to 256. 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. Refer Note 20 on page 203. 2.12.9 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 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. Refer Note 48 on page 265 for details. 2.12.10 Defined benefit obligation The cost of the defined benefit plans 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 increases, etc. Due to the long-term nature of these plans, such estimates are subject to significant uncertainty. Refer Note 50 on pages 268 to 275 for the assumptions used. 2.12.11 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 7.9 to 7.15 on pages 190 and 191. 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 70 on page 332, 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 other controls. This process of risk management is critical to the Bank’s continuing profitability and each individual within the Bank is accountable for the risk exposures relating to his or her responsibilities. The Group has exposure mainly to the following risks from financial instruments: yy Credit risk; yy Market risk; yy Liquidity risk; and yy Operational risk. Commercial Bank of Ceylon PLC Annual Report 2017 177
  179. Financial Reports Notes to the Financial Statements Reputation risk Operational risk Funding liquidity risk Market risk 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 Policy 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, and to monitor risks and adherence to limits. The Risk Management Policy Framework constitutes the Credit Policy, Lending Guidelines, ALM Policy including Liquidity Risk Policy, Foreign Exchange Policy, Operational Risk Policy, IT Risk Management Policy, Market Risk Management Policy, Stress Testing Policy, etc., which have been firmly established to provide control and guidance for decision-making throughout the Bank in a uniform manner. 178 Credit risk Business risk The Committee structure embedded to the system acts as a fact finding and decision-making authority through meaningful discussions of multiple points of view. The Risk Management Committees 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 a mandatory Subcommittee namely, the Board Integrated Risk Management Committee (BIRMC) 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. The meetings of the Executive Integrated Risk Management Committee (EIRMC) are conducted on a monthly basis to discuss Credit and Operational risk matters of the Bank while priority is given for liquidity and market risks at the Assets and Liabilities Committee (ALCO) meetings that convene at least once a fortnight. Commercial Bank of Ceylon PLC Annual Report 2017 In addition, the Integrated Risk Management Department carries out semi-annual Bankwide risk assessment function focusing on adherence to laws, regulations, and regulatory guidelines as well as internal controls and approved policies. A dedicated Compliance Department is entrusted with the responsibility of monitoring these requirements on an ongoing basis. Further, the Internal Audit function of the Bank independently monitors and evaluates the risk management function of the Bank and provides their views on adequacy of the Risk Management Framework to the Board Audit Committee.
  180. Financial Reports Notes to the Financial Statements Bank ’s financial risk management framework Bank’s strategy Bank’s risk strategy Risk management framework 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 Credit risk The risk that the Bank will incur a loss because its customers or counterparties fail to discharge their contractual obligations. The Bank manages and controls credit risk by setting limits on the amount of risk it is willing to accept for individual counterparties and for geographical and industry concentrations and by monitoring exposures in relation to such limits. Management of credit risk Lending Guidelines of the Bank formulated in consultation with lending units provide expected granularity of credit assessment, risk grading, their acceptability of collateral, etc., as well as limits on exposures and concentration levels to various sectors, counterparties, geographies, and segments. A robust risk grading system incorporating Basel requirements of facility rating and counterparty rating are adopted by the Bank for evaluation of credit proposals. This risk grading framework consists 10 grades of varying degrees of risk as indicators for the Lending Officers to evaluate and arrive at suitable risk-reward trade-offs in their propositions. These risk grades are reviewed by the Integrated Risk Management Department regularly. Portfolio level credit risk analyses are taken up at monthly EIRMC as well as quarterly 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 any lending proposals. Escalation of approving levels occurs based on exposure levels as well as final risk ratings of borrowers. The Executive Credit Committee (ECC) and the Board Credit Committee (BCC) are entrusted with approval of high value 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 within the specified threshold and recommendation for approval of the Board based on quantum of exposures proposed is exercised. The Integrated Risk Management Department 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. 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 and manages each of those portfolios separately. The market risk for the trading portfolio is monitored and managed closely. Management of market risk Market Risk Policy, ALCO 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 currencies other than local currency, continued to expose the Bank to associated risk elements. Volatile interest scenarios experienced by the country during the period impacted the financial market in Sri Lanka and resulted in shrinking Net Interest Margin. Interest Rates of the Banking Book was 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. Commercial Bank of Ceylon PLC Annual Report 2017 179
  181. Financial Reports Notes to the Financial Statements Trading Book too was subjected to Value at Risk (VaR) framework as described in the, Section on “Managing Risk: An Overview” on pages 154 to 158. The Bank also carried out sensitivity analysis on a regular basis to ascertain the impact on portfolios maintained, mainly in Government Securities and marking to market such portfolios to reflect fair value for decision-making process. Foreign exchange positions were maintained within the regulatory framework in a market where much volatility was observed in the major currency that the Bank deals in, i.e., US Dollars. The positions were subjected to sensitivity analysis to provide insight to possible losses/gains arising from currency appreciation/depreciation, as the reporting currency of the Bank being Sri Lankan Rupees. 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. liquidity risk arises because of the possibility that the Bank might be unable to meet its payment obligations when they fall due under both normal and stress circumstances. To limit this risk, Management has arranged for diversified funding sources in addition to its core deposit base and adopted a policy of managing assets with 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. This incorporates an assessment of expected cash flows and the availability of high grade collateral which could be used to secure additional funding, if required. Management of liquidity risk Market Risk Management Policy and the ALCO 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. 180 Having access to a substantial stable Current Account and Savings Account (CASA) base due to its wide branch network and the top of the mind perception created in the depositors in general, for stability provides immense strength to the Bank in managing liquidity. Having high quality liquid assets at the disposal of the Bank is another plus factor for the Bank. The strength of such was amply reflected in the Basel III computation the Bank carries out for arriving at Liquidity Coverage Ratio as per the CBSL Guidelines that recorded very healthy results as compared to regulatory minimum threshold levels. Contingency funding plans in force, constant monitoring of salient liquidity ratios, and scenario based stress testing being carried out regularly, provide the sense of Bank with required indicators enabling the Bank to take proactive measures that could provide time to overcome any adverse liquidity position on a future date. Operational risk The risk that the Bank will incur a loss due to systems failure, human error, fraud or external events. 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 and responding to potential risks. 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 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. Commercial Bank of Ceylon PLC Annual Report 2017 Internal control framework and audit function with firmly established “three lines of defences” serve the Bank to manage operational risk at current acceptable levels. Risk and Control Self-Assessment (RCSA) framework is adopted to identify risks involved in business activities of the Bank and to implement appropriate mitigatory measures after assessing criticality of such risks. IT Risk of the Bank is managed through strict monitoring of Key IT Risk Indicators 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 69 on pages 303 to 332 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 “Managing Risk: An Overview” on pages 154 to 158. The said write-up on “Managing Risk: An Overview” 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
  182. Financial Reports Notes to the Financial Statements technique incorporates all of the factors that market participants would take into account in pricing a transaction . Set out below is an index of Significant Accounting Policies, the details of which are available on the pages that follow: Note The fair value of an asset or a liability is measured using the assumptions that market participants would use the fair value hierarchy 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 non-financial 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 26 on pages 214 to 219. 5. Changes in Accounting Policies The Group and the Bank have consistently applied the Accounting Policies as set out in Notes 6 to 10 on pages 182 to 192 to all periods presented in these Financial Statements, except for application of “Hedge Accounting” principles of LKAS 39 on “Financial Instruments: Recognition and Measurement” as set out in Note 7.1.5 on pages 185 and 186. 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, unless otherwise indicated. These Accounting Policies have been applied consistently by Group entities. Description Reference to the Note Page No. 6. Significant accounting policies – General 182 6.1 Basis of consolidation 182 6.2 Foreign currency 182 7. Significant accounting policies – Recognition of assets and liabilities 183 7.1 Financial instruments – Initial recognition, classification and subsequent measurement 183 7.2 Non-current assets held for sale and disposal groups 7.3 Property, plant and equipment 39 7.4 Intangible assets 40 7.5 Impairment of non-financial assets 188 7.6 Dividends payable 188 7.7 Employee benefits 7.8 Other liabilities 50 7.9 Provisions 49 188 188 188 189 190 190 7.10 Restructuring 191 7.11 191 Onerous contracts 7.12 Bank levies 191 7.13 Financial guarantees and loan commitments 191 7.14 Commitments 191 7.15 Contingent liabilities and commitments 59 & 61 7.16 Stated capital and reserves 191 53, 55, 56 & 57 191 7.17 Earnings per Share (EPS) 23 191 7.18 Operating segments 63 191 7.19 Fiduciary assets 191 8. Significant accounting policies – Recognition of income and expense 8.1 Interest income and expense 13 191 8.2 Fee and commission income and expense 14 191 8.3 Net gains/(losses) from trading 15 191 8.4 Dividend income 8.5 Leases 8.6 Rental income and expenses 192 9. Significant accounting policies – Income tax expense 192 9.1 Current tax 47 9.2 Deferred tax 48 9.3 Tax exposures 192 9.4 Crop Insurance Levy (CIL) 192 9.5 Withholding tax on dividends distributed by the Bank, subsidiaries, and associates 192 9.6 Economic Service Charge (ESC) 192 9.7 Value Added Tax (VAT) on financial services 192 9.8 Nation Building Tax (NBT) on financial services 192 10. Significant accounting policies – Statement of Cash Flows 192 10.1 Statement of Cash Flows 192 191 15, 16, & 17 191 68 191 Commercial Bank of Ceylon PLC Annual Report 2017 192 192 181
  183. Financial Reports Notes to the Financial Statements 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” 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”. 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. The consideration transferred in the acquisition and identifiable net assets acquired are measured at fair value. Any goodwill that arises is tested annually for impairment (Refer Note 7.5 on page 188). 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 re-measured 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 58 on page 285. 6.1.3 Subsidiaries Details of the Bank’s subsidiaries and their contingencies are set out in Notes 37 and 59.4 (a) on pages 141 to 143 and 287. 182 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 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 associates together with their fair values and the Group’s share of contingent liabilities of such associates are set out in Notes 38 and 59.4 (b) on pages 243 to 245 and 287. 6.1.6 Transactions eliminated on consolidation 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. 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. Commercial Bank of Ceylon PLC Annual Report 2017 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. 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: yy Available-for-sale equity instruments; or yy A financial liability designated as a hedge of the net investment in a foreign operation to the extent that the hedge is effective; and yy 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 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.
  184. Financial Reports Notes to the Financial Statements 6 .2.4 Foreign operations The results and financial position of overseas operations that have a functional currency different from the Bank’s presentation currency are translated into the Bank’s presentation currency as follows: yy 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. yy 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. yy All resulting exchange differences are recognised in the OCI and accumulated in the Foreign Currency Translation Reserve (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 reattributed 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. 7.1.2 Initial measurement of financial instruments 7.1.3 Classification and subsequent measurement of financial assets The classification of financial instruments at initial recognition depends on their purpose and characteristics and the Management’s intention in acquiring them. (Please refer Notes 7.1.3 and 7.1.4 for further details on classification of financial instruments). Group classifies financial assets into one of the following categories: All financial instruments are measured initially at their fair value plus transaction costs that are directly attributable to acquisition or issue of such financial instrument, except in the case of financial assets and financial liabilities at fair value through profit or loss as per the Sri Lanka Accounting Standard – LKAS 39 on “Financial Instruments: Recognition and Measurement”. Transaction cost in relation to financial assets and financial liabilities at fair value through profit or loss are dealt with through the Income Statement. 7.1.2.1 “Day 1” profit or loss on employee below market loans When the transaction price differs from the fair value of other observable current market transactions in the same instrument, or based on a valuation technique whose variables include only data from observable markets, the Group recognises the difference between the transaction price and fair value (a “Day 1” profit or loss) in “Interest Income and Personnel Expenses”. In cases where fair value is determined using data which is not observable, the difference between the transaction price and model value is only recognised in the 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) over the remaining service period of the employees or tenure of the loan whichever is shorter. Refer Note 8.1 on page 191. yy Financial assets at fair value through profit or loss, and within this category as – • held for trading; or • designated at fair value through profit or loss; yy Loans and receivables; yy Held to maturity; and yy Available for sale. The subsequent measurement of financial assets depends on their classification. Please refer Note 25 on pages 210 to 213 for details on different types of financial assets recognised on the Statement of Financial Position. 7.1.3.1 Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss include financial assets held for trading and financial assets designated upon initial recognition at fair value through profit or loss which are discussed in Notes 7.1.3.1.1 and 7.1.3.1.2 below: 7.1.3.1.1 Financial assets – Held-for-trading Details of “Financial assets – Held for trading” are given in Note 31 on pages 223 to 225. Derivatives recorded at fair value through profit or loss Details of “Derivative financial assets” recorded at fair value through profit or loss are given in Note 30 on page 221. 7.1.3.1.2 Financial assets designated at fair value through profit or loss The Group designates financial assets at fair value through profit or loss in the following circumstances: yy the assets are managed, evaluated and reported internally on a fair value basis; or yy the designation eliminates or significantly reduces an accounting mismatch, which would otherwise have arisen; or Commercial Bank of Ceylon PLC Annual Report 2017 183
  185. Financial Reports Notes to the Financial Statements yy the asset contains an embedded derivative that significantly modifies the cash flows which would otherwise have been required under the contract . Financial assets designated at fair value through profit or loss are recorded in the Statement of Financial Position at fair value. Changes in fair value are recorded in “Net gain or loss on financial assets and liabilities designated at fair value through profit or loss”. 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 fair value through profit or loss. 7.1.3.2 Loans and receivables to banks and other customers Loans and receivable to banks and other customers include amounts due from banks, loans and advances and lease receivable of the Group. 7.1.3.4 Financial investments – Available for sale Details of “Financial investments – Available for sale” are given in Note 34 on pages 232 to 238. Changes in fair value are recorded in “Net gain or loss on financial assets and liabilities designated at fair value through profit or loss”. Interest paid/payable is accrued in “Interest expense”, using the EIR. 7.1.3.5 Financial investments – Held-to-maturity Details of “Financial investments – Held to maturity” are given in Note 35 on page 238. The Group has not designated any financial liabilities upon initial recognition as at fair value through profit or loss. 7.1.3.6 Cash and cash equivalents Details of “Cash and cash equivalents” are given in Note 27 on page 219. 7.1.3.7 Balances with central banks Details of “Balances with central banks” are given in Note 28 on pages 219 and 220. 7.1.4 Classification and subsequent measurement of financial liabilities Group classifies financial liabilities into one of the following categories: yy Financial liabilities at fair value through profit or loss, and within this category as – • Held for trading; or • Designated at fair value through profit or loss; Details of “Loans and receivables to banks and other customers” are given in Notes 32 and 33 on pages 225 to 232. yy Financial liabilities at amortised cost. 7.1.3.2.1 Securities purchased under resale agreements (reverse repos) The subsequent measurement of financial liabilities depends on their classification. 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 Statement of Financial Position 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 receivable being recognised as interest income in profit or loss. Details of “Securities purchased under resale agreements” are given in the Statement of Financial Position on page 167. 7.1.3.3 Other financial investments classified as loans and receivables Details of “Financial investments – Loans and receivables” are given in Note 36 on pages 239 to 241. 184 Please refer Notes 7.1.4.1 and 7.1.4.2 as detailed below: 7.1.4.1 Financial liabilities at fair value through profit or loss Financial liabilities at fair value through profit or loss include financial liabilities held for trading and financial liabilities designated upon initial recognition as at fair value through profit or loss. Refer Notes 7.1.4.1.1 and 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 44 on page 262. 7.1.4.1.2 Financial liabilities designated at fair value through profit or loss Financial liabilities designated at fair value through profit or loss are recorded in the Statement of Financial Position at fair value. Commercial Bank of Ceylon PLC Annual Report 2017 7.1.4.2 Financial liabilities at amortised cost Financial instruments issued by the Group that are not designated at fair value through profit or loss are classified as liabilities under “Due to banks”, “Due to Other Customers/Deposits from Customers”, “Securities sold under repurchase agreements”, 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 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 fees or costs that are an integral part of the EIR. The EIR amortisation is included in “Interest expense” in the Income Statement. Gains and losses too are recognised in the Income Statement 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 43 on page 261. 7.1.4.2.2 Due to other customers/deposits from customers Details of “Due to other customers/deposits from customers” are given in Note 45 on pages 263 and 264.
  186. Financial Reports Notes to the Financial Statements 7 .1.4.2.3 Subordinated liabilities Details of “Subordinated liabilities” are given in Note 52 on pages 276 and 277. 7.1.4.2.4 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 Statement of Financial Position 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 Statement of Financial Position on page 167. 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 Statement of Financial Position. The Group designates certain derivatives held for risk management as well as certain non-derivative financial instruments as 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 as discussed in the 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 together with changes in the fair value of the hedged item that are 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 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 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 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 44.2 on page 262. 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 derivative are 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 fair value through profit or loss. 7.1.5.5 Embedded derivatives Derivatives may be embedded in another contractual arrangement (a host contract). The Group accounts for an embedded derivative separately from the host contract when: yy the host contract was not itself carried at fair value through profit or loss; yy the terms of the embedded derivative would have met the definition of a derivative if they were contained in a separate contract; and yy the economic characteristics and risks of the embedded derivative were not closely related to the economic characteristics and risks of the host contract. Commercial Bank of Ceylon PLC Annual Report 2017 185
  187. Financial Reports Notes to the Financial Statements 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 Statement of Financial Position 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 in the period after the Group changes its business model for managing financial assets. The Group reclassifies financial assets and liabilities into and out of the different categories of financial instruments as permitted by the Sri Lanka Accounting Standard – LKAS 39 on “Financial Instruments: Recognition and Measurement”. 7.1.6.1 Reclassification of financial instruments at “fair value through profit or loss” The Group does not reclassify financial instruments out of the fair value through profit or loss category while it is held or issued. Non-derivative financial assets and liabilities designated at fair value through profit or loss upon initial recognition are not reclassified subsequently out of fair value through profit or loss category. The Group may in rare circumstances, reclassify financial instruments out fair value through profit or loss category, if such instruments are no longer held for the purpose of selling or repurchasing in the near term notwithstanding that such financial instruments may have been acquired for the purpose of selling or repurchasing in the near term. Financial assets classified as fair value through profit or loss at the initial recognition which would have also met the definition of “loans and receivable” as at that date is reclassified out of the fair value through profit or loss category only if the Group has the intention or ability to hold such asset for the foreseeable future or until maturity. Fair value of financial instrument at the date of reclassification becomes the new cost or new amortised cost of the financial instrument. Any gain or loss already recognised in respect of the reclassified 186 financial instrument until the date of reclassification is not reversed to the Income Statement. between the carrying value of the financial asset before reclassification and fair value is recognised in equity through OCI. If financial asset is reclassified and if the Group subsequently increases its estimate of future cash receipts as a result of increased recoverability of those cash receipts, the effect of such increase is recognised as an adjustments to the EIR from the date of the change in estimate rather than an adjustment to the carrying amount of the asset at the date of change in estimates. However, if the Group were to sell or reclassify more than an insignificant amount of held to maturity financial investments before maturity (other than in certain specific circumstances permitted in the Sri Lanka Accounting Standard – LKAS 39 on “Financial Instruments: Recognition and Measurement”), the entire category would be tainted and would have to be reclassified as AFS. Furthermore, the Group would be prohibited from classifying any financial asset as held-to-maturity during the following two years. The Group does not reclassify any financial instrument into the “Fair value through profit or loss” category after initial recognition. 7.1.6.2 Reclassification of financial investments – Available for sale The Group may reclassify financial investments out of AFS category as a result of change in intention or ability or in rare circumstances that a reliable measure of fair value is no longer available. For a financial asset with a fixed maturity reclassified out of the “available-for-sale” category, any previous gain or loss on that asset that has been recognised in equity is amortised to profit or loss over the remaining life of the asset using the EIR. Any difference between the new amortised cost and the expected cash flows is also amortised over the remaining life of the asset using the EIR. In the case of a financial asset that does not have a fixed maturity, the gain or loss is recognised in the profit or loss when such financial asset is sold or disposed of. If the financial asset is subsequently determined to be impaired, then the amount recorded in equity is recycled to profit or loss. If a financial asset is reclassified and if the Group subsequently increases its estimates of future cash receipts as a result of increased recoverability of those cash receipts, the effect of that increase is recognised as an adjustment to the EIR from the date of the change in estimate. 7.1.6.3 Reclassification of Financial Investments – Held to Maturity As a result of a change in intention or ability, if it is no longer appropriate to classify an investment as held to maturity, Group may reclassify such financial asset as AFS and remeasured at fair value. Any difference Commercial Bank of Ceylon PLC Annual Report 2017 The above reclassifications at the election of the Management and is determined on an instrument-by-instrument basis. 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. 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. 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 Statement of Financial Position, 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
  188. Financial Reports Notes to the Financial Statements are not derecognised . Examples of such transactions are securities lending and sale and repurchase transactions. 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. In certain transactions, the Group retains the obligation to service the transferred financial asset for a fee. The transferred asset is derecognised, if it meets the derecognition criteria. An asset or liability is recognised for the servicing contract, if the servicing fee is more than adequate (asset) or is less than adequate (liability) for performing the servicing. 7.1.7.2 Financial liabilities The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or expired. 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. The difference between the carrying value of the original financial liability and the consideration paid is recognised in profit or loss. 7.1.8 Offsetting of financial instruments Financial assets and financial liabilities are offset and the net amount reported in the Statement of Financial Position 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. yy other observable data relating to a group of assets such as adverse changes in the payment status of borrowers or issuers in the Group or economic conditions that correlate with defaults in the Group. 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. In addition, for an investment in an equity security, a significant or prolonged decline in its fair value below its cost is considered as an objective evidence of impairment. 7.1.9 Amortised cost measurement An “amortised cost” of a financial asset or financial liability is the amount at which the financial asset or liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortisation using the EIR method of any difference between the initial amount recognised and the maturity amount, minus any reduction for impairment. 7.1.10 Fair value of financial instruments Fair value measurement of financial instruments including the fair value hierarchy is explained in Notes 4 and 26 on pages 180 and 214. 7.1.11 Identification and measurement of impairment of financial assets At each Reporting date, the Group assesses whether there is objective evidence that financial assets not carried at fair value through profit or loss are impaired. A financial asset or a group of financial assets is “impaired” when objective evidence demonstrates that a loss event has occurred after the initial recognition of the asset(s) and that the loss event has an impact on the future cash flows of the asset(s) that can be estimated reliably. Objective evidence that financial assets (including equity securities) are impaired can include: yy significant financial difficulty of the borrower or issuer; yy reschedulement of credit facilities; yy default or delinquency by a borrower; yy restructuring of a loan or advance by the Group on terms that the Group would not otherwise consider; yy indications that a borrower or issuer will enter bankruptcy; yy the disappearance of an active market for a security; or 7.1.11.1 Impairment of financial assets carried at amortised cost Details of the individual and collective assessment of impairments are given in Note 18 on pages 201 to 203. 7.1.11.2 Impairment of financial investments – Available for sale For available-for-sale financial investments, the Group assesses at each Reporting date whether there is objective evidence that an investment is impaired. In the case of debt instruments classified as AFS, the Group assesses individually whether there is objective evidence of impairment based on the same criteria as financial assets carried at amortised cost. However, the amount recorded for impairment is the cumulative loss measured as the difference between the amortised cost and the current fair value, less any impairment loss on that investment previously recognised in profit or loss. Future interest income is based on the reduced carrying amount/impaired balance and is accrued using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. The interest income on such assets is also recorded within “Interest income”. In the case investments classified as AFS, objective evidence would also include a “significant” or “prolonged” decline in the fair value of the investment below its cost. In general, the Group considers a decline of 20% to be “significant” and a period of nine months to be “prolonged”. However, in specific circumstances a smaller decline or a shorter period may be appropriate. Where there is evidence of impairment, the cumulative impairment loss on that investment previously recognised in Equity through the OCI is removed from Equity and charged to profit or loss. Commercial Bank of Ceylon PLC Annual Report 2017 187
  189. Financial Reports Notes to the Financial Statements If , in a subsequent period, the fair value of an impaired available-for-sale debt instrument increases and the increase can be objectively related to an event occurring after the impairment loss was recognised, then such impairment loss is reversed through profit or loss; otherwise, any increase in fair value is recognised through OCI. Any subsequent recovery in the fair value of an available-for-sale equity instrument is always recognised in OCI. The Group writes-off certain financial investments – available for sale, either partially or in full and any related provision for impairment losses, when the Group determines that there is no realistic prospect of recovery. 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 and the asset or disposal group is available-forsale in its present condition, Management has committed to the sale and the sale is expected to have been completed within one year from the date of classification. As per the Sri Lanka Accounting Standard – SLFRS 5 on “Non-current Assets Held for Sale and Discontinued Operations”, 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. 188 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 245 to 257. 7.3.1 Depreciation Details of “Depreciation” are given in Note 20 on pages 203 and 204. 7.3.2 Borrowing costs As per the Sri Lanka Accounting Standard – LKAS 23 on “Borrowing Costs”, 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 Intangible assets 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 value in use and its fair value less costs to sell. “Value in use” 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. 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. 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. Refer Note 20 on pages 203 and 204. 7.6 Dividends payable Details of “Intangible assets” are given in Note 40 on pages 258 to 260. 7.5 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. Commercial Bank of Ceylon PLC Annual Report 2017 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
  190. Financial Reports Notes to the Financial Statements reporting period in accordance with the Sri Lanka Accounting Standard – LKAS 10 on “Events after the reporting period” in Note 70 on page 332. 7.7 Employee benefits 7.7.1 Defined Benefit Plans (DBPs) A defined benefit plan is a post-employment benefit plan other than a Defined contribution plan as defined in the Sri Lanka Accounting Standard – LKAS 19 on “Employee Benefits”. 7.7.1.1 Defined benefit pension plans 7.7.1.1.1 Description of the plans and employee groups covered The Bank operates three types of Defined Benefit Pension Plans for its employees as described below: who joined the Bank on or after January 1, 2002, as they are not in pensionable service of the Bank under either the DBP or DCP. However, if any of these employees resign before retirement, the Bank is liable to pay gratuity to such employees. 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. 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 the Sri Lanka Accounting Standard – LKAS 19 on “Employee Benefits” as detailed in Note 50 on pages 268 to 275. (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 who joined the Bank on or before December 31, 2001, were in pensionable service of the Bank; 7.7.1.1.2 Recognition of actuarial gains or losses Actuarial gains or losses are recognised in the OCI in the period in which they arise. During 2006, the Bank offered a restructured pension scheme to convert the Defined Benefit Plan (DBP) to a Defined Contribution Plan (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 previously but retired before the restructured pension scheme came into effect; (b) Provision for pensions has been made for those employees who retired on or before December 31, 2001, 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; (c) Provision has been made in the Financial Statements for Retirement Gratuity from the first year of service for all employees 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. 7.7.1.1.3 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 less the fair value of 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 defined benefit plans are recognised in profit or loss. 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 defined benefit plan when the settlement occurs. 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 50 on pages 203 and 268 to 275, respectively. 7.7.2 Defined Contribution Plans (DCPs) A defined contribution plan is a postemployment 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 three such plans as explained in Notes 7.7.2.1, 7.7.2.2 and 7.7.2.3. Amounts recognised in profit or loss as expenses on DCPs are given in Note 19 on page 203. 7.7.2.1 Defined contribution pension plan As explained in Note 7.7.1.1.1(a), during 2006, the Bank restructured its pension Commercial Bank of Ceylon PLC Annual Report 2017 189
  191. Financial Reports Notes to the Financial Statements 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 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. 7.7.2.2 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 entities of the Group and their employees contribute at the same percentages as above to the Employees’ Provident Fund managed by the Central Bank of Sri Lanka. 7.7.2.3 Employees’ Trust Fund The Bank and other entities of the Group contribute at the rate of 3% of the salaries of each employee to the Employees’ Trust Fund managed by the Central Bank of Sri Lanka. 7.7.3 Other long-term employee benefits The Group’s net obligation in respect of long-term 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 190 assets is deducted. The discount rate 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. 7.7.4 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. 7.7.5 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. 7.7.6 Share-based payment arrangements Share-based payment arrangements in which the Group receives services as consideration for its own equity instruments are accounted for as equity-settled share-based payment transactions, regardless of how the equity instruments are obtained by the Group. Senior Executive Employees of the Group receive remuneration in the form of sharebased 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” 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 the Sri Lanka Accounting Commercial Bank of Ceylon PLC Annual Report 2017 Standard – SLFRS 2 on “Share-based Payment”, 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 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 non-vesting conditions, the grant date fair value of the sharebased payment is measured to reflect such conditions and there is no true-up for differences between expected and actual outcomes. The Employee Share Option Plan – 2015, which was granted is subjected to the above accounting treatment. However, the Employee Share Option Plan – 2008 which was granted prior to January 1, 2012, the effective date of the SLFRS 2 was not subjected to the above accounting treatment and the proceeds received during the year by the Group in consideration for shares issued were accounted for as Stated Capital within Equity. The details of Employee Share Option Plans are given in Notes 53.2 and 54 on pages 279 to 281. The dilutive effect of outstanding options is reflected as additional share dilution in the computation of diluted Earnings per Share as disclosed in Notes 23.2 and 23.3 on page 208. 7.8 Other liabilities Details of “Other liabilities” are given in Note 50 on pages 268 to 275. 7.9 Provisions Details of “Other provisions” are given in Note 49 on page 267.
  192. Financial Reports Notes to the Financial Statements 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 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. 7.13 Financial guarantees and 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. “Loan commitments” are firm commitments to provide credit under pre-specified terms and conditions. Liabilities arising from financial guarantees or commitments to provide a loan at a below-market interest rate are initially measured at fair value and the initial fair value is amortised over the life of the guarantee or the commitment. The liability is subsequently carried at the higher of this amortised amount and the present value of any expected payment to settle the liability when a payment under the contract has become probable. 8.1 Interest income and expense The Group has issued no loan commitment that are measured at FVTPL. The Group recognises a provision in accordance with the Sri Lanka Accounting Standard – LKAS 37 on “Provisions, Contingent Liabilities and Contingent Assets”, if the contract was considered to be onerous. Liabilities arising from financial guarantees and loan commitments are included within provisions. 8.2 Fee and commission income and expense Details of “Interest income and expense” are given in Note 13 on pages 195 to 198. Details of “Fees and commission income and expense” are given in Note 14 on pages 198 and 199. 8.3 Net gains/(losses) from trading Details of “Net gains/(losses) from trading” are given in Note 15 on page 199. 7.14 Commitments All discernible risks are accounted for in determining the amount of known liabilities as explained in Notes 7.8 and 7.9 above. Details of the Commitments are given in Notes 59.2 to 59.4 on page 287 . 7.15 Contingent liabilities and commitments A detailed list of “Contingent liabilities and commitments” and “Litigation against the Bank and the Group” are given in Notes 59 and 61 on pages 285 to 288. 8.4 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, 16 and 17 on pages 199 and 200. 7.16 Stated capital and reserves Details of the “Stated capital and reserves” are given in Notes 53, 55, 56 and 57 to the Financial Statements on pages 278 to 280 and 282 to 285. 7.17 Earnings per Share (EPS) Details of “Basic and Diluted EPS” are given in Note 23 on pages 207 and 208. 7.18 Operating segments Details of “Operating segments” are given in Note 63 on pages 291 to 293. 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 195 to 205. 8.5 Leases The determination of whether an arrangement is a lease or it contains a lease, is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. 8.5.1 Finance leases 8.5.1.1 Finance leases – Group as a lessee Finance leases that transfer substantially all risks and rewards incidental to ownership of the leased item to the Group are classified as finance leases and capitalised at the commencement of the lease at the lower of the fair value of the leased property and the present value of the minimum lease payments. Lease payments are apportioned between finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Commercial Bank of Ceylon PLC Annual Report 2017 191
  193. Financial Reports Notes to the Financial Statements A leased asset is depreciated over the useful life of the asset . However, if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term, the asset is depreciated over the shorter of the estimated useful life of the asset and the lease term. 8.6 Rental income and expenses 9.6 Economic Service Charge (ESC) Rental income and expense are recognised in profit or loss on an accrual basis. 8.5.1.2 Finance leases – Group as a lessor When the Group is the lessor under a lease agreement that transfers substantially all of the risks and rewards incidental to the ownership of the asset to the lessee, the net investment in lease (i.e., after deduction of unearned charges) are included in “loans and advances to banks” or “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. Details of “Income tax expense” are given in Note 22 on pages 205 to 207. As per the provisions of the Finance Act No. 11 of 2004, and amendments thereto, the ESC was introduced with effect from April 1, 2004. Currently, the ESC is payable at 0.5% of the total turnover and is deductible from the income tax payments. Unclaimed ESC, if any, can be carried forward and set-off against the income tax payable in the five subsequent years. 8.5.2 Operating leases 8.5.2.1 Operating leases – group as a lessee Assets held under leases other than finance leases are classified as operating leases and are not recognised in the Group’s Statement of Financial Position. Payments made under operating leases are recognised in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognised as an integral part of the total lease expense, over the term of the lease. Contingent rental payable is recognised as an expense in the period in which they are incurred. 8.5.2.2 Operating leases – Group as a lessor Assets leased under leases other than finance leases are classified as operating leases. Initial direct costs incurred in negotiating operating leases are added to the carrying amount of the leased asset and 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. Details of “Operating leases” are given in Note 68 on page 302. 9. Significant Accounting Policies – Income Tax Expense 9.1 Current tax 9.2 Deferred tax Details of “Deferred tax assets and liabilities” are given in Note 48 on pages 265 to 267. 9.3 Tax exposures In determining the amount of current and deferred tax, the Group considers the impact of tax exposures, including whether additional taxes and penalties are due. Finalisation of the tax liability with authorities may change the position already recorded in the Financial Statements and such changes to tax liabilities could impact the tax expense in the period in which such a determination is made either as an over or under provision. 9.4 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. 9.5 Withholding tax on dividends distributed by the Bank, subsidiaries and associates 9.5.1 Withholding tax on dividends distributed by the Bank Withholding tax that arises from the distribution of dividends by the Bank is recognised at the time the liability to pay the related dividend is recognised. 9.5.2 Withholding tax on dividends distributed by the subsidiaries and associates Dividends received by the Bank from its subsidiaries and associates, have attracted a 10% deduction at source. 9.7 Value Added Tax (VAT) on financial services The value base for the computation of value added tax on 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. 9.8 Nation Building Tax (NBT) on financial services With effect from January 1, 2014, NBT of 2% was introduced on supply of financial services via an amendment to the NBT Act No. 09 of 2009. NBT is chargeable on the same base used for calculation of VAT on financial services as explained in Note 9.7 above. The amount of Value Added Tax and NBT charged in determining the profit or loss for the period is given in the Income Statement on page 165. 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”. Cash and cash equivalents comprise of shortterm, 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 27 on page 219. The Statement of Cash Flows is given on page 172. 192 Commercial Bank of Ceylon PLC Annual Report 2017
  194. Financial Reports Notes to the Financial Statements 11 . New Accounting Standards issued but not yet effective A number of new standards and amendments to standards, which have been issued but not yet effective as at the Reporting date, have not been applied in preparing these Consolidated Financial Statements. Accordingly, the following Accounting Standards have not been applied in preparing these Financial Statements and the Group plans to apply these standards on the respective effective dates: Accounting standard Summary of the requirements Possible impact on Consolidated Financial Statements SLFRS 9 – “Financial Instruments” SLFRS 9, issued in 2014 which replaces the existing guidance in LKAS 39 – “Financial Instruments: Recognition and Measurement” is effective for annual reporting periods beginning on or after January 1, 2018. The key aspects of SLFRS 9 are; The most significant impact on the Bank’s financial statements from the implementation of SLFRS 9 is expected to result from the new impairment requirements. Impairment losses will increase and become more volatile for financial instruments within the scope of SLFRS 9. 1. Classification – Financial assets SLFRS 9 contains a new classification and measurement approach for financial assets that reflects the business model in which assets are managed and their cashflow characteristics. SLFRS 9 includes three principal classification categories for financial assets – i.e. measured at amortised cost, fair value through other comprehensive income (FVOCI) and fair value through profit or loss (FVTPL). It eliminates the existing LKAS 39 categories of Held to maturity, Loans and receivables and Available for sale. 2. Impairment – Financial assets, loan commitments and financial guarantee contracts The Bank has employed statistical models to analyse the data collected and generate estimates of the remaining lifetime PD of exposure and how these are expected to change as a result of the passage of time. This analysis includes the identification and calibration of relationship between changes in default rates and changes in key macro-economic factors as well as analysis of the impact of certain other factors on the risk of default. SLFRS 9 replaces the “Incurred Loss Model” in LKAS 39 with forward looking “Expected Loss Model” (ECL). This will require considerable judgement over how changes in economic factors affect ECL, which will be determined on a probability weighted basis. The Bank has estimated LGD parameters based on the history of recovery rates of claims against defaulted counterparties. The LGD models consider the structure, collateral, seniority of the claim, counterparty industry and recovery costs of any collateral that is integral to the financial asset. SLFRS 9 requires loan loss to be recognised at an amount equal to either 12 month ECL or life time ECL. Lifetime ECLs are the ECLs that result from possible default events over the expected life of a financial instrument, whereas 12 months ECLs are the portion of the ECLs that results from default events that are possible within 12 months after the Reporting date. EAD for lending commitments and financial guarantees, include the amount drawn, as well as potential future amounts that may be drawn or repaid under the contract, which has been estimated based on historical observations and forward looking forecasts. 3. Inputs into measurement of ECLs Under SLFRS 9, the Bank has incorporated forward looking information into both its assessment of whether the credit risk of an instrument has increased significantly since its initial recognition and its measurement of ECL. The key inputs into measurement of ECLs are likely to be the term structures of the following variables which will be derived from internally developed statistical models and other historical data that leverage regulatory models. They will be adjusted to reflect forward looking information. yy Probability of Default (PD) are estimates at a certain date which will be calculated based on statistical models and assessed using rating tools tailored to the various categories of counterparties and exposures. yy Loss Given Default (LGD) is the magnitude to the likely loss if there is default. The Bank estimates LGD parameters based on history of recovery rates of claims against defaulted counter parties. yy Exposure at Default (EAD) represents the expected exposure in the event of a default. The Bank will derive the EAD from the current exposure to the counterparty and potential chances to the current amount allowed under the contract. The Bank has completed the initial high level assessment of the potential impact on its Financial Statements for the year ended December 31, 2016, resulting from the application of SLFRS 9 with the assistance of an external consultant. Based on the preliminary assessments undertaken to date which is yet to be audited, the total estimated additional loan loss provision on the Financial Statements for the year ended December 31, 2016 on adoption of SLFRS 9 is expected to be in the range of 25% to 35% of the total impairment provision as per the current LKAS 39. It will also have an impact on Tier 1 Capital Adequacy Ratio of approximately 60 bps. Commercial Bank of Ceylon PLC Annual Report 2017 193
  195. Financial Reports Accounting standard Notes to the Financial Statements Summary of the requirements Possible impact on Consolidated Financial Statements The above assessment is preliminary (and is yet to be audited) because not all transition work has been finalised. The actual impact of adopting SLFRS 9 on January 1, 2018 may change because; yy SLFRS 9 will require the Bank to revise accounting process and internal controls and these changes are not yet complete; yy The Bank is refining and finalising its models for ECL calculations; and yy The new accounting policies, assumptions, judgements and estimation techniques employed are subject to change until the Bank finalises its first financial statements for the year December 31, 2018 that include the date of initial application. The Bank is in the process of assessing the additional loan loss provision impact on the Financial Statements for the year ended December 31, 2017, resulting from the application of SLFRS 9. The Bank is expected to maintain solid capital position even after taking into account the first time adoption of SLFRS 9, effective from January 1, 2018. The Group does not expect significant impact on the Consolidated Financial Statements resulting from the application of SLFRS 9 on the other Group entities. SLFRS 15 – “Revenue from Contracts with Customers” SLFRS 15 establishes a comprehensive framework for determining whether, how much, and when revenue is recognised. New qualitative and quantitative disclosure requirements aim to enable Financial Statements users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Group and the Bank do not expect significant impact on its Financial Statements resulting from the application of SLFRS 15. Entities will apply five-step model to determine when to recognise revenue and at what amount. The model specified that revenue is recognised when or as an entity transfers control of goods and services to a customer at the amount to which the entity expects to be entitled. Depending on whether certain criteria are met, revenue is recognised. It replaces existing revenue recognition guidance, including LKAS 18 on “Revenue” and LKAS 11 on “Construction Contracts” and IFRIC 13 on “Customer Loyalty Programmes”. SLFRS 15 is effective for annual reporting periods beginning on or after January 1, 2018. SLFRS 16 – “Leases” SLFRS 16 eliminates the current dual accounting model for lessees which distinguishes between On-Balance Sheet finance leases and Off-Balance Sheet operating leases. Instead there will be a single On-Balance Sheet accounting model that is similar to current finance lease accounting. SLFRS 16 is effective for annual reporting periods beginning on or after January 1, 2019. 194 Commercial Bank of Ceylon PLC Annual Report 2017 The Group and the Bank are assessing the potential impact on its Financial Statements resulting from the application of SLFRS 16, based on operating leases set-out in Note 68 on page 302.
  196. Financial Reports Notes to the Financial Statements 12 . Gross Income 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 For the year ended December 31, BANK 2017 2016 2017 2016 Note Page No. Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Interest income 13.1 196 104,049,102 81,314,607 103,034,386 80,738,176 Fees and commission income 14.1 198 10,510,800 8,230,131 10,169,211 8,143,041 Net gains/(losses) from trading 15 199 233,956 Net gains/(losses) from financial investments 16 199 129,210 110,759 129,030 110,701 Other income (net) 17 200 1,918,687 5,536,749 2,027,365 5,617,403 116,841,755 93,725,535 115,593,948 93,142,610 Total (1,466,711) 233,956 (1,466,711) 13. Net Interest Income Interest income and expense are recognised in profit or loss using the effective interest rate (EIR) method. Interest income and expense presented in the Income Statement include: yy Interest on Held-for-trading financial instruments calculated using EIR method; yy Interest on Loans and receivables calculated using EIR method; yy Interest on Available-for-sale investments calculated using EIR method; yy Interest on Held-to-maturity investments calculated using EIR method; yy Interest on financial liabilities measured at amortised cost calculated using EIR method. Effective Interest Rate (EIR) The “effective interest rate" is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset or financial liability (or, where appropriate, a shorter period) to the carrying amount of the financial asset or financial liability. The calculation of the EIR includes transaction costs and fees and points paid or received that are an integral part of the EIR. Transaction costs include incremental costs that are directly attributable to the acquisition or issue of a financial asset or financial liability. When calculating the effective interest rate for financial instruments other than credit impaired assets, the Group estimates future cash flows considering all contractual terms of the financial instrument, but not future credit losses. For credit impaired financial assets, a credit adjusted effective interest rate is calculated using estimated future cash flows. GROUP For the year ended December 31, BANK 2017 2016 2017 2016 Note Page No. Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Interest income 13.1 196 104,049,102 81,314,607 103,034,386 80,738,176 Less: Interest expense 13.2 196 64,481,804 48,186,331 64,010,991 47,914,573 39,567,298 33,128,276 39,023,395 32,823,603 Net interest income Commercial Bank of Ceylon PLC Annual Report 2017 195
  197. Financial Reports Notes to the Financial Statements 13 .1 Interest income GROUP BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 362,695 219,048 356,930 218,337 4,400 40,575 3,263 40,504 Placements with banks 215,909 145,504 215,920 145,504 Securities purchased under resale agreements 139,153 352,695 139,153 352,695 Financial instruments – Held for trading 469,012 457,308 469,012 457,308 For the year ended December 31, Cash and cash equivalents Balances with central banks Derivative financial instruments 24,111 Other financial instruments – 24,111 – 444,901 457,308 444,901 457,308 Loans and receivables to other customers 78,132,371 58,135,238 77,294,117 57,587,445 Financial investments – Available for sale 15,349,974 14,311,753 15,335,424 14,307,559 Financial investments – Held to maturity 5,475,592 3,757,168 5,318,994 3,731,930 Financial investments – Loans and receivables 3,036,526 3,360,048 3,036,526 3,360,048 861,057 533,528 861,057 533,528 Interest income from impaired loans and receivables to other customers Other interest income 2,413 1,742 3,990 3,318 Total interest income 104,049,102 81,314,607 103,034,386 80,738,176 Interest income – Bank Interest expense – Bank Rs. Bn. Rs. Bn. 125 75 100 60 75 45 50 25 0 2016 2017 27.62% 30 33.59% 2017: Rs. 103.034 Bn. 15 2017: Rs. 64.011 Bn. 2016: Rs. 80.738 Bn. 0 2016 2017 2016: Rs. 47.915 Bn. 13.2 Interest expense GROUP For the year ended December 31, Due to banks Derivative financial instruments Securities sold under repurchase agreements Due to other customers/deposits from customers Refinance borrowings Foreign currency borrowings BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 2,069,416 1,278,205 1,617,094 990,560 38,702 – 38,702 – 5,943,417 7,756,308 5,965,608 7,775,316 53,385,259 37,176,139 53,344,577 37,174,433 352,074 270,977 352,074 270,977 315,242 169,353 315,242 169,353 Subordinated liabilities 2,377,694 1,535,349 2,377,694 1,533,934 Total interest expense 64,481,804 48,186,331 64,010,991 47,914,573 196 Commercial Bank of Ceylon PLC Annual Report 2017
  198. Financial Reports Notes to the Financial Statements 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 incomes 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 For the year ended December 31, Interest income Securities purchased under resale agreements Financial instruments – Held for trading BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 22,331,944 19,870,503 22,317,394 19,866,309 81,635 290,627 81,635 290,627 296,520 351,293 296,520 351,293 Financial investments – Available for sale 15,349,974 13,412,354 15,335,424 13,408,160 Financial investments – Held to maturity 4,520,977 3,678,099 4,520,977 3,678,099 Financial investments – Loans and receivables 2,082,838 2,138,130 2,082,838 2,138,130 5,942,176 7,755,075 5,964,367 7,774,082 5,942,176 7,755,075 5,964,367 7,774,082 16,389,768 12,115,428 16,353,027 12,092,227 Less: Interest expenses Securities sold under repurchase agreements Net interest income Notional tax credit on secondary market transactions As per the Section 137 of the Inland Revenue Act No. 10 of 2006 and amendments thereto, net interest income of the Group derived from secondary market transactions in Government Securities, Treasury Bills and Bonds (Interest income accrued or received on outright or reverse repurchase transactions on Government Securities, Treasury Bills and Bonds less interest expenses accrued or paid on repurchase transactions with such Government Securities, Treasury Bills and Bonds from which such interest income was earned) for the period January 1, 2017 to December 31, 2017 has been grossed up by Rs. 1,338.116 Mn. (2016 – Rs. 918.062 Mn.) and Rs. 1,336.673 Mn. (2016 – Rs. 916.767 Mn.) by the Group and the Bank respectively as the notional tax credit, consequent to the interest income on above instruments being subjected to withholding tax. 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 instruments – Held for trading Financial investments – Available for sale Financial investments – Held to maturity Less: Interest expenses Securities sold under repurchase agreements Net interest income BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 1,003,916 1,121,313 1,003,916 1,121,313 57,518 62,068 57,518 62,068 106,015 148,381 148,381 – 899,399 – 106,015 899,399 798,017 53,831 798,017 53,831 1,240 1,252 1,240 1,252 1,240 1,252 1,240 1,252 1,002,676 1,120,061 1,002,676 1,120,061 Commercial Bank of Ceylon PLC Annual Report 2017 197
  199. Financial Reports Notes to the Financial Statements 13 .3 (c) Net interest income from Maldivian Government securities GROUP Interest income Financial investments – Held to maturity Net interest income BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 156,598 25,238 – – 156,598 25,238 – – 156,598 25,238 – – For the year ended December 31, 14. Net Fee and Commission Income 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, placement fees and syndication 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. Other fee and commission expenses relate mainly to transaction and service fees, which are expensed as the services are received. GROUP For the year ended December 31, Note Page No. BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Fee and commission income 14.1 198 10,510,800 8,230,131 10,169,211 8,143,041 Less: Fee and commission expenses 14.2 199 1,586,334 1,140,954 1,566,851 1,127,536 8,924,466 7,089,177 8,602,360 7,015,505 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Net fee and commission income Fee and commission income – Bank Fee and commission expense – Bank Rs. Bn. Rs. Bn. 12.5 1.750 10.0 1.400 7.5 1.050 5.0 2.5 0 2016 2017 24.88% 0.700 38.96% 2017: Rs. 10.169 Bn. 0.350 2017: Rs. 1.567 Bn. 2016: Rs. 8.143 Bn. 0 2016 2017 2016: Rs. 1.128 Bn. 14.1 Fee and commission income GROUP For the year ended December 31, Loans and advances related services BANK 834,468 778,517 742,996 715,086 Credit and debit cards related services 3,389,773 2,671,294 3,388,707 2,671,116 Trade and remittances related services 3,184,574 2,619,429 3,176,106 2,619,194 Deposits related services 1,687,448 1,110,216 1,680,926 1,109,285 Guarantees related services 798,583 669,497 798,281 669,409 Other financial services 615,954 381,178 382,195 358,951 10,510,800 8,230,131 10,169,211 8,143,041 Total fee and commission income 198 Commercial Bank of Ceylon PLC Annual Report 2017
  200. Financial Reports Notes to the Financial Statements 14 .2 Fee and commission expenses GROUP For the year ended December 31, Loans and advances related services BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 58,313 53,289 42,114 39,871 Credit and debit cards related services 1,385,010 980,927 1,385,010 980,927 Trade and remittances related services 44,205 32,851 40,921 32,851 Other financial services Total fee and commission expenses 98,806 73,887 98,806 73,887 1,586,334 1,140,954 1,566,851 1,127,536 15. Net Gains/(Losses) from Trading “Net gains/(losses) from trading” comprise gains less losses related to trading assets and trading liabilities, and include all realised and unrealised fair value changes, dividends, and foreign exchange differences. GROUP For the year ended December 31, Derivative financial instruments BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 107,201 (1,429,188) 107,201 (1,429,188) 107,201 (1,429,188) 107,201 (1,429,188) 122,390 (9,042) 122,390 (9,042) Net mark-to-market losses 94,672 (79,981) 94,672 (79,981) Net capital gains 27,718 70,939 27,718 70,939 Foreign exchange gains/(losses) from banks and other customers Other financial instruments – Held for trading Government securities Equities 4,365 (28,481) 4,365 (28,481) (9,046) (49,581) (9,046) (49,581) Net capital gains 3,251 13,299 3,251 13,299 Dividend income 10,160 7,801 10,160 7,801 233,956 (1,466,711) 233,956 (1,466,711) Net mark-to-market losses Total 16. Net Gains/(Losses) from Financial Investments “Net gains/(losses) from financial investments” comprise gains less losses related to Available-for-sale investments, Held-to-maturity investments, and Loans and receivables and include all realised and unrealised fair value changes and dividends. GROUP For the year ended December 31, BANK 2017 2016 2017 2016 Note Page No. Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Financial investments – Available for sale 16.1 200 129,140 75,555 128,960 75,497 Financial investments – Loans and receivables 16.2 200 70 35,204 70 35,204 129,210 110,759 129,030 110,701 Total Commercial Bank of Ceylon PLC Annual Report 2017 199
  201. Financial Reports Notes to the Financial Statements 16 .1 Financial investments – Available for sale GROUP For the year ended December 31, Government securities Net capital gains Equities Net capital gains 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 91,202 38,091 91,202 38,091 91,202 38,091 91,202 38,091 37,938 37,464 37,758 37,406 – Dividend income Total BANK 2017 – – – 37,938 37,464 37,758 37,406 129,140 75,555 128,960 75,497 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 70 35,204 70 35,204 70 35,204 70 35,204 70 35,204 70 35,204 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 (18,774) 10,395 (35,018) 16.2 Financial investments – Loans and receivables GROUP For the year ended December 31, Government securities Net capital gains Total BANK 17. Other Income (Net) GROUP For the year ended December 31, Gains/(losses) on sale of property, plant and equipment Note Page No. 17.1 200 Gains on revaluation of foreign exchange Recoveries of loans written off and provision reversals Dividend income from subsidiaries BANK 1,705 489,824 3,755,346 481,012 3,755,047 1,269,419 1,589,763 1,269,419 1,589,763 96,332 81,468 – – Dividend income from associates 4,111 5,808 4,111 4,111 Profit due to change in ownership 5,262 3,047 5,262 3,047 178,218 181,245 206,247 182,262 Rental and other income 17.2 200 Less: Dividends received from associates transferred to investment account (4,111) (5,808) – Less: Profit due to change in ownership (5,262) (3,047) – Total 1,918,687 5,536,749 2,027,365 – – 5,617,403 17.1 Gains/(losses) on sale of property, plant and equipment The gains or losses on disposal of property, plant and equipment is 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 of “Other Income” in the year in which significant risks and rewards of ownership are transferred to the buyer. 17.2 Rental income Rental income is recognised in profit or loss on an accrual basis. 200 Commercial Bank of Ceylon PLC Annual Report 2017
  202. Financial Reports Notes to the Financial Statements 18 . Impairment Charges for Loans and Other Losses For financial assets carried at amortised cost (such as amounts due from banks, loans and advances to customers as well as held to maturity investments), the Group first assesses whether objective evidence of impairment exists for individually significant financial assets or collectively for financial assets that are not individually significant. Assets that are individually assessed for impairment and for which an impairment loss is not recognised are included in a collective assessment of impairment together with the financial assets that are not individually significant. Individual assessment of impairment For financial assets above a pre determined threshold (i.e., for individually significant financial assets), if there is objective evidence that an impairment loss has been incurred, 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 (excluding future expected credit losses that have not yet been incurred). The carrying amount of the asset is reduced through the use of a provision account and the amount of impairment loss is recognised in profit or loss. Interest income continues to be accrued and recorded in “Interest Income” on the reduced carrying amount/impaired balance and is accrued using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. The present value of the estimated future cash flows is discounted at the financial asset’s original EIR. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current EIR. If the Bank has reclassified trading assets to loans and advances, the discount rate for measuring any impairment loss is the new EIR determined at the reclassification date. The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable. Collective assessment of impairment Those financial assets for which, the Group determines that no provision is required under individual impairment, such financial assets are then collectively assessed for any impairments that have been incurred but not yet identified. For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of similar risk characteristics such as internal credit ratings, asset type, industry, geographical location, collateral type, past-due status, etc. Future cash flows on a group of financial assets that are collectively evaluated for impairment, are estimated based on the historical loss experiences of assets with similar credit risk characteristics to those in the group. The key inputs into the measurement of provision for collective impairment are the term structure of the following variables: yy Probability of default (PD) yy Loss given default (LGD) yy Exposure at default (EAD) These parameters are generally derived from internally developed statistical models and other historical data. PD values are estimates at a certain date, which are calculated based on statistical rating models, and assessed using rating tools tailored to the various categories of counterparties and exposures. These statistical models are based on internally compiled data comprising both quantitative and qualitative factors. If a counterparty or exposure migrates between rating classes, then this will lead to a change in the estimate of the associated PD. PDs are estimated considering the contractual maturities of exposures. LGD is the magnitude of the likely loss in case of default. The Group estimates LGD parameters based on the history of recovery rates of claims against defaulted counterparties. The LGD models consider the structure, collateral, seniority of the claim, counterparty industry and recovery costs of any collateral that is integral to the financial asset. They are calculated on a discounted cash flow basis using the effective interest rate as the discounting factor. EAD represents the expected exposure in the event of a default or the financial asset’s gross carrying amount. Commercial Bank of Ceylon PLC Annual Report 2017 201
  203. Financial Reports Notes to the Financial Statements Historical loss experiences are adjusted based on the current observable data to reflect the effects of current conditions on the historical losses experienced , further removing the effects of conditions that do not exist at the reporting date. Estimates of changes in future cash flows reflect, and are directionally consistent with the changes in related observable data year-on-year such as changes in: – Interest rates, – Inflation rates, – Growth in Gross Domestic Product (GDP), – Global GDP growth rates, – Countries’ Sovereign ratings, – Ease of doing business Indices, – Exchange rates, – Political stability, and – Portfolio factors including percentage of restructured performing loans. The methodology and assumptions used for estimating provision for impairment including assumptions for projecting future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experiences. Impairment of rescheduled loans and advances Where possible, the Bank seeks to reschedule loans and advances rather than to take possession of collateral. If the terms of a financial asset are renegotiated, modified or an existing financial asset is replaced with a new one due to financial difficulties of the borrower, then an assessment is made to whether the financial asset should be derecognised. If the cash flows of the renegotiated asset is 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 new financial asset is recognised at fair value. The impairment loss before an expected restructuring is measured as follows: yy If the expected restructuring will not result in derecognition of the existing asset, then the estimated cash flows arising from the modified financial asset are included in the measurement of the existing asset based on their expected timing and amounts discounted at the original EIR of the existing financial asset. yy If the expected restructuring will result in derecognition of the existing asset, then the expected fair value of the new asset is treated as the final cash flow from the existing financial asset at the time of its derecognition. This amount is discounted from the expected date of derecognition to the reporting date using the original EIR of the existing financial asset. 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. The fair value of collateral is generally assessed, at a minimum, at inception and based on the Bank’s annual reporting schedule. Collateral repossessed The Bank’s policy is to carry collaterals repossessed at fair value at the repossession date and such assets will be disposed at the earliest possible opportunity. These assets are recorded under assets held for sale as per the Sri Lanka Accounting Standard – SLFRS 5 on “Non-Current Assets Held for Sale and Discontinued Operations”. Write-off Financial assets (and the related impairment allowances) are normally written off either partially or in full, when there is no realistic prospect of recovery. Where financial assets are secured, this is generally after receipt of any proceeds from the realisation of securities. Impairment losses are recognised in profit or loss and reflected in a provision account against the relevant category of financial assets. If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognised, the previously recognised impairment loss is increased or reduced by adjusting the provision account. If a write-off is later recovered, the recovery is credited to “Other Income”. 202 Commercial Bank of Ceylon PLC Annual Report 2017
  204. Financial Reports Notes to the Financial Statements Impairment charges for loans and other losses are given below : GROUP For the year ended December 31, Loans and receivables to banks Note Page No. 32 225 Loans and receivables to other customers 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 – 1,956,725 1,511,158 3,439,879 401,716 3,439,879 229 401,716 Charge/(write-back) to the Income Statement – Collective impairment 33.2 229 1,823,522 37.1 243 (1,859,806) 676 Due from subsidiaries 2,225,914 1,554,333 – 3,211 (42,484) 15,350 – – 1,583,326 (1,931,932) 676 3,253 – – Total – 1,583,326 33.2 Direct write–offs – – 2,225,914 Charge to the Income Statement – Individual impairment Investments in subsidiaries BANK 2017 3,306 1,914,241 1,529,814 19. Personnel Expenses GROUP For the year ended December 31, BANK 2017 2016 2017 2016 Note Page No. Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Salary and bonus 19.1 203 8,538,989 8,261,068 8,509,813 8,161,579 Pension costs 19.1 203 1,596,841 1,595,795 1,569,187 1,582,798 1,308,050 1,361,533 1,289,938 1,354,982 288,791 234,262 279,249 227,816 Contributions to defined contribution/benefit plans – Funded schemes Contributions to defined benefit plans – Unfunded schemes Equity-settled share-based payment expense Others Total 50.1 (c) & 50.2 (c) 269 & 270 19.2 & 57.5 203 & 285 138,341 206,174 138,341 206,174 19.3 203 1,064,346 850,051 1,050,675 843,756 11,338,517 10,913,088 11,268,016 10,794,307 19.1 Salary, bonus and pension costs Salary, bonus and contributions to defined contribution/benefit plans, reported above also include amounts paid to and contribution made on behalf of Executive Directors. 19.2 Share-based payment The Bank has an equity-settled share-based compensation plan, the details of which are given in Note 54 on page 280. 19.3 Others This includes expenses such as overtime payments, medical and hospitalisation charges, expenses incurred on staff training/recruitment and staff welfare activities, etc. 20. Depreciation and Amortisation 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 profit or loss. Leased assets under finance leases are depreciated over the shorter of the lease term and their useful lives. Freehold land is not depreciated. Commercial Bank of Ceylon PLC Annual Report 2017 203
  205. Financial Reports Notes to the Financial Statements The estimated useful lives of the property , plant and equipment of the Bank as at December 31, 2017 are as follows: Class of asset Depreciation % per annum Period (years) Freehold and leasehold buildings 2.5 40 Motor vehicles 20 5 Computer equipment 20 5 Office equipment 20 5 Office interior work 20 5 Furniture and fittings 10 10 Machinery and equipment 10 10 The above rates are compatible with the rates used by all Group entities. 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 are given in Note 39 on pages 245 to 257. Depreciation methods, useful lives, and residual values are reassessed at each 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 rate specified below: Class of asset Amortisation % per annum Period (years) Computer software 20 5 Trademarks 20 5 The above rate is compatible with the rates used by all Group entities. The unamortised balances of intangible assets with finite lives are reviewed for impairment whenever there is an indication for impairment and recognised in profit or loss 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 reassessed at each reporting date and adjusted, if required. GROUP For the year ended December 31, BANK 2017 2016 2017 2016 Note Page No. Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Depreciation of property, plant and equipment 39 245 1,185,698 1,093,088 1,097,096 1,022,648 Amortisation of intangible assets 40 258 229,764 173,790 209,766 165,903 Amortisation of trademarks Amortisation of leasehold property Total 204 Commercial Bank of Ceylon PLC Annual Report 2017 13 41 260 – – – 1,452 1,452 942 942 1,416,927 1,268,330 1,307,804 1,189,493
  206. Financial Reports Notes to the Financial Statements 21 . Other Operating Expenses GROUP For the year ended December 31, BANK 2017 2016 2017 2016 Note Page No. Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 21.1 205 65,205 38,872 45,901 32,133 30,260 31,218 22,696 25,124 16,656 14,304 10,563 9,766 Audit-related fees and expenses 7,620 8,677 6,825 8,392 Non-audit fees and expenses 6,084 8,237 5,308 6,966 Professional and legal expenses 361,880 262,522 443,387 329,237 Deposit insurance premium paid to the Central Banks 682,108 590,544 681,944 590,236 Directors’ fees Auditors’ remuneration Audit fees and expenses Donations, including contribution made to the CSR Trust Fund 83,104 61,681 83,043 61,681 Establishment expenses 2,677,614 2,439,490 2,714,360 2,488,984 Maintenance of property, plant and equipment 1,187,143 890,002 1,205,215 1,035,238 Office administration expenses 2,531,679 2,495,106 2,265,418 2,269,712 Total 7,618,993 6,809,435 7,461,964 6,832,345 21.1 Directors’ emoluments Directors emoluments represent salaries paid to Executive Directors and the fees paid to both Executive and Non-Executive Directors of the Group and the Bank. 22. Income Tax Expense Income tax expense comprises current and deferred tax. Income tax expense is recognised in the Income Statement, except to the extent it relates to items recognised directly in Equity or in OCI. Current tax “Current tax” comprises the expected tax payable or receivable on the taxable income or loss for the year and any adjustment to the tax payable or receivable in respect of previous years. The amount of current tax receivable or payable is the best estimate of the tax amount expected to be paid or received that reflects uncertainty related to income taxes, if any. It is measured using tax rates enacted or substantively enacted, as at the reporting date. Current tax also includes any tax arising from dividends. 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 provisions of the Inland Revenue Act No. 10 of 2006 and amendments thereto, at the rates specified in Note 22.1 on page 206. This Note also includes the major components of tax expense, the effective tax rates and a reconciliation between the profit before tax and tax expense, as required by the Sri Lanka Accounting Standard – LKAS 12 on “Income Taxes”. Provision for taxation on the overseas operations is made on the basis of the accounting profit for the year, as adjusted for taxation purposes, in accordance with the provisions of the relevant statutes in those countries, using the tax rates enacted or substantively enacted as at the reporting date. 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 is not recognised for: yy temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss; yy temporary differences related to investments in subsidiaries to the extent that it is probable that they will not reverse in the foreseeable future; and yy taxable temporary differences arising on the initial recognition of goodwill. Commercial Bank of Ceylon PLC Annual Report 2017 205
  207. Financial Reports Notes to the Financial Statements 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 reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Unrecognised deferred tax assets are reassessed at each reporting date and recognised to the extent that it has become probable that future taxable profits will be available, against which they can be used. Deferred tax 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 that would follow the manner in which the Group expects as at the reporting date to recover or settle the carrying amount of its assets and liabilities. Additional taxes that arise from the distribution of dividends by the Group, are recognised at the same time as the liability to pay the related dividend is recognised. These amounts are generally recognised in profit or loss as they generally relate to income arising from transactions that were originally recognised in profit or loss. 22.1 Entity-wise breakup of income tax expense in the Income Statement is as follows: GROUP BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Current year tax expense 6,679,675 5,606,143 6,564,443 5,554,989 Current year income tax expense of Domestic Banking Unit 4,870,548 4,086,795 4,870,548 4,086,795 For the year ended December 31, Note Page No. Current year income tax expense of Off-shore Banking Centre 232,412 291,831 232,412 291,831 1,450,193 1,167,596 1,450,193 1,167,596 Current year Income tax expense of Commercial Development Company PLC 37,450 40,063 – – Current year Income tax expense of ONEzero Company Limited 17,684 13,169 – – Current year Income tax expense of Serendib Finance Limited 45,744 (2,258) – – Current year Income tax expense of Commercial Bank of Maldives Private Limited 13,518 – – – 656 – – – Current year income tax expense of Bangladesh Operation Current year Income tax expense of Commex Sri Lanka S.R.L. – Italy Withholding tax on dividends received 11,470 8,947 11,290 8,767 Prior years Under/(Over) provision of taxes in respect of prior years 47 265 Deferred tax expense 74,138 Effect of change in tax rates Origination and reversal of temporary differences (99,996) – 42,017 – (100,000) 137,257 – – (16,317) – 74,138 42,017 137,257 6,653,817 5,648,160 6,601,700 5,538,672 Effective tax rate (including deferred tax) (%) 28.48 27.62 Effective tax rate (excluding deferred tax) (%) 27.88 27.70 Total 206 Commercial Bank of Ceylon PLC Annual Report 2017 48.1 265 – (16,317)
  208. Financial Reports Notes to the Financial Statements Income tax expense for 2017 and 2016 of the Bank and its subsidiaries have been provided for on the taxable income at rates shown below : 2017 2016 % % Domestic operations of the Bank 28 28 Off-shore banking operation of the Bank 28 28 Bangladesh operation of the Bank 42.5 42.5 Commercial Development Company PLC 28 28 ONEzero Company Limited 28 28 Serendib Finance Limited 28 28 Commercial Bank of Maldives Private Limited 25 25 Commex Sri Lanka S.R.L. – Italy 24 24 22.2 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 Tax Rate For the year ended December 31, Note Page No. BANK 2017 2016 2017 2016 2017 2016 % % Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 23,280,324 20,114,584 23,182,944 20,051,183 Accounting profit before tax from operations Tax effect at the statutory income tax rate 7,031,752 5,988,705 6,959,962 5,907,894 Domestic banking operation of the Bank 28 28 4,808,919 4,497,651 4,808,919 4,497,651 Offshore banking operation of the Bank 28 28 744,242 273,192 744,242 273,192 42.5 42.5 1,406,801 1,137,051 1,406,801 1,137,051 28, 25 & 24 28, 25 & 24 Bangladesh operation of the Bank Subsidiaries Tax effect of exempt income Tax effect of non-deductible expenses Tax effect of deductible expenses Qualifying payments Under/(over) provision of taxes in respect of prior years 22.1 & 47 206 & 265 22.1 & 48.1 206 & 265 Withholding tax on dividends received Deferred tax expense Income tax expense reported in the Income Statement at the effective income tax rate 71,790 (1,490,271) 80,811 (1,313,810) – (1,490,271) – (1,313,424) 7,840,250 6,766,163 7,550,140 6,722,770 (6,711,539) (5,841,357) (6,464,691) (5,768,513) (1,987) (2,505) (1,987) (2,505) (99,996) – (100,000) – 11,470 8,947 11,290 8,767 74,138 42,017 137,257 (16,317) 6,653,817 5,648,160 6,601,700 5,538,672 23. Earnings Per Share (EPS) 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. Commercial Bank of Ceylon PLC Annual Report 2017 207
  209. Financial Reports Notes to the Financial Statements Details of Basic and Diluted EPS are given below : 23.1 Basic earnings per ordinary share GROUP Note Page No. BANK 2017 2016 2017 2016 16,605,963 14,510,333 16,581,244 14,512,511 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 23.3 208 960,767,103 918,193,096 Basic earnings per ordinary share (Rs.) 17.28 960,767,103 918,193,096 15.80 17.26 2017 2016 2017 2016 16,605,963 14,510,333 16,581,244 14,512,511 15.81 23.2 Diluted earnings per ordinary share GROUP Note Page No. BANK 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 23.3 208 961,802,370 920,199,124 Diluted earnings per ordinary share (Rs.) 17.27 15.77 961,802,370 920,199,124 17.24 15.77 23.3 Weighted average number of ordinary shares for basic and diluted earnings per share Outstanding no. of shares Note Page No. Number of shares in issue as at January 1, 2017 2016 890,734,540 876,866,801 Weighted average no. of shares 2017 2016 890,734,540 876,866,801 Add: Number of shares satisfied in the form of issue and allotment of new shares from final dividend for 2015 53.1 278 Add: Number of shares satisfied in the form of issue and allotment of new shares from final dividend for 2016 53.1 278 11,425,159 – 11,425,159 11,425,159 Add: Number of shares exercised in the form of Rights Issue in 2017 53.1 278 90,461,066 – 56,449,510 16,730,174 – 12,731,007 992,620,765 889,597,808 – 12,731,007 958,609,209 917,753,141 Add: Number of shares issued under Employee Share Option Plan (ESOP) 2008 2,518,564 894,487 1,737,730 268,784 Add: Number of shares issued under Employee Share Option Plan (ESOP) 2015 759,973 242,245 420,164 171,171 Weighted average number of ordinary shares for basic earnings per ordinary share calculation 995,899,302 890,734,540 960,767,103 918,193,096 Add: Bonus element on number of outstanding options under ESOP 2008 as at the year end – – 625,382 1,404,951 Add: Bonus element on number of outstanding options under ESOP 2015 as at the year end – – 409,885 601,077 Weighted average number of ordinary shares for diluted earnings per ordinary share calculation(*) 995,899,302 890,734,540 961,802,370 920,199,124 (*) The market value of the Bank’s shares for the purpose of calculating the dilutive effect of share options has been based on the excess of quoted market price as of December 31, 2017 and December 31, 2016 over the offer price. 208 Commercial Bank of Ceylon PLC Annual Report 2017
  210. Financial Reports Notes to the Financial Statements 24 . Dividends GROUP 2017 Second interim Rs. 3.00 per share for 2016 BANK 2016 (paid on February 17, 2017) Rs. ’000 2017 Second interim Rs. 3.00 per share for 2016 2016 (paid on February 17, 2017) Rs. ’000 Rs. ’000 Rs. ’000 On ordinary shares Net dividend paid to the ordinary shareholders out of normal profits 2,418,709 – 2,418,709 – Withholding tax deducted at source 256,090 – 256,090 – 2,674,799 – 2,674,799 – Gross ordinary dividend paid First interim Rs. 1.50 per share for 2017 First interim Rs. 1.50 per share for 2016 (paid on November 20, 2017) (paid on November 18, 2016) First interim Rs. 1.50 per share for 2017 (paid on November 20, 2017) First interim Rs. 1.50 per share for 2016 (paid on November 18, 2016) Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 1,350,719 1,208,039 1,350,719 1,208,039 On ordinary shares Net dividend paid to the ordinary shareholders out of normal profits Withholding tax deducted at source 143,000 127,889 143,000 127,889 Gross ordinary dividend paid 1,493,719 1,335,928 1,493,719 1,335,928 Total gross ordinary dividend paid 4,168,518 1,335,928 4,168,518 1,335,928 The Board of Directors of the Bank has approved the payment of a second interim dividend of Rs. 3.00 per share for both the voting and non-voting ordinary shareholders of the Bank for the year ended December 31, 2017 and this dividend was paid on February 20, 2018. The Board of Directors of the Bank has recommended the payment of a final dividend of Rs. 2.00 per share which is to be satisfied 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, 2017 (Bank declared a final dividend of Rs. 2.00 per share for 2016 in 2017 and this was satisfied in the form of issue and allotment of new shares for both voting and non-voting ordinary shares of the Bank). The total dividend recommended by the Board is to be approved at the forthcoming Annual General Meeting to be held on March 28, 2018. In accordance with provisions of the Sri Lanka Accounting Standard No. 10 on “Events after the Reporting Period”, the second interim dividend referred to above and the proposed final dividend for the year ended December 31, 2017 have not been recognised as liabilities as at the year end. Final dividend payable for the year 2017 has been estimated at Rs.1,993.401 Mn. (Actual final dividend for 2016 amounted to Rs. 1,785.054 Mn.). Accordingly, the dividend per ordinary share (for both voting and non-voting ) for the year 2017 would be Rs. 6.50 (2016 – Rs. 6.50). Commercial Bank of Ceylon PLC Annual Report 2017 209
  211. Financial Reports Notes to the Financial Statements 25 . 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: 25.1 Classification of financial assets and financial liabilities – Group 25.1 (a) Group Held for Held to Trading (HFT) Maturity (HTM) As at December 31, 2017 Rs. ’000 Rs. ’000 Loans and Receivables Rs. ’000 Available Other amortised for Sale (AFS) cost Rs. ’000 Rs. ’000 Total Rs. ’000 Note Page No. Cash and cash equivalents 27 219 – – 34,673,424 – – 34,673,424 Balances with central banks 28 219 – – 45,546,349 – – 45,546,349 Placements with banks 29 221 – – 17,633,269 – – 17,633,269 Derivative financial assets 30 221 2,334,536 – – – – 2,334,536 Other financial instruments – Held for trading 31 222 4,410,913 – – – – 4,410,913 Loans and receivables to banks 32 225 – – 640,512 – – 640,512 Loans and receivables to other customers 33 226 – – 742,444,130 – – 742,444,130 Financial investments – Available for sale 34 232 – – – 154,913,643 Financial investments – Held to maturity 35 238 – – – 69,365,796 Financial investments – Loans and receivables 36 239 – – 48,712,477 – 1,120,675,049 Financial assets Total financial assets – 6,745,449 69,365,796 – – – 48,712,477 154,913,643 69,365,796 889,650,161 154,913,643 Financial liabilities Due to banks 43 261 Derivative financial liabilities 44 262 Securities sold under repurchase agreements – – – – – – – – – – – 49,532,385 49,532,385 3,678,494 60,244,892 – 60,244,892 3,678,494 Due to other customers/ deposits from customers 45 263 – – – – 857,269,981 857,269,981 Other borrowings 46 265 – – – – 23,786,094 23,786,094 Subordinated liabilities 52 276 – – – – 25,165,924 25,165,924 – – – Total financial liabilities 210 Commercial Bank of Ceylon PLC Annual Report 2017 3,678,494 1,015,999,276 1,019,677,770
  212. Financial Reports Notes to the Financial Statements 25 .1 (b) Group As at December 31, 2016 Held for Trading (HFT) Note Page No. Rs. ’000 Held to Maturity (HTM) Rs. ’000 Loans and Receivables Rs. ’000 Available Other amortised for Sale (AFS) cost Rs. ’000 Rs. ’000 Total Rs. ’000 Financial assets Cash and cash equivalents 27 219 – – 32,924,227 – – 32,924,227 Balances with central banks 28 219 – – 43,935,258 – – 43,935,258 Placements with banks 29 221 – – 11,718,499 – – 11,718,499 Derivative financial assets 30 221 1,052,829 – – – – 1,052,829 Other financial instruments – Held for trading 31 222 4,987,798 – – – – 4,987,798 Loans and receivables to banks 32 225 – – 624,458 – – 624,458 Loans and receivables to other customers 33 226 – – 620,129,488 – – 620,129,488 Financial investments – Available for sale 34 232 – – – 160,092,522 Financial investments – Held to maturity 35 238 – – – 63,626,598 Financial investments – Loans and receivables 36 239 – – 51,824,026 – 990,915,703 Total financial assets – 6,040,627 63,626,598 – 63,626,598 – – 51,824,026 761,155,956 160,092,522 160,092,522 Financial liabilities Due to banks 43 261 Derivative financial liabilities 44 262 Securities sold under repurchase agreements – – – – – – – – – – – 69,628,961 69,628,961 1,515,035 71,098,391 – 71,098,391 1,515,035 Due to other customers/ deposits from customers 45 263 – – – – 743,310,613 743,310,613 Other borrowings 46 265 – – – – 9,270,154 9,270,154 Subordinated liabilities 52 276 – – – – 24,849,539 24,849,539 – – – 918,157,658 919,672,693 Total financial liabilities 1,515,035 Commercial Bank of Ceylon PLC Annual Report 2017 211
  213. Financial Reports Notes to the Financial Statements 25 .2 Classification of financial assets and financial liabilities – Bank 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 Bank: 25.2 (a) Bank Held for Held to Trading (HFT) Maturity (HTM) As at December 31, 2017 Rs. ’000 Rs. ’000 Loans and Available Other amortised Receivables for Sale (AFS) cost Rs. ’000 Rs. ’000 Rs. ’000 Total Rs. ’000 Note Page No. Cash and cash equivalents 27 219 – – 33,224,619 – – 33,224,619 Balances with central banks 28 219 – – 44,801,446 – – 44,801,446 Placements with banks 29 221 – – 17,633,269 – – 17,633,269 Derivative financial assets 30 221 2,334,536 – – – – 2,334,536 Other financial instruments – Held for trading 31 222 4,410,913 – – – – 4,410,913 Loans and receivables to banks 32 225 – – 640,512 – – 640,512 Loans and receivables to other customers 33 226 – – 737,446,567 – – 737,446,567 Financial investments – Available for sale 34 232 – – – 154,714,132 Financial investments – Held to maturity 35 238 – – – 63,562,752 Financial investments – Loans and receivables 36 239 – – – 48,712,477 – 1,107,481,223 Financial assets Total financial assets 6,745,449 63,562,752 – 63,562,752 – – 48,712,477 154,714,132 882,458,890 154,714,132 Financial liabilities Due to banks 43 261 Derivative financial liabilities 44 262 Securities sold under repurchase agreements – – – – – – – – – – – 49,676,767 49,676,767 3,678,494 57,120,991 – 57,120,991 3,678,494 Due to other customers/ deposits from customers 45 263 – – – – 850,127,511 850,127,511 Other borrowings 46 265 – – – – 23,786,094 23,786,094 Subordinated liabilities 52 276 – – – – 25,165,924 25,165,924 – – Total financial liabilities 212 Commercial Bank of Ceylon PLC Annual Report 2017 3,678,494 1,005,877,287 1,009,555,781
  214. Financial Reports Notes to the Financial Statements 25 .2 (b) Bank As at December 31, 2016 Held for Trading (HFT) Note Page No. Rs. ’000 Held to Maturity (HTM) Rs. ’000 Loans and receivables Rs. ’000 Available for Sale (AFS) Rs. ’000 Other amortised Cost Total Rs. ’000 Rs. ’000 Financial assets Cash and cash equivalents 27 219 – – 30,193,589 – – 30,193,589 Balances with central banks 28 219 – – 43,873,205 – – 43,873,205 Placements with banks 29 221 – – 11,718,499 – – 11,718,499 Derivative financial assets 30 221 1,052,829 – – 1,052,829 4,987,798 – – Other financial instruments – Held for trading 31 222 Loans and receivables to banks 32 225 – – 624,458 616,018,228 – Loans and receivables to other customers 33 226 – – Financial investments – Available for sale 34 232 – – Financial investments – Held to maturity 35 238 – Financial investments – Loans and receivables 36 239 – Total financial assets 6,040,627 60,981,298 – 60,981,298 – – – 51,824,026 754,252,005 – – 4,987,798 – – 624,458 – – 616,018,228 – 160,023,471 – – 60,981,298 – – 51,824,026 – 981,297,401 160,023,471 160,023,471 Financial liabilities Due to banks 43 261 Derivative financial liabilities 44 262 Securities sold under repurchase agreements – – – – – – – – – – – 69,867,469 69,867,469 739,563,494 1,515,035 67,608,811 – 67,608,811 1,515,035 Due to other customers/ deposits from customers 45 263 – – – – 739,563,494 Other borrowings 46 265 – – – – 9,270,154 9,270,154 Subordinated liabilities 52 276 – – – – 24,849,539 24,849,539 – – – 911,159,467 912,674,502 Total financial liabilities 1,515,035 Commercial Bank of Ceylon PLC Annual Report 2017 213
  215. Financial Reports Notes to the Financial Statements 26 . Fair Value Measurement 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 non-financial assets and liabilities is provided below: Level 1 Inputs that are quoted market prices (unadjusted) in an active market for identical instruments. When available, the Group measures 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 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. 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. 214 Commercial Bank of Ceylon PLC Annual Report 2017
  216. Financial Reports Notes to the Financial Statements 26 .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, 2017 Note Page No. 26.2 217 BANK Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Non-financial assets Property, plant and equipment Land and buildings Total non-financial assets at fair value – – 11,559,056 11,559,056 – – 11,218,112 11,218,112 – – 11,559,056 11,559,056 – – 11,218,112 11,218,112 Financial assets Derivative financial assets 30 221 Currency swaps – 1,067,259 – 1,067,259 – 1,067,259 – 1,067,259 Forward contracts – 1,264,900 – 1,264,900 – 1,264,900 – 1,264,900 Spot contracts – 2,377 – 2,377 – 2,377 – 2,377 Other financial instruments – Held for trading 31 222 Government securities Equity shares Financial investments – Available for sale 34 4,096,168 – – 4,096,168 4,096,168 – – 4,096,168 314,745 – – 314,745 314,745 – – 314,745 154,366,556 – – 154,366,556 154,167,169 – – 154,167,169 500,278 – 547,087 500,278 – 232 Government securities Equity securities Investment in unit trust – – 46,809 – – – – 46,685 546,963 – – Total financial assets at fair value 159,277,747 2,334,536 46,809 161,659,092 159,078,360 2,334,536 46,685 161,459,581 Total assets at fair value 159,277,747 2,334,536 11,605,865 173,218,148 159,078,360 2,334,536 11,264,797 172,677,693 Financial liabilities Derivative financial liabilities 44 262 Currency swaps – Interest rate swaps Forward contracts Spot contracts Total liabilities at fair value 2,656,376 – 2,656,376 – – 4,462 – 1,015,648 – – 2,656,376 – – 4,462 – 1,015,648 2,008 – 3,678,494 – 2,656,376 – 4,462 – 4,462 – 1,015,648 – 1,015,648 2,008 – 2,008 – 2,008 3,678,494 – 3,678,494 – 3,678,494 Commercial Bank of Ceylon PLC Annual Report 2017 215
  217. Financial Reports Notes to the Financial Statements GROUP As at December 31 , 2016 Note Page No. 26.2 217 BANK Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Non-financial assets Property, plant and equipment Land and buildings Total non-financial assets at fair value – – 7,743,071 7,743,071 – – 7,528,891 7,528,891 – – 7,743,071 7,743,071 – – 7,528,891 7,528,891 Financial assets Derivative financial assets 30 221 Currency swaps – 261,664 – 261,664 – 261,664 – 261,664 Forward contracts – 788,808 – 788,808 – 788,808 – 788,808 Spot contracts – 2,357 – 2,357 – 2,357 – 2,357 Other financial instruments – Held for trading 31 222 Government securities Equity shares Financial investments – Available for sale 34 4,693,989 – – 4,693,989 4,693,989 – – 4,693,989 293,809 – – 293,809 293,809 – – 293,809 159,642,243 – – 159,642,243 159,573,316 – – 159,573,316 246,548 – 293,819 246,548 – 232 Government securities Equity securities Investment in unit trust – 156,460 47,271 – 156,460 – 156,460 47,147 – 293,695 156,460 Total financial assets at fair value 164,876,589 1,209,289 47,271 166,133,149 164,807,662 1,209,289 47,147 166,064,098 Total assets at fair value 164,876,589 1,209,289 7,790,342 173,876,220 164,807,662 1,209,289 7,576,038 173,592,989 Financial liabilities Derivative financial liabilities 44 262 Currency swaps – 663,714 – 663,714 – 663,714 Forward contracts – 849,011 – 849,011 – Spot contracts – 2,310 – 2,310 – – 1,515,035 – 1,515,035 – Total liabilities at fair value 216 Commercial Bank of Ceylon PLC Annual Report 2017 – 663,714 849,011 – 849,011 2,310 – 2,310 1,515,035 – 1,515,035
  218. Financial Reports Notes to the Financial Statements 26 .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 available in Notes 39.1 to 39.4 on pages 247 to 257. 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 168 to 171. Note 39.5 (b) on page 252 provides information on significant unobservable inputs used as at December 31, 2017 in measuring fair value of land and buildings categorised as Level 3 in the fair value hierarchy. Note 39.5 (c) on page 256 provides details of valuation techniques used and sensitivity of fair value measurement to changes in significant unobservable inputs. Equity securities Value of unquoted shares of Rs. 46.809 Mn. in Group and Rs. 46.685 Mn. in Bank as at end of the year 2017 (Rs. 47.271 Mn. in Group and Rs. 47.147 Mn. in Bank as at end 2016) categorised under financial investments – Available for sale whose fair value cannot be reliably measured is stated at cost in the Statement of Financial Position as permitted by the LKAS 39 on “Financial Instruments: Recognition and Measurement”. 26.3 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 liabilities carried at amortised cost (e.g. fixed rate loans and receivables, due to other customers, subordinated liabilities) are estimated based on the Discounted Cash Flow approach. This approach employs the current market interest rates of similar financial instruments as a significant unobservable input in measuring the fair value and hence it is categorised under Level 3 in the fair value hierarchy. Sensitivity of significant unobservable inputs used to measure fair value of fixed rate financial instruments A significant increase/(decrease) in the market interest rate would result in lower/(higher) fair value being disclosed. Assets for which fair value approximates carrying value For financial assets and liabilities with short-term maturities or with short-term re-pricing intervals, it is assumed that the carrying amounts approximate to their fair value. This assumption is also applied to demand deposits and savings deposits which do not have a specific maturity. Commercial Bank of Ceylon PLC Annual Report 2017 217
  219. Financial Reports Notes to the Financial Statements The following table sets out the fair values of financial assets and liabilities not measured at fair value and related fair value hierarchy used : GROUP As at December 31, 2017 BANK Level 1 Level 2 Level 3 Total fair values Total carrying amount Level 1 Level 2 Level 3 Total fair values Total carrying amount Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Note Page No. Rs. ’000 Cash and cash equivalents 27 219 – 34,673,424 – 34,673,424 34,673,424 – 33,224,619 – 33,224,619 33,224,619 Balances with central banks 28 219 – 45,546,349 – 45,546,349 45,546,349 – 44,801,446 – 44,801,446 44,801,446 Placements with banks 29 221 – 17,633,269 – 17,633,269 17,633,269 – 17,633,269 – 17,633,269 17,633,269 Loans and receivables to banks 32 225 – 640,512 – 640,512 640,512 – 640,512 – 640,512 640,512 Loans and receivables to other customers 33 226 – 741,818,598 741,818,598 742,444,130 – 736,821,035 737,446,567 Financial investments – Held-to-maturity 35 238 68,892,386 63,089,342 63,562,752 Financial investments – Loans and receivables 36 239 48,712,477 48,712,477 48,712,477 63,089,342 96,299,846 785,533,512 944,922,700 946,021,642 57,120,991 57,120,991 49,676,767 49,676,767 850,127,511 Financial assets Total financial assets not at fair value – – – – – 48,712,477 68,892,386 98,493,554 790,531,075 68,892,386 69,365,796 48,712,477 48,712,477 957,917,015 959,015,957 – 63,089,342 736,821,035 – – – – Financial liabilities Due to banks 43 – 261 Securities sold under repurchase agreements – – 60,244,892 60,244,892 60,244,892 – 49,532,385 49,532,385 – 856,454,642 856,454,642 49,532,385 – – 57,120,991 49,676,767 – Due to other customers/ deposits from customers 45 263 – – 857,269,981 – – 849,312,172 849,312,172 Other borrowings 46 265 – – 23,786,094 23,786,094 23,786,094 – – 23,786,094 23,786,094 23,786,094 Subordinated liabilities 52 276 – – 25,731,210 25,731,210 25,165,924 – – 25,731,210 25,731,210 25,165,924 Total financial liabilities not at fair value – 49,532,385 966,216,838 1,015,749,223 1,015,999,276 – 49,676,767 955,950,467 1,005,627,234 1,005,877,287 GROUP As at December 31, 2016 Note Page No. BANK Level 1 Level 2 Level 3 Total fair value Total carrying amount Level 1 Level 2 Level 3 Total fair value Total carrying amount Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Financial assets Cash and cash equivalents 27 219 – 32,924,227 – 32,924,227 32,924,227 – 30,193,589 – 30,193,589 30,193,589 Balances with central banks 28 219 – 43,935,258 – 43,935,258 43,935,258 – 43,873,205 – 43,873,205 43,873,205 Placements with banks 29 221 – 11,718,499 – 11,718,499 11,718,499 – 11,718,499 – 11,718,499 11,718,499 Loans and receivables to banks 32 225 – 624,458 – 624,458 624,458 – 624,458 – 624,458 624,458 Loans and receivables to other customers 33 226 – 625,821,184 625,821,184 620,129,488 – Financial investments – Held to maturity 35 238 Financial investments – Loans and receivables 36 239 Total financial assets not at fair value 62,777,800 – – – 62,777,800 63,626,598 51,824,026 51,824,026 62,777,800 89,202,442 677,645,210 829,625,452 824,782,554 – – 51,824,026 60,132,500 – – – – 621,709,924 621,709,924 616,018,228 – 51,824,026 60,132,500 60,981,298 51,824,026 51,824,026 60,132,500 86,409,751 673,533,950 820,076,201 815,233,303 Financial liabilities Due to banks 43 261 Securities sold under repurchase agreements – – – 69,628,961 71,098,391 – 71,098,391 71,098,391 – 69,628,961 69,628,961 – – 69,867,469 67,608,811 – 67,608,811 67,608,811 69,867,469 69,867,469 Due to other customers/deposits from customers 45 263 – – 743,145,668 743,145,668 743,310,613 – – Other borrowings 46 265 – – 9,270,154 9,270,154 9,270,154 – – 9,270,154 9,270,154 9,270,154 Subordinated liabilities 52 276 – – 24,175,367 24,175,367 24,849,539 – – 24,175,367 24,175,367 24,849,539 69,628,961 847,689,580 917,318,541 918,157,658 – Total financial liabilities not at fair value 218 – Commercial Bank of Ceylon PLC Annual Report 2017 739,728,439 739,728,439 739,563,494 69,867,469 840,782,771 910,650,240 911,159,467
  220. Financial Reports Notes to the Financial Statements 26 .4 Valuation techniques and inputs in measuring fair values The table below provides information on the valuation techniques and inputs used in measuring the fair values of derivative financial assets and liabilities in the Level 2 of the fair value hierarchy, as given in Note 26.1 on page 215. Type of financial instruments Fair value as at December 31, 2017 (Rs. ’000) Derivative financial assets 2,334,536 Derivative financial liabilities 3,678,494 Valuation technique Significant valuation inputs Adjusted Forward Rate Approach yy Spot exchange rate This approach considers the present value of projected forward exchange rate as at the reporting date as the fair yy Interest rate differentials value. The said forward rate is projected, based on the spot between currencies under exchange rate and the forward premium/discount calculated consideration using extrapolated interest rates of the currency pairs under consideration. In computing the present value, interest rate differential between two currencies under consideration is used as the discount rate. 27. Cash and Cash Equivalents Cash and cash equivalents include cash in hand, placements with banks and loans at call/short notice and highly liquid financial assets with original maturities within three months or less from the date of acquisition that are subject to an insignificant risk of changes in fair value and are used by the Group in the management of its short-term commitments. These items are brought to Financial Statements at face values or the gross values, where appropriate. There were no cash and cash equivalents held by the Group companies that were not available for use by the Group. Cash and cash equivalents are carried at amortised cost in the Statement of Financial Position. GROUP As at December 31, Cash in hand Coins and notes held in local currency Coins and notes held in foreign currency Balances with banks Local banks BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 23,577,061 17,599,901 23,280,599 17,406,776 20,846,435 15,497,697 20,836,652 15,488,867 2,730,626 2,102,204 2,443,947 1,917,909 6,748,718 6,122,355 6,700,666 5,794,927 – Foreign banks Money at call and at short notice Total – – – 6,748,718 6,122,355 6,700,666 5,794,927 4,347,645 9,201,971 3,243,354 6,991,886 34,673,424 32,924,227 33,224,619 30,193,589 The maturity analysis of cash and cash equivalents is given in Note 62 on pages 289 and 290. 28. Balances with Central Banks Balances with central banks are carried at amortised cost in the Statement of Financial Position. GROUP As at December 31, Statutory balances with central banks Total BANK 2017 2016 2017 2016 Note Page No. Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 28.1 220 45,546,349 43,935,258 44,801,446 43,873,205 45,546,349 43,935,258 44,801,446 43,873,205 Commercial Bank of Ceylon PLC Annual Report 2017 219
  221. Financial Reports Notes to the Financial Statements 28 .1 Statutory balances with central banks GROUP As at December 31, Balances with the Central Bank of Sri Lanka Balances with the Bangladesh Bank Balances with the Maldives Monetary Authority Total BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 40,199,840 40,469,986 40,199,840 40,469,986 4,601,606 3,403,219 4,601,606 3,403,219 744,903 62,053 45,546,349 43,935,258 – 44,801,446 – 43,873,205 Balances with Central Bank of Sri Lanka The Monetary Law Act requires that all commercial banks operating in Sri Lanka to maintain a statutory reserve on all deposit liabilities denominated in Sri Lankan Rupees. As required by the provisions of Section 93 of the Monetary Law Act, a cash balance is maintained with the Central Bank of Sri Lanka. As at December 31, 2017, the minimum cash reserve requirement was 7.50% of the rupee deposit liabilities (7.50% in 2016). There is no reserve requirement for foreign currency deposits liabilities of the Domestic Banking Unit (DBU) and the deposit liabilities of the Off-shore Banking Centre (OBC) in Sri Lanka. Balances with Bangladesh Bank The Bank’s Bangladesh operation is required to maintain the statutory liquidity requirement on time and demand liabilities (both local and foreign currencies), partly in the form of a Cash Reserve Requirement and the balance by way of foreign currency and/or in the form of unencumbered securities held with the Bangladesh Bank. As per the Bangladesh Bank regulations, the Statutory Liquidity Requirement as at December 31, 2017 was 19.50% (19.50% in 2016) on time and demand liabilities (both local and foreign currencies), which includes a 6.50% (6.50% in 2016) cash reserve requirement and the balance 13.00% (13.00% in 2016) is permitted to be maintained in foreign currency and/or also in unencumbered securities held with the Bangladesh Bank. Balances with Maldives Monetary Authority The Maldives Banking Act No. 24 of 2010 Section 25 requires the Bank to maintain a statutory reserve on all deposits liabilities denominated in both foreign currency and local currency deposits excluding interbank deposits of other banks in Maldives and Letter of Credit margin deposits. According to the Bank regulations of Maldives Monetary Authority, the Minimum Reserve Requirement (MRR) as at December 31, 2017 was 10% (10% in 2016). The reserve requirement for local currency is to be met in the form of Rufiyaa deposits, while reserve requirement for foreign currency is to be met in the form of US dollar deposits. The maturity analysis of balances with central banks is given in Note 62 on pages 289 and 290. 220 Commercial Bank of Ceylon PLC Annual Report 2017
  222. Financial Reports Notes to the Financial Statements 29 . Placements with Banks GROUP As at December 31, BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Placements – within Sri Lanka – 1,094,821 – 1,094,821 Placements – outside Sri Lanka 17,633,269 10,623,678 17,633,269 10,623,678 Total 17,633,269 11,718,499 17,633,269 11,718,499 The maturity analysis of placements with banks is given in Note 62 on pages 289 and 290. 30. Derivative Financial Assets The Bank uses derivatives such as interest rate swaps, foreign currency swaps and forward foreign exchange contracts, etc. Derivative financial assets are recorded at fair value. Changes in the fair value of derivatives are included in “Net Gains/(Losses) from Trading” in the Income Statement. Derivatives embedded in other financial instruments are treated as separate derivatives and recorded at fair value if their economic characteristics and risks are not closely related to those of the host contract and the host contract is not itself held for trading or designated at fair value through profit or loss. The embedded derivatives separated from the host are carried at fair value in the trading portfolio with changes in fair value recognised in the profit or loss. GROUP BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Currency swaps 1,067,259 261,664 1,067,259 261,664 Forward contracts 1,264,900 788,808 1,264,900 788,808 2,377 2,357 2,377 2,357 2,334,536 1,052,829 2,334,536 1,052,829 As at December 31, Foreign currency derivatives Spot contracts Total The maturity analysis of derivative financial assets is given in Note 62 on pages 289 and 290. Commercial Bank of Ceylon PLC Annual Report 2017 221
  223. Financial Reports Notes to the Financial Statements 31 . Other Financial Instruments – Held for Trading Financial assets are classified as held for trading if: yy they are acquired principally for the purpose of selling or repurchasing in the near term; or yy they hold as a part of a portfolio that is managed together for short-term profit or position taking; or yy they form part of derivative financial instruments entered into by the Group that are not designated as hedging instruments in hedge relationships as per the Sri Lanka Accounting Standard – LKAS 39 on “Financial Instruments: Recognition and Measurement”. Financial assets held for trading are recorded in the Statement of Financial Position at fair value. Changes in fair value are recognised in profit or loss. Interest and dividend income are recorded in “Interest Income” and “Net Gains/(Losses) from Trading” respectively in the Income Statement, according to the terms of the contract, or when the right to receive the payment has been established. The Group evaluates its financial assets held for trading, other than derivatives, to determine whether the intention to sell them in the near term is still appropriate. When the Group is unable to trade these financial assets, due to inactive markets and Management’s intention to sell them in the foreseeable future significantly changes, the Group may elect to reclassify these financial assets in rare circumstances. Financial assets held-for-trading include instruments such as Government and other debt securities and equity instruments that have been acquired principally for the purpose of selling or repurchasing in the near term and derivatives, including separated embedded derivatives explained below, unless they are designated as effective hedging instruments. GROUP As at December 31, BANK 2017 2016 2017 2016 Note Page No. Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Government securities 31.1 222 4,096,168 4,693,989 4,096,168 4,693,989 Equity securities 31.2 223 314,745 293,809 314,745 293,809 4,410,913 4,987,798 4,410,913 4,987,798 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Total 31.1 Government securities GROUP As at December 31, Treasury bills BANK 933,056 2,467,221 933,056 2,467,221 Treasury bonds 3,163,112 2,226,768 3,163,112 2,226,768 Total Government securities 4,096,168 4,693,989 4,096,168 4,693,989 The maturity analysis of other financial instruments held for trading is given in Note 62 on pages 289 and 290. 222 Commercial Bank of Ceylon PLC Annual Report 2017
  224. Financial Reports Notes to the Financial Statements 31 .2 Equity securities – Group and Bank As at December 31, 2017 Sector/name of the Company No. of shares Market price As at December 31, 2016 Market Cost of the value investment Rs. Rs. ’000 Rs. ’000 No. of shares Market price Market value Cost of the investment Rs. Rs. ’000 Rs. ’000 Bank, Finance and Insurance Central Finance Company PLC 196,189 92.30 18,108 18,937 196,189 100.00 19,619 18,937 Citizens Development Business Finance PLC (Non-voting) 101,965 56.00 5,710 3,398 101,965 62.10 6,332 3,398 84 249.00 21 12 83 225.00 19 12 Lanka Ventures PLC 100,000 55.00 5,500 3,033 100,000 42.50 4,250 3,033 National Development Bank PLC 207,628 136.40 28,320 34,381 200,000 156.00 31,200 34,381 People’s Insurance PLC 126,500 23.00 2,910 1,898 126,500 19.00 2,404 1,898 32,341 315.70 10,210 5,430 26,350 260.40 6,862 4,298 70,779 67,089 70,686 65,957 Hatton National Bank PLC Sampath Bank PLC Subtotal Beverage, Food and Tobacco Lanka Milk Foods (CWE) PLC 250,000 157.00 39,250 27,866 250,000 119.00 29,750 27,866 Melstacorp PLC 245,960 59.50 14,635 9,814 245,960 59.30 14,585 9,814 1,000 13.80 14 15 1,000 19.50 20 15 53,899 37,695 44,355 37,695 Renuka Foods PLC (Non-voting) Subtotal Chemicals and Pharmaceuticals Chemical Industries Colombo Holding PLC (Non-voting) 161,400 47.40 7,650 11,692 161,400 68.00 10,975 11,692 Haycarb PLC 107,100 147.50 15,797 15,914 107,100 150.00 16,065 15,914 23,447 27,606 27,040 27,606 5,895 16,685 5,895 16,685 Subtotal Construction and Engineering Colombo Dockyard PLC 75,000 88.50 Subtotal 6,638 16,685 6,638 16,685 75,000 78.60 Diversified Holdings Hayleys PLC Hemas Holdings PLC John Keells Holdings PLC – – – – 68,313 241.00 16,463 19,269 60 126.00 8 2 60 98.00 6 2 130,611 148.50 19,396 20,527 130,611 145.00 18,939 20,527 35,867 39,798 18,945 20,529 12,868 Subtotal Healthcare Ceylon Hospitals PLC Ceylon Hospitals PLC (Non-voting) 121,900 83.00 10,118 12,868 121,900 87.40 10,654 61,100 65.30 3,990 4,423 61,100 69.50 4,246 4,423 14,108 17,291 14,900 17,291 3,473 Subtotal Hotels and Travels John Keells Hotels PLC 267,608 8.80 2,355 3,473 267,608 10.90 2,917 Taj Lanka Hotels PLC 212,390 15.90 3,377 6,625 212,390 25.20 5,352 6,625 5,732 10,098 8,269 10,098 Subtotal Commercial Bank of Ceylon PLC Annual Report 2017 223
  225. Financial Reports Notes to the Financial Statements As at December 31 , 2017 Sector/name of the Company No. of shares Market price As at December 31, 2016 Market Cost of the value investment Rs. Rs. ’000 Rs. ’000 No. of shares Market price Market value Cost of the investment Rs. Rs. ’000 Rs. ’000 Investment Trusts Renuka Holdings PLC 117,158 24.00 2,812 3,180 117,158 21.10 2,472 3,180 Renuka Holdings PLC (Non-voting) 265,368 17.00 4,511 4,958 265,368 18.00 4,777 4,958 7,323 8,138 7,249 8,138 Subtotal Land and Property CT Land Development PLC Overseas Reality Ceylon PLC RIL Property PLC 15,000 45.50 683 531 15,000 53.10 797 531 183,320 17.60 3,226 2,716 183,320 20.00 3,666 2,716 2,500,000 7.20 18,000 20,000 21,909 23,247 Subtotal – – – – 4,463 3,247 Manufacturing ACL Cables PLC 100,000 42.40 4,240 3,676 343,032 60.50 20,753 14,096 Dipped Products PLC 200,000 85.00 17,000 24,239 200,000 86.80 17,360 24,239 60 99.40 6 5 60 99.70 6 5 12,300 0.10 1 351 12,300 0.10 1 351 155,927 114.50 17,854 18,057 155,927 115.50 18,010 18,057 39,101 46,328 56,130 56,748 2,461 9,172 1,796 9,172 2,461 9,172 1,796 9,172 Lanka Walltiles PLC Pelwatte Sugar Industries PLC Royal Ceramics Lanka PLC Subtotal Plantations Kotagala Plantations PLC 201,750 12.20 Subtotal 201,750 8.90 Power and Energy Hemas Power PLC 106,249 18.20 1,934 2,053 106,249 22.30 2,369 2,053 Lanka IOC PLC 685,984 28.00 19,208 15,013 685,984 31.70 21,746 15,013 21,142 17,066 24,115 17,066 12,339 6,300 9,966 6,300 12,339 6,300 9,966 6,300 314,745 326,513 293,809 296,532 Subtotal Telecommunications Dialog Axiata PLC Subtotal Total 949,172 13.00 Mark to market gains/(losses) (11,768) Market value of equity securities 314,745 224 Commercial Bank of Ceylon PLC Annual Report 2017 949,172 10.50 (2,723) 293,809
  226. Financial Reports Notes to the Financial Statements 31 .3 Industry/sector composition of equity securities – Group and Bank As at December 31, 2017 Market value Cost of the investment Rs. ’000 Rs. ’000 Banking, finance and insurance 70,779 Beverage, food and tobacco 53,899 Chemicals and pharmaceuticals 23,447 Industry/sector Construction and engineering As at December 31, 2016 Market value Cost of the investment % Rs. ’000 Rs. ’000 % 67,089 22.49 70,686 65,957 24.06 37,695 17.12 44,355 37,695 15.10 27,606 7.45 27,040 27,606 9.20 6,638 16,685 2.11 5,895 16,685 2.01 Diversified holdings 35,867 39,798 11.40 18,945 20,529 6.45 Healthcare 14,108 17,291 4.48 14,900 17,291 5.07 5,732 10,098 1.82 8,269 10,098 2.81 Hotels and travels Investment trusts 7,323 8,138 2.33 7,249 8,138 2.47 Land and property 21,909 23,247 6.96 4,463 3,247 1.52 Manufacturing 39,101 46,328 12.42 56,130 56,748 19.10 Plantations Power and energy Telecommunications Subtotal 2,461 9,172 0.78 1,796 9,172 0.61 21,142 17,066 6.72 24,115 17,066 8.21 12,339 6,300 3.92 9,966 6,300 3.39 314,745 326,513 100.00 293,809 296,532 100.00 Mark to market gains/(losses) for the year Market value of equity securities (11,768) 314,745 314,745 (2,723) 100.00 293,809 293,809 100.00 32. Loans and Receivables to Banks “Loans and receivables to banks” comprised non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than: yy those that the Group intends to sell immediately or in the near term and those that the Group, upon initial recognition, designates as at fair value through profit or loss. yy those that the Group, upon initial recognition, designates as available for sale. yy those for which the Group may not recover substantially all of its initial investment, other than because of credit deterioration. yy finance lease receivables “Loans and receivables to banks” include amounts due from banks. After initial measurement, Loans and receivables to banks are subsequently measured at amortised cost using the EIR, less provision for impairment, except when the Group designates loans and receivables at fair value through profit or loss. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees and costs that are an integral part of the EIR. The amortisation is included in “Interest Income” while the losses arising from impairment are recognised in “Impairment charges for loans and other losses” in the Income Statement. GROUP As at December 31, Gross loans and receivables Less: Provision for impairment Net loans and receivables BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 640,512 624,458 640,512 624,458 – 640,512 – 624,458 – 640,512 – 624,458 The maturity analysis of loans and receivables to banks is given in Note 62 on pages 289 and 290. Commercial Bank of Ceylon PLC Annual Report 2017 225
  227. Financial Reports Notes to the Financial Statements The Bank did not make any payments to counterparty banks for the oil hedging transactions with effect from June 02 , 2009 in response to a Directive received from the Exchange Controller of the Central Bank of Sri Lanka. Consequently, one of the counterparty banks appropriated USD 4.170 Mn. (Rs. 640.512 Mn.) which has been kept as a deposit with them. This action has been contested by the Bank. In view of the stance taken by the Bank in this regard, both the deposit (made by the Bank) and the amount due to the said counterparty bank, have been recorded in the Statement of Financial Position. 32. 1 (a) By currency GROUP BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 United States Dollar 640,512 624,458 640,512 624,458 Subtotal 640,512 624,458 640,512 624,458 As at December 31, 33. Loans and Receivables to Other Customers “Loans and receivables to other customers” comprised non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than: yy those that the Group intends to sell immediately or in the near term and those that the Group, upon initial recognition, designates as at fair value through profit or loss yy those that the Group, upon initial recognition, designates as available-for-sale yy those for which the Group may not recover substantially all of its initial investment, other than because of credit deterioration. “Loans and receivables to other customers” include, Loans and Advances and Lease Receivables of the Group. When the Group is the lessor in a lease agreement that transfers substantially all risks and rewards incidental to ownership of the asset to the lessee, the arrangement is classified as a finance lease. Amounts receivable under finance leases, net of initial rentals received, unearned lease income and provision for impairment, are classified as lease receivable and are presented within “Loans and receivables to other customers” in the Statement of Financial Position. After initial measurement, “Loans and receivables to other customers” are subsequently measured at amortised cost using the EIR, less provision for impairment, except when the Group designates loans and receivables at fair value through profit or loss. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees and costs that are an integral part of the EIR. The amortisation is included in ‘Interest Income’, while the losses arising from impairment are recognised in ‘Impairment charges for loans and other losses’ in the Income Statement. The Bank may enter into certain lending commitments where the loan, on drawdown, is expected to be classified as Held for trading because the intent is to sell the loans in the short term. These commitments to lend, if any, are recorded as derivatives and measured at fair value through profit or loss. Where the loan, on drawdown, is expected to be retained by the Bank and not sold in the short term, the commitment is recorded only when it is an onerous contract that is likely to give rise to a loss. GROUP As at December 31, Note Page No. Gross loans and receivables BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 760,453,937 637,982,536 754,707,977 633,390,907 8,453,457 Less: Provision for individual impairment 33.2 229 7,853,654 8,453,457 7,853,654 33.2 229 10,156,153 9,399,591 9,407,756 8,919,222 742,444,130 620,129,488 737,446,567 616,018,228 Provision for collective impairment Net loans and receivables The maturity analysis of loans and receivables to other customers is given in Note 62 on pages 289 and 290. 226 Commercial Bank of Ceylon PLC Annual Report 2017
  228. Financial Reports Notes to the Financial Statements 33 .1 Analysis 33.1 (a) By product GROUP As at December 31, Note Page No. BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 118,072,316 100,985,232 117,362,030 100,903,024 58,291,188 43,088,097 58,275,965 43,088,097 Loans and receivables Overdrafts Trade finance Lease/hire purchase receivable 40,766,415 39,040,966 37,865,183 35,993,964 Credit cards 9,639,046 6,679,059 9,639,046 6,679,059 Pawning 1,339,259 1,239,785 1,339,259 1,239,785 33.3 229 Staff loans 7,980,429 7,276,285 7,973,685 7,274,154 Housing loans 53,628,645 47,275,462 53,628,645 47,275,462 Personal loans 28,401,829 25,996,196 28,272,669 25,906,055 88,668,616 72,590,084 87,600,808 71,219,300 333,059,523 277,354,045 332,144,016 277,354,682 3,499,574 3,974,359 3,499,574 3,974,359 Term loans Short-term Long-term Loans granted from Investment Fund Account (IFA) Bills of exchange Subtotal 33.4 231 17,107,097 12,482,966 17,107,097 12,482,966 760,453,937 637,982,536 754,707,977 633,390,907 33.1 (b) By currency GROUP BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Sri Lankan Rupee 600,058,048 506,118,547 595,745,318 501,609,126 United States Dollar 113,192,698 94,727,963 112,496,635 94,645,778 Great Britain Pound 892,245 695,403 892,245 695,403 As at December 31, Euro 1,500,772 1,545,852 1,500,772 1,545,852 Australian Dollar 690,992 514,017 690,992 514,017 Japanese Yen 135,765 71,144 135,765 71,144 Singapore Dollar 5,504 127 5,504 127 Bangladesh Taka 43,164,009 34,174,199 43,164,009 34,174,199 Maldivian Rufiyaa 737,167 23 76,737 135,261 76,737 135,261 760,453,937 637,982,536 754,707,977 633,390,907 Others Subtotal – – Commercial Bank of Ceylon PLC Annual Report 2017 227
  229. Financial Reports Notes to the Financial Statements 33 .1 (c) By industry GROUP As at December 31, Agriculture and fishing Manufacturing BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 63,332,661 71,041,888 63,529,644 70,786,178 115,028,848 92,030,456 114,980,885 91,982,499 47,671,546 46,086,461 46,808,711 45,919,393 Tourism Transport 17,190,601 14,892,683 17,083,533 14,800,244 Construction 106,784,977 81,259,365 106,328,774 81,187,168 Trading 114,649,323 94,987,320 113,037,048 93,538,474 New economy (e-commerce, IT, etc.) 17,479,610 15,111,861 17,479,610 15,111,861 Financial and business services 46,764,237 49,066,227 47,393,198 49,740,977 Infrastructure 20,886,155 17,894,260 20,886,155 17,894,260 Other services (education, health, media, etc.) 64,040,605 57,961,305 63,062,660 56,923,320 Other customers 138,916,147 105,162,954 136,861,225 102,960,050 Subtotal 760,453,937 637,982,536 754,707,977 633,390,907 Sectoral classification of loans and advances – Bank 20% 10% Other customers Agriculture and fishing 8% 13% Other services (Education, health, media, etc.) Manufacturing 6% Tourism 6% Infrastructure 2017 16% 3% Infrastructure 4% 13% New economy (e-Commerce, IT, etc.) 228 12% Construction Commercial Bank of Ceylon PLC Annual Report 2017 Trading 15% Other services (Education, health, media, etc.) Manufacturing 7% Tourism 2016 2% Transport Transport Financial and business services Agriculture and fishing 9% 2% 6% 10% Other customers 8% Financial and business services 2% New economy (e-Commerce, IT, etc.) 13% Construction 15% Trading
  230. Financial Reports Notes to the Financial Statements 33 .2 Movement in provision for individual and collective impairment during the year GROUP Note Page No. 18 203 BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 8,453,457 5,369,960 8,453,457 5,369,960 401,716 3,439,879 401,716 3,439,879 Movement in provision for individual impairment Balance as at January 1, Charge/(write-back) to the Income Statement Net write-off/(recoveries) during the year (695,023) Exchange rate variance on foreign currency provisions Interest accrued/(reversals) on impaired loans and advances Other movements Balance as at December 31, (287,226) (695,023) (287,226) 30,057 51,080 30,057 51,080 (861,057) (533,528) (861,057) (533,528) 524,504 413,292 524,504 413,292 7,853,654 8,453,457 7,853,654 8,453,457 9,399,591 13,089,833 8,919,222 12,681,594 1,823,522 (1,859,806) 1,554,333 (1,931,932) (1,060,768) (1,835,798) (1,060,768) (1,835,798) Movement in provision for collective impairment Balance as at January 1, Charge/(write-back) to the Income Statement 18 203 Net write-off/(recoveries) during the year Exchange rate variance on foreign currency provisions (6,192) 5,362 (5,031) 5,358 Balance as at December 31, 10,156,153 9,399,591 9,407,756 8,919,222 Total of individual and collective impairment 18,009,807 17,853,048 17,261,410 17,372,679 33.3 Lease/hire purchase receivable GROUP As at December 31, Note Page No. Gross lease/hire purchase receivable BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 35,993,964 40,766,415 39,040,966 37,865,183 Within one year 33.3 (a) 229 15,149,364 13,440,584 14,297,074 12,631,092 From one to five years 33.3 (b) 230 25,307,569 25,250,003 23,564,939 23,358,999 After five years 33.3 (c) 230 309,482 350,379 3,170 3,873 Less: Provision for individual impairment 33.3 (d) 230 133,536 241,185 133,536 241,185 33.3 (e) 231 642,502 681,035 254,128 262,381 39,990,377 38,118,746 37,477,519 35,490,398 Provision for collective impairment Net lease receivable 33.3 (a) Lease/hire purchase receivable within one year GROUP As at December 31, Total lease/hire purchase receivable within one year Less: Unearned lease/hire purchase income Gross lease/hire purchase receivable within one year BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 19,613,099 17,390,714 18,418,203 16,232,578 4,463,735 3,950,130 4,121,129 3,601,486 15,149,364 13,440,584 14,297,074 12,631,092 Less: Provision for individual impairment 119,231 228,553 119,231 228,553 351,640 364,252 214,659 228,060 14,678,493 12,847,779 13,963,184 12,174,479 Provision for collective impairment Subtotal Commercial Bank of Ceylon PLC Annual Report 2017 229
  231. Financial Reports Notes to the Financial Statements 33 .3 (b) Lease/hire purchase receivable from one to five years GROUP As at December 31, Total lease/hire purchase receivable from one to five years Less: Unearned lease/hire purchase income Gross lease/hire purchase receivable from one to five years Less: Provision for individual impairment Provision for collective impairment Subtotal BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 29,262,074 29,185,428 27,056,087 26,793,674 3,954,505 3,935,425 3,491,148 3,434,675 25,307,569 25,250,003 23,564,939 23,358,999 14,305 12,632 14,305 12,632 236,877 268,364 39,468 34,319 25,056,387 24,969,007 23,511,166 23,312,048 33.3 (c) Lease/hire purchase receivable after five years GROUP As at December 31, Total lease/hire purchase receivable after five years Less: Unearned lease/hire purchase income Gross lease/hire purchase receivable after five years Less: Provision for individual impairment Provision for collective impairment Subtotal BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 311,269 354,646 3,215 4,480 1,787 4,267 45 607 309,482 350,379 3,170 3,873 – – – – 53,985 48,419 1 2 255,497 301,960 3,169 3,871 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 241,185 93,710 241,185 93,710 209,134 33.3 (d) Movement in provision for individual impairment on lease/hire purchase receivable GROUP Balance as at January 1, Charge/(write-back) to the Income Statement Net write-off/(recoveries) during the year Interest accrued on impaired lease/hire purchase receivable Other movements Balance as at December 31, 230 Commercial Bank of Ceylon PLC Annual Report 2017 BANK 55,258 209,134 55,258 (149,508) (31,648) (149,508) (31,648) (15,171) (32,268) (15,171) (32,268) 1,772 2,257 1,772 2,257 133,536 241,185 133,536 241,185
  232. Financial Reports Notes to the Financial Statements 33 .3 (e) Movement in provision for collective impairment on lease/hire purchase receivable GROUP Balance as at January 1, Charge/(write-back) to the Income Statement Net write-off/(recoveries) during the year Balance as at December 31, BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 681,035 953,696 262,381 556,776 75,108 1,154,843 105,388 1,133,109 (113,641) (1,427,504) (113,641) (1,427,504) 642,502 254,128 681,035 262,381 33.4 Loans granted from Investment Fund Account (IFA) As per the guidelines issued by the Central Bank of Sri Lanka, Investment Fund Account was established effective from January 1, 2011, by transferring tax savings as explained below: (a) 5% of the Profits Before Tax (PBT) calculated for Income Tax (IT) purposes, on the dates of making self-assessment payments on IT. (b) 8% of the profits calculated for the payment of Value Added Tax (VAT) on financial services at the time of making payments on VAT. The sectoral distribution of loans disbursed under IFA is given below: 2017 As at December 31, Sector Range of interest rates (%) (a) Cultivation of plantation crops/agriculture crops 7.91– 12.12 Tenure (Years) 5.5 Rs. ’000 11,363 (b) Factory/mills modernisation/ establishment/expansion 7.91– 13.12 5.5 76,179 (c) Infrastructure development 6.80– 11.00 14.5 3,232,587 (d) Construction of hotels and for related purposes 8.41– 12.62 7 6,278 Capital outstanding of the loans granted 3,326,407 173,167 (e) Interest receivable Carrying amount of the loans granted 2016 Pending Amount outstanding disbursement (B) (A) 3,499,574 Rs. ’000 Total (A) + (B) Amount outstanding (A) Rs. ’000 Rs. ’000 – 11,363 38,636 – 76,179 192,040 64,691 3,297,278 3,559,585 – 6,278 8,236 64,691 3,391,098 3,798,497 – 173,167 175,862 64,691 3,564,265 3,974,359 Pending disbursement (B) Rs. ’000 Total (A) + (B) Rs. ’000 – 38,636 – 192,040 98,627 3,658,212 – 8,236 98,627 3,897,124 – 175,862 98,627 4,072,986 The requirement to maintain the Investment Fund Account was ceased effective from October 1, 2014 as per the instructions issued by the Central Bank of Sri Lanka. Sectoral distribution of loans under IFA 0.2% 0.3% Construction of hotels and for related purposes Cultivation of plantation crops/agriculture crops 0.2% 1.5% Construction of hotels and for related purposes 2017 97.2% Infrastructure development Cultivation of plantation crops/agriculture crops 2016 2.3% Factory/mills modernisation/ establishment/expansion 6.9% 91.4% Infrastructure development Factory/mills modernisation/ establishment/expansion Commercial Bank of Ceylon PLC Annual Report 2017 231
  233. Financial Reports Notes to the Financial Statements 33 .5 Summary of individually impaired loans and receivables – Bank 2017 As at December 31, 2016 Individually impaired loans and receivables Provision for individual impairment Individually impaired loans and receivables Provision for individual impairment Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Loans and advances Overdrafts 2,350,482 1,522,572 2,311,257 1,554,417 Trade finance 906,384 533,034 749,241 507,360 Lease/hire purchase receivable 295,761 133,536 444,882 241,185 484 7 Housing loans 581,651 183,109 480,970 Personal loans 8,583 5,024 6,586 4,338 18,899,904 5,476,372 18,109,141 5,976,326 Pawning Term loans Bills of exchange Total – 23,043,248 – 7,853,654 – – 169,831 – 22,102,077 – 8,453,457 The net exposure of Rs. 15,189.594 Mn. (Rs. 13,648.620 Mn. As at December 31, 2016) is substantially covered by collaterals excluding machinery and stocks. 34. Financial Investments – Available for Sale Available-for-sale financial investments include equity and debt securities. Equity investments classified as available for sale are those which are neither classified as held for trading nor designated at fair value through profit or loss. Debt securities in this category are intended to be held for an indefinite period of time and may be sold in response to needs for liquidity or in response to changes in the market conditions. The Group has not designated any loans or receivables as available for sale. After initial measurement, available-for-sale financial investments are subsequently measured at fair value. Unrealised gains and losses are recognised in Equity through OCI in the “Available for-sale reserve”. When these financial investments are disposed of, the cumulative gain or loss previously recognised in Equity is recycled to profit or loss through “Operating income”. Interest earned while holding available-for-sale financial investments is reported as “Interest income” using the EIR. Dividend earned while holding available-for-sale financial investments are recognised in the Income Statement as “Operating income” when the right to receive the payment has been established. The losses arising from impairment of such investments are recognised in the Income Statement in ‘Impairment charges for loans and other losses’ and removed from the “Available-for-sale reserve”. 232 Commercial Bank of Ceylon PLC Annual Report 2017
  234. Financial Reports Notes to the Financial Statements GROUP As at December 31 , Note Page No. Government Securities Government securities – Sri Lanka 34.1 (a) 233 Government securities – Bangladesh 34.1 (b) 233 BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 154,366,556 159,642,243 154,167,169 159,573,316 154,366,556 159,642,243 154,167,169 159,573,316 – – – – 235 & 236 547,087 293,819 546,963 293,695 Quoted shares (market value) 34.2 (a) & 34.3 (a) 235 & 236 500,278 246,548 500,278 246,548 Unquoted shares (at cost) 34.2 (b) & 34.3 (b) 235 & 237 46,809 47,271 46,685 47,147 Equity securities Investment in unit trust Total 34.2 & 34.3 34.4 & 34.5 237 & 238 – – 156,460 154,913,643 160,092,522 156,460 154,714,132 160,023,471 There were no impairment losses on Financial Investments – Available for Sale as at December 31, 2017 (2016 – Nil). The maturity analysis of Financial Investments – Available for Sale is given in Note 62 on pages 289 and 290. 34.1 Government securities 34.1 (a) Government securities – Sri Lanka GROUP As at December 31, Treasury bills Treasury bonds Sri Lanka sovereign bonds Subtotal BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 15,367,792 17,827,210 15,168,405 17,758,283 136,195,443 138,993,358 136,195,443 138,993,358 2,803,321 2,821,675 2,803,321 2,821,675 154,366,556 159,642,243 154,167,169 159,573,316 During 2016, the Sri Lankan operation of the Bank reclassified part of the Treasury Bonds and Sovereign Bonds portfolio amounting Rs. 34,646.318 Mn. (Face value Rs. 35,094.126 Mn.) classified as Available-for-sale (AFS) investments to the Held to maturity (HTM) category based on a detailed assessment of the actual intention and ability to hold to maturity. The said re-classification was effected after obtaining written approval from the Board of Directors and the Central Bank of Sri Lanka and this transfer also meets the requirement set out for reclassification under Sri Lanka Accounting Standard – LKAS 39 on “Financial Instruments: Recognition and Measurement”. 34.1 (b) Government securities – Bangladesh GROUP As at December 31, BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Treasury Bills – – – – Treasury Bonds – – – – Subtotal – – – – During 2016, Bangladesh operation of the Bank reclassified its total Available-for-sale (AFS) portfolio amounting to Rs. 9,556.057 Mn. (Face Value Rs. 8,521.690 Mn.) to Held-to-maturity (HTM) category, based on a detailed assessment and the actual intention and ability to hold to maturity. Commercial Bank of Ceylon PLC Annual Report 2017 233
  235. Financial Reports Notes to the Financial Statements 34 .1 (c) Reclassification out of available-for-sale investment securities During 2016, Group reclassified part of available-for-sale investment securities to held-to-maturity category. The Group identified financial assets that would have met the definition of held to maturity (if they had not been designated as available-for-sale) for which at the date of reclassification it had the intention and ability to hold them until maturity. The fair value of the reclassified available-for-sale investment securities was Rs. 44,202.375 Mn. which was considered to be the new amortised cost of the held-to-maturity portfolio at the date of reclassification. The table below sets out the amounts actually recognised in profit or loss and OCI in respect of the financial assets reclassified out of available-for-sale investment securities. 2017 2016 Profit or loss Rs. ’000 OCI Rs. ’000 Profit or loss Rs. ’000 Interest income N/A N/A 2,830,744 Net impairment loss on financial assets N/A N/A – Net change in fair value N/A N/A – Amount transferred from AFS reserve to profit or loss N/A N/A – N/A N/A OCI Rs. ’000 Available-for-sale investment securities reclassified to held to maturity Total – – – 243,331 2,830,744 243,331 The table below sets out the amounts that would have been recognised, if the reclassification had not been made. 2017 2016 Profit or loss Rs. ’000 OCI Rs. ’000 Profit or loss Rs. ’000 Interest income N/A N/A 2,830,744 Net impairment loss on financial assets N/A N/A – Net change in fair value N/A N/A – N/A N/A OCI Rs. ’000 Available-for-sale investment securities reclassified to held to maturity Total 2,830,744 – – (844,209) (844,209) The effective interest rates on reclassified available-for-sale investment securities that were held as at the reporting date ranged from 5.25% to 10.74%, with expected recoverable cash flows of Rs. 65,838.057 Mn. 234 Commercial Bank of Ceylon PLC Annual Report 2017
  236. Financial Reports Notes to the Financial Statements 34 .2 (a) Equity securities – as at December 31, 2017 GROUP No. of shares BANK Market price Market value Cost of investment Rs. Rs. ’000 Rs. ’000 3,496 122.80 429 155 No. of shares Market price Market value Cost of investment Rs. Rs. ’000 Rs. ’000 3,496 122.80 429 155 Sector/type of securities Quoted shares: Bank, finance and insurance DFCC Bank PLC Hatton National Bank PLC 11,950 249.00 2,976 315 11,950 249.00 2,976 315 Nations Trust Bank PLC 1,333 78.00 104 22 1,333 78.00 104 22 National Development Bank PLC 5,424 136.40 740 215 5,424 136.40 740 215 Sampath Bank PLC 4,600 315.70 1,452 72 4,600 315.70 1,452 72 Seylan Bank PLC 1,015 87.20 89 24 1,015 87.20 89 24 VISA Inc. 19,424 USD 114.02 Subtotal 340,182 – 345,972 803 141,093 156,770 141,093 156,770 13,213 9,999 13,213 9,999 500,278 167,572 19,424 USD 114.02 340,182 – 345,972 803 141,093 156,770 141,093 156,770 13,213 9,999 13,213 9,999 500,278 167,572 Market price Market value Cost of investment Rs. Rs. ’000 Rs. ’000 Land and property RIL Property PLC 19,596,200 7.20 Subtotal 19,596,200 7.20 Manufacturing Alumex PLC 714,200 18.50 Subtotal Total 714,200 18.50 34.2 (b) Equity securities – as at December 31, 2017 GROUP No. of shares BANK Market price Market value Cost of investment No. of shares Rs. Rs. ’000 Rs. ’000 3,427,083 BDT2.75 17,491 17,491 3,427,083 BDT2.75 17,491 17,491 5,637 100.00 564 564 4,400 100.00 440 440 Sector/type of securities Unquoted shares: Bank, finance and insurance Central Depository of Bangladesh Limited Credit Information Bureau of Sri Lanka Fitch Ratings Lanka Limited 62,500 10.00 625 625 62,500 10.00 625 625 1,000,000 10.00 10,000 10,000 1,000,000 10.00 10,000 10,000 Lanka Financial Services Bureau Limited 225,000 10.00 2,250 2,250 225,000 10.00 2,250 2,250 Lanka Ratings Agency Limited 689,590 12.50 8,620 8,620 689,590 12.50 8,620 8,620 LankaClear (Pvt) Limited Society for Worldwide Interbank Financial Telecommunication (SWIFT) Total 47 EUR 841.90 7,259 7,259 46,809 46,809 47 EUR 841.90 7,259 7,259 46,685 46,685 Commercial Bank of Ceylon PLC Annual Report 2017 235
  237. Financial Reports Notes to the Financial Statements 34 .2 (c) Sector/industry composition of the equity securities – as at December 31, 2017 GROUP BANK Market value Cost of investment Market value Cost of investment Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Bank, finance and insurance 392,781 47,612 392,657 47,488 Land and property 141,093 156,770 141,093 156,770 13,213 9,999 13,213 9,999 547,087 214,381 546,963 214,257 Sector/industry Manufacturing Total 34.3 (a) Equity securities – as at December 31, 2016 GROUP No. of shares BANK Market price Market value Cost of investment Rs. Rs. ’000 Rs. ’000 No. of shares Market price Market value Cost of investment Rs. Rs. ’000 Rs. ’000 Sector/type of securities Quoted shares: Bank, finance and insurance DFCC Bank PLC Hatton National Bank PLC 3,496 122.50 428 155 3,496 122.50 428 155 11,950 225.00 2,689 315 11,950 225.00 2,689 315 Nations Trust Bank PLC 1,333 80.90 108 22 1,333 80.90 108 22 National Development Bank PLC 5,424 156.00 846 215 5,424 156.00 846 215 Sampath Bank PLC 3,914 260.40 1,019 72 3,914 260.40 1,019 72 Seylan Bank PLC 1,015 90.00 91 24 1,015 90.00 91 24 19,424 USD 78.02 226,940 – 19,424 USD 78.02 226,940 – 232,121 803 232,121 803 14,427 9,999 14,427 9,999 14,427 9,999 14,427 9,999 246,548 10,802 246,548 10,802 VISA Inc. Subtotal Manufacturing Alumex PLC 714,200 Subtotal Total 236 Commercial Bank of Ceylon PLC Annual Report 2017 20.20 714,200 20.20
  238. Financial Reports Notes to the Financial Statements 34 .3 (b) Equity securities – as at December 31, 2016 GROUP No. of shares BANK Market price Market value Cost of investment Rs. Rs. ’000 Rs. ’000 3,427,083 BDT2.75 17,953 17,953 5,637 100.00 564 564 62,500 10.00 625 No. of shares Market price Market value Cost of investment Rs. Rs. ’000 Rs. ’000 3,427,083 BDT2.75 17,953 17,953 4,400 100.00 440 440 625 62,500 10.00 625 625 Sector/type of securities Unquoted shares: Bank, finance and insurance Central Depository of Bangladesh Limited Credit Information Bureau of Sri Lanka Fitch Ratings Lanka Limited LankaClear (Pvt) Limited 1,000,000 10.00 10,000 10,000 1,000,000 10.00 10,000 10,000 Lanka Financial Services Bureau Limited 225,000 10.00 2,250 2,250 225,000 10.00 2,250 2,250 Lanka Ratings Agency Limited 689,590 12.50 8,620 8,620 689,590 12.50 8,620 8,620 47 EUR 978.01 7,259 7,259 47 EUR 978.01 7,259 7,259 47,271 47,271 47,147 47,147 Society for Worldwide Interbank Financial Telecommunication (SWIFT) Total 34.3 (c) Sector/industry composition of the equity securities – as at December 31, 2016 GROUP BANK Market value Cost of investment Market value Cost of investment Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 279,392 48,074 279,268 47,950 14,427 9,999 14,427 9,999 293,819 58,073 293,695 57,949 Market value Cost of investment Market value Cost of investment Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Sector/industry Bank, finance and insurance Manufacturing Total 34.4 Investment in unit trust – as at December 31, 2017 GROUP BANK Sector/industry Bank, finance and insurance Capital Alliance Investment Limited – – – – Total – – – – Commercial Bank of Ceylon PLC Annual Report 2017 237
  239. Financial Reports Notes to the Financial Statements 34 .5 Investment in unit trust – as at December 31, 2016 GROUP BANK Market value Cost of investment Market value Cost of investment Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Capital Alliance Investment Limited 156,460 153,849 156,460 153,849 Total 156,460 153,849 156,460 153,849 Sector/industry Bank, finance and insurance 35. Financial Investments – Held to Maturity Held-to-maturity financial investments are non-derivative financial assets with fixed or determinable payments and fixed maturities, that the Group has the positive intention and ability to hold to maturity, and which are not designated as at Fair value through profit or loss or Available-for-sale. After initial measurement, held-to-maturity financial investments are subsequently measured at amortised cost using the EIR, less provision for impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees that are an integral part of the EIR. The amortisation is included in “Interest Income” while the losses arising from impairment of such investments are recognised in ‘Impairment charges for loans and other losses’ in the Income Statement. A sale or reclassification of a more than insignificant amount of held-to-maturity investments would result in the reclassification of all held-to-maturity investments as available-for-sale, and would prevent the Group from classifying investment securities as held to maturity for the current and the following two financial years. However, sales and reclassifications in any of the following circumstances would not trigger a reclassification: yy sales or reclassifications that are so close to maturity that changes in the market rate of interest would not have a significant effect on the financial asset’s fair value; yy sales or reclassifications after the Group has collected substantially all of the asset’s original principal; and yy sales or reclassifications that are attributable to non-recurring isolated events beyond the Group’s control that could not have been reasonably anticipated. GROUP As at December 31, Government Securities – Sri Lanka BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 53,555,302 50,980,717 53,555,302 50,980,717 Treasury bonds 38,675,911 36,599,599 38,675,911 36,599,599 Sri Lanka Sovereign Bonds 14,879,391 14,381,118 14,879,391 14,381,118 Government Securities – Bangladesh 10,007,450 10,000,581 10,007,450 10,000,581 Treasury bills 1,197,755 1,524,677 1,197,755 1,524,677 Treasury bonds 8,809,695 8,475,904 8,809,695 8,475,904 5,803,044 2,645,300 Government Securities – Maldives Treasury bills Total 5,803,044 2,645,300 69,365,796 63,626,598 – – 63,562,752 – – 60,981,298 Please refer Notes 34.1 (a), 34.1 (b) and 34.1 (c) on page 233 for the details of re-classification to Held-to-maturity (HTM) investments from Available-for-sale (AFS) category effected during 2016. The maturity analysis of financial investments – Held to maturity is given in Note 62 on pages 289 and 290. 238 Commercial Bank of Ceylon PLC Annual Report 2017
  240. Financial Reports Notes to the Financial Statements 36 . Financial Investments – Loans and Receivables Financial investments classified as loans and receivables include unquoted debt instruments. After initial measurement, these are subsequently measured at amortised cost using the EIR, less provision for impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees and costs that are an integral part of the EIR. The amortisation is included in “Interest Income” while the losses arising from impairment are recognised in “Impairment charges for loans and other losses” in the Income Statement. GROUP As at December 31, BANK 2017 2016 2017 2016 Note Page No. Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Investments in Government securities 36.1 239 40,566,702 40,076,392 40,566,702 40,076,392 Other investments 36.2 239 8,145,775 11,747,634 8,145,775 11,747,634 48,712,477 51,824,026 48,712,477 51,824,026 Total 36.1 Investments in government securities GROUP BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Sri Lanka Development Bonds 40,566,702 40,076,392 40,566,702 40,076,392 Total 40,566,702 40,076,392 40,566,702 40,076,392 As at December 31, 36.2 Other investments GROUP As at December 31, BANK 2017 2016 2017 2016 Note Page No. Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Debentures 36.2.1 240 8,045,593 11,236,208 8,045,593 11,236,208 Trust certificates 36.2.2 240 98,087 511,208 98,087 511,208 Corporate investments in Bangladesh 36.2.3 241 Total 2,095 218 2,095 218 8,145,775 11,747,634 8,145,775 11,747,634 The maturity analysis of financial investments – Loans and receivables is given in Note 62 on pages 289 and 290. Commercial Bank of Ceylon PLC Annual Report 2017 239
  241. Financial Reports Notes to the Financial Statements 36 .2.1 Debentures GROUP 2017 As at December 31, No. of debentures BANK Carrying value No. of debentures Rs. ’000 Central Finance Company PLC Commercial Leasing and Finance PLC Dunamis Capital PLC Hayleys PLC Hemas Holdings PLC 2017 2016 Carrying value No. of debentures 2016 Carrying value No. of debentures Carrying value Rs. ’000 Rs. ’000 Rs. ’000 2,084,400 300,475 2,349,400 391,976 2,084,400 300,475 2,349,400 391,976 10,000,000 1,097,500 10,000,000 1,097,767 10,000,000 1,097,500 10,000,000 1,097,767 500,000 50,403 500,000 50,403 500,000 50,403 500,000 50,403 10,878,400 1,114,983 10,878,400 1,114,983 10,878,400 1,114,983 10,878,400 1,114,983 525,900 54,048 525,900 54,048 525,900 54,048 525,900 54,048 20,000,000 2,045,370 20,000,000 2,045,370 20,000,000 2,045,370 20,000,000 2,045,370 Lion Brewery (Ceylon) PLC 200,000 206,286 400,000 413,177 200,000 206,286 400,000 413,177 Mercantile Investments and Finance PLC 418,650 42,551 418,650 42,551 418,650 42,551 418,650 42,551 MTD Walkers PLC 3,000,000 307,373 3,000,000 307,373 3,000,000 307,373 3,000,000 307,373 Nawaloka Hospitals PLC 2,290,000 237,167 2,290,000 237,167 2,290,000 237,167 2,290,000 237,167 Orient Finance PLC 1,968,800 197,173 1,968,800 197,173 1,968,800 197,173 1,968,800 197,173 Lanka ORIX Leasing Company PLC People's Leasing & Finance PLC 328,800 36,045 6,924,200 751,180 328,800 36,045 6,924,200 751,180 Richard Pieris and Company PLC 5,353,500 550,326 6,763,400 695,136 5,353,500 550,326 6,763,400 695,136 Singer (Sri Lanka) PLC 9,598,100 997,423 9,598,100 998,155 9,598,100 997,423 9,598,100 998,155 Singer Finance (Lanka) PLC 4,435,230 478,005 5,914,610 631,335 4,435,230 478,005 5,914,610 631,335 Softlogic Finance PLC 3,223,400 330,465 3,223,400 330,465 3,223,400 330,465 3,223,400 330,465 1,857,008 DFCC Bank PLC – – 18,000,000 1,857,008 – – 18,000,000 Senkadagala Finance PLC – – 200,684 20,941 – – 200,684 Subtotal 8,045,593 8,045,593 11,236,208 20,941 11,236,208 The above debentures are stated at amortised cost and classified under Financial Investments – Loans and Receivables due to the absence of an active market. 36.2.2 Trust certificates GROUP BANK 2017 2016 2017 2016 Carrying value Carrying value Carrying value Carrying value Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 People's Leasing Company PLC 48,111 213,303 48,111 213,303 Richard Pieris Arpico Finance Limited 49,976 117,712 49,976 As at December 31, 117,712 Assetline Leasing Company Limited – 141,699 – 141,699 Mercantile Investments & Finance PLC – 38,494 – 38,494 Subtotal 240 Commercial Bank of Ceylon PLC Annual Report 2017 98,087 511,208 98,087 511,208
  242. Financial Reports Notes to the Financial Statements 36 .2.3 Corporate investments in Bangladesh GROUP As at December 31, BANK 2017 2016 2017 2016 Carrying value Carrying value Carrying value Carrying value Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Price bonds 2,095 218 2,095 218 Sub total 2,095 218 2,095 218 37. Investments in Subsidiaries Subsidiaries are investees controlled by the Group. The Group “controls” an investee if it is exposed to, or has rights to, variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The Group reassesses whether it has control if there are changes to one or more of the elements of control. This includes circumstances in which protective rights held (e.g. those resulting from a lending relationship) become substantive and lead to the Group having power over an investee. The cost of an acquisition is measured at fair value of the consideration, including contingent consideration. The acquired identifiable assets, liabilities and contingent liabilities are measured at their fair values at the date of acquisition. Subsequent to the initial measurement the Bank continues to recognise the investments in Subsidiaries at cost. The Financial Statements of Subsidiaries are included in the Consolidated Financial Statements from the date on which control commences until the date when control ceases. The Financial Statements of all Subsidiaries in the Group have a common financial year which ends on December 31, except for the Serendib Finance Ltd., a licensed finance company, whose financial year ends on March 31. The Financial Statements of the Bank’s Subsidiaries are prepared using consistent accounting policies. The reason for using a different reporting date by the aforesaid subsidiary is due to the requirement imposed by the Central Bank of Sri Lanka for licensed finance companies to publish their key financial data and key performance indicators for a 12-month period ending March 31 and 6 month period ending September 30, every year, in accordance with a format prescribed by the Director of the Department of Supervision of Non-Bank Financial Institutions of the Central Bank of Sri Lanka. All intra-group balances, transactions, unrealised gains and losses resulting from intra-group transactions, income and expenses are eliminated in full. There are no significant restrictions on the ability of Subsidiaries to transfer funds to the Parent (the Bank) in the form of cash dividend or repayment of loans and advances. All Subsidiaries of the Bank have been incorporated in Sri Lanka except Commex Sri Lanka S.R.L. which was incorporated in Italy, Commercial Bank of Maldives Private Limited which was incorporated in the Republic of Maldives and CBC Myanmar Microfinance Company Limited which was incorporated in Myanmar. Commercial Bank of Ceylon PLC Annual Report 2017 241
  243. Financial Reports Notes to the Financial Statements GROUP BANK 2017 As at December 31 , Note 2017 2016 2016 Holding Cost Market value/ Directors’ valuation Cost Market value/ Directors’ valuation Cost Market value/ Directors’ valuation Cost Market value/ Directors’ valuation % Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 269,821 780,963 272,363 845,755 Page No. Local subsidiaries: Quoted: Commercial Development Company PLC 92.97* – – – – (11,156,619 Ordinary shares) (@ Rs. 70.00) (11,261,717 Ordinary shares as at December 31, 2016) (@ Rs. 75.10) (93.85 in 2016) Unquoted: ONEzero Company Limited 100 – – – – 5,000 (500,001 Ordinary shares) 5,000 5,000 (@ Rs. 10.00) 5,000 (@ Rs. 10.00) (500,001 Ordinary shares as at December 31, 2016) Unquoted: Serendib Finance Limited 100 – – – – 1,616,046 1,616,046 1,116,046 1,116,046 100 – – – – 112,400 69,622 193,080 27,140 55 – – – – 1,040,934 1,040,934 1,014,843 1,014,843 100 – – – – 64,512 64,512 – – – – 3,108,713 3,577,077 (53,352,686 Ordinary shares) (30,728,252 Ordinary shares as at December 31, 2016) Foreign subsidiaries: Unquoted: Commex – Sri Lanka S.R.L. (incorporated in Italy) (**) (300,000 Ordinary shares) (300,000 Ordinary shares as at December 31, 2016) Commercial Bank of Maldives Private Limited (104,500 Ordinary shares) (104,500 Ordinary shares as at December 31, 2016) CBC Myanmar Microfinance Co. Limited (***) – – (420,000 Ordinary shares) Gross Total Provision for impairment 37.1 (42,778) 243 Net Total – – – – 3,065,935 – 3,577,077 2,601,332 3,008,784 (165,940) 2,435,392 – 3,008,784 (*) During 2015, the Board of Directors of the Bank resolved to reduce the shareholding of Commercial Development Company PLC, (in which the Bank originally had a stake of 94.55%) to comply with the requirements of the Listing Rule No. 7.13 of the Colombo Stock Exchange on Minimum Public Holding. Accordingly, the Bank disposed 189,086 shares since November 2015 through the Colombo Stock Exchange and reduced the shareholding in the above Company to 92.97% by December 31, 2017 and is in the process of taking steps to dispose the required number of shares to adhere to the requirements of the Listing Rules. Consequent to the above disposal, ownership interests of the Bank has changed while retaining control. As per SLFRS 10 on “Consolidated Financial Statements”, changes in a parent’s ownership interest in a subsidiary that do not result in the parent losing control are equity transactions and hence, the resulting gain/loss is recognised in equity. (**) The investment made in Commex Sri Lanka S.R.L. – Italy has been written down to account for pre-operational expenses. (***) The CBC Myanmar Microfinance Company Limited was incorporated as a fully owned subsidiary in Myanmar. The Bank obtained a licence from the Myanmar Microfinance Supervisory Enterprise to operate a non-savings deposit organisation. 242 Commercial Bank of Ceylon PLC Annual Report 2017
  244. Financial Reports Notes to the Financial Statements 37 .1 Movement in provision for impairment o/a subsidiaries during the year GROUP As at December 31, Note Page No. 18 201 Balance as at January 1, Charge/(write back) to the Income Statement 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 – – 165,940 150,590 – – (42,484) 15,350 – (80,678) – – 42,778 Pre-operational expenses written-off o/a Commex Sri Lanka S.R.L. – Italy Balance as at December 31, BANK 2017 – 165,940 38. Investments in Associates Associates are those entities in which the Group has significant influence, but not control, over the variable returns through its power over the investee. Significant influence is presumed to exist when the Group holds 20% or more of the voting power of another entity. Investments in associates are accounted for using the equity method and are recognised initially at cost, in terms of Sri Lanka Accounting Standard – LKAS 28 on “Investments in Associates and Joint Ventures”. The Group’s investment includes goodwill identified on acquisition, net of any accumulated impairment losses. The Consolidated Financial Statements include the Group’s share of the income and expenses and equity movements of equity-accounted investees, after adjustments to align the Accounting Policies with those of the Group, from the date that significant influence commences until the date that significant influence ceases. Accordingly, under the Equity Method, investments in Associates are carried at cost plus post-acquisition changes in the Group’s share of net assets of the Associates and are reported as a separate line item in the Statement of Financial Position. The Income Statement reflects the Group’s share of the results of operations of the Associates. Any change in OCI of those investees is presented as part of the Group’s OCI. In addition, when there has been a change recognised directly in the equity of the Associate, the Group recognises its share of any changes, when applicable, in Equity through OCI. Unrealised gains and losses resulting from transactions between the Group and the Associate are eliminated to the extent of the interest in Associate. When the Group’s share of losses exceeds its interest in an equity-accounted investee, the carrying amount of that interest, including any long-term investments, is reduced to nil and the recognition of further losses is discontinued except to the extent that the Group has an obligation or has made payments on behalf of the investee. If the Associate subsequently reports profits, the Group resumes recognising its share of those profits only after its share of the profits equal the share of losses not recognised previously. The Group discontinues the use of the Equity Method from the date that it ceases to have significant influence over an Associate and accounts for such investments in accordance with the Sri Lanka Accounting Standard – LKAS 39 on “Financial Instruments: Recognition and Measurement”. Upon loss of significant influence over the Associate, the Group measures and recognises any retained investment at its fair value. Any difference between the carrying amount of the Associate upon loss of significant influence and the fair value of the retained investment and proceeds from disposal is recognised in profit or loss. After application of the Equity Method, the Group determines whether it is necessary to recognise an impairment loss on its investment in its Associate. At each reporting date, the Group determines whether there is objective evidence that the investment in the Associate is impaired. If there is such evidence, the Group calculates the amount of impairment as the difference between the recoverable amount of the Associate and its carrying value, and recognises the loss as “Share of profits of associates” in the Income Statement. 2017 As at December 31, Incorporation and operation Ownership interest No. of shares % Equity Investments Lanka Limited Sri Lanka 22.92 Commercial Insurance Brokers (Pvt) Limited Sri Lanka 18.59 * 4,110,938 120,000 2016 Cost Carrying value Cost Carrying value Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 44,331 66,528 44,331 68,621 100 43,316 100 40,238 44,431 109,844 44,431 108,859 (*) 20% stake of Commercial Insurance Brokers (Pvt) Limited is held by Commercial Development Company PLC, a 92.97% owned Subsidiary of the Bank, which is listed on the Colombo Stock Exchange. The Bank has a significant influence over financial and operating activities of Commercial Insurance Brokers (Pvt) Limited though it effectively holds only 18.59%. Commercial Bank of Ceylon PLC Annual Report 2017 243
  245. Financial Reports Notes to the Financial Statements 38 .1 Reconciliation of summarised financial information Reconciliation of the summarised financial information to the carrying amount of the interest in Associates recognised in the Consolidated Financial Statements is as follows: 2017 2016 Equity Investments Lanka Ltd. Commercial Insurance Brokers (Pvt) Ltd. Total Equity Investments Lanka Ltd. Commercial Insurance Brokers (Pvt) Ltd. Total Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 44,331 100 44,431 44,331 100 44,431 24,290 40,138 64,428 23,043 37,030 60,073 Total comprehensive income 2,018 5,186 7,204 5,358 4,903 10,261 Profit/(loss) for the period recognised in income statement, net of tax (1,539) 5,217 3,678 1,645 4,809 6,454 3,526 3,713 94 3,807 (98) (98) Cost of investments Add: Share of profit applicable to the Group Investment in associate – as at January 1, Profit or loss and other comprehensive income, net of tax Movement due to change in equity Transactions which are recorded directly in equity – 3,557 (31) – (419) – (419) – Dividend received (4,111) (1,689) Balance as at December 31, 66,528 43,316 – (5,800) 109,844 – – – (4,111) (1,697) 68,621 40,238 – (5,808) 108,859 38.2 Summarised financial information in respect of associates is set out below: 38.2 (a) Summarised income statement 2017 For the year ended December 31, 2016 Equity Investments Lanka Ltd. Commercial Insurance Brokers (Pvt) Ltd. Total Equity Investments Lanka Ltd. Commercial Insurance Brokers (Pvt) Ltd. Total Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Percentage ownership interest Revenue 21,048 274,885 295,015 28,000 252,335 280,335 Expenses (27,159) (230,556) (257,715) (21,602) (214,731) (236,333) (605) Income tax (15,618) (16,223) (12,090) (11,307) Profit from continuing operations, net of tax (6,716) 28,711 21,077 7,181 25,514 32,695 Group’s share of profit from continuing operations, net of tax (1,539) 5,217 3,678 1,645 4,809 6,454 Other comprehensive income, net of tax 783 15,519 (166) 15,353 16,201 499 16,700 Group’s share of other comprehensive income from continuing operations, net of tax 3,557 (31) 3,526 3,713 94 3,807 Share of results of equity-accounted investee recognised in Income Statement and Statement of Profit or Loss and Other Comprehensive Income 2,018 7,204 5,358 4,903 10,261 244 Commercial Bank of Ceylon PLC Annual Report 2017 5,186
  246. Financial Reports Notes to the Financial Statements 38 .2 (b) Summarised statement of financial position 2017 As at December 31, 2016 Equity Investments Lanka Ltd. Commercial Insurance Brokers (Pvt) Ltd. Equity Investments Lanka Ltd. Commercial Insurance Brokers (Pvt) Ltd. Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 202,474 138,530 194,144 143,515 Current assets 97,902 165,034 114,197 152,333 Non-current liabilities (1,448) (23,485) Percentage ownership interest Non-current assets Current liabilities Net assets Group’s share of net assets Less: Unrealised profits Carrying amount of interest in associates (8,672) (47,072) (5,975) (2,974) (22,366) (60,020) 290,256 233,007 299,392 213,462 66,528 43,316 68,621 40,238 – – 66,528 43,316 – 68,621 – 40,238 The Group recognises the share of net assets of the Associates under the Equity Method to arrive at the Directors’ valuation. The maturity analysis of Investments of Associates is given in Note 62 on pages 289 and 290. 39. Property, Plant and Equipment The Group applies the requirements of the Sri Lanka Accounting Standard – LKAS 16 on “Property, Plant and Equipment” in accounting for its owned assets (including buildings under operating leases where the Group is the lessor) which are held for and used in the provision of services, for rental to others or for administrative purposes and are expected to be used for more than one year. Basis of recognition Property, plant and equipment is recognised if it is probable that future economic benefits associated with the asset will flow to the Group and cost of the asset can be reliably measured. Basis of measurement An item of property, plant and equipment that qualifies for recognition as an asset is initially measured at its cost. Cost includes expenditure that is directly attributable to the acquisition of the asset and subsequent costs (excluding the costs of day-to-day servicing) as explained in Note below. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the asset to a working condition for its intended use and the costs of dismantling and removing the items and restoring the site on which they are located and capitalised borrowing costs. Purchased software which is integral to the functionality of the related equipment is capitalised as part of computer equipment. When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment. Commercial Bank of Ceylon PLC Annual Report 2017 245
  247. Financial Reports Notes to the Financial Statements yy Cost Model The Group applies the Cost Model to all property , plant and equipment except freehold land and freehold & leasehold buildings. These are recorded at cost of purchase together with any incidental expenses thereon, less accumulated depreciation and any accumulated impairment losses. yy Revaluation Model The Group applies the Revaluation Model for the entire class of freehold land and freehold & leasehold buildings for measurement after initial recognition. Such properties are carried at revalued amounts, being their fair value at the date of revaluation, less any subsequent accumulated depreciation on buildings and any accumulated impairment losses charged subsequent to the date of valuation. Freehold land and buildings of the Group are revalued by independent professional valuers every three years or more frequently if the fair values as are substantially different from carrying amounts to ensure that the carrying amounts do not differ from the fair values as at the reporting date. On revaluation of an asset, any increase in the carrying amount is recognised in Revaluation Reserve in Equity through OCI or used to reverse a previous loss on revaluation of the same asset, which was charged to the Income Statement. In this circumstance, the increase is recognised as income only to the extent of the previous write down in value. Any decrease in the carrying amount is recognised as an expense in the Income Statement or charged to Revaluation Reserve in equity through OCI, only to the extent of any credit balance existing in the Revaluation Reserve in respect of that asset. Any balance remaining in the Revaluation Reserve in respect of an asset, is transferred directly to retained earnings on retirement or disposal of the asset. The Group revalued all its freehold land and freehold and leasehold buildings as at December 31, 2017. Methods and significant assumptions including unobservable market inputs employed in estimating the fair value together with the sensitivity of same are given in Note 39.5 (b) and Note 39.5 (c). Subsequent cost Subsequent expenditure is capitalised only when it is probable that the future economic benefits of the expenditure will flow to the Group. Ongoing repairs and maintenance are expensed as incurred. Derecognition An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected from its use. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset), is recognised in “Other Income (Net)” in profit or loss in the year the asset is derecognised. When replacement costs are recognised in the carrying amount of an item of property, plant and equipment, the remaining carrying amount of the replaced part is derecognised as required by Sri Lanka Accounting Standard – LKAS 16 on “Property, Plant and Equipment”. Capital work-in-progress These are expenses of a capital nature directly incurred in the construction of buildings, major plant and machinery and system development, awaiting capitalisation. These are stated in the Statement of Financial Position at cost less any accumulated impairment losses. Capital work-in-progress is transferred to the relevant asset when it is in the location and condition necessary for it to be capable of operating in the manner intended by the Management (i.e. available for use). 246 Commercial Bank of Ceylon PLC Annual Report 2017
  248. Financial Reports Notes to the Financial Statements 39 .1 Group – 2017 Note Page No. Freehold land Freehold buildings Leasehold buildings Computer equipment Motor vehicles Office equipment, furniture and fixtures Capital work-inprogress Total 2017 Total 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs.’000 Rs. ’000 Rs. ’000 Rs. ’000  Rs. ’000  349,833 5,190,415 43,957 18,861,131 17,730,795 138,041 2,163,733 1,501,070 Cost/valuation Balance as at January 1, 4,914,283 3,014,202 1,083,368 4,265,073 Additions/transfers during the year 306,932 Transfer of accumulated depreciation on assets revalued – Surplus on revaluation of property 74,797 71,292 (282,656) (74,247) 2,175,514 1,418,299 Disposals during the year (34,000) (21,263) 252,168 798,192 – – 22,107 – – 752,372 – – – (76,893) (17,230) (130,437) – – – (390,405) (11,367) 19,671 – – – (3,153) (1,376) (6,838) – – (5,351) (477) – – 5,828 – 353,334 5,811,340 3,845,981 (284,381) Transfers/adjustments 7,362,729 4,198,028 1,332,104 4,983,219 – (4,558) Exchange rate variance Balance as at December 31, (356,903) – – 24,218,194 18,861,131 – 7,291,465 6,549,362 – 1,185,698 1,093,088 177,440 Accumulated depreciation and impairment losses Balance as at January 1, Charge for the year Impairment loss 20 203 – 185,414 92,183 3,121,246 – 101,848 32,513 – – – 459,910 – 229,322 3,663,300 42,892 – Transfer of accumulated depreciation on assets revalued – (282,656) Disposals during the year – (2,850) – (72,861) (17,230) Exchange rate variance – – – (3,203) (1,376) Transfers/adjustments – (55) 1,109 – Balance as at December 31, – 1,701 (74,247) (2) – – 548,535 – – – – (356,903) – (207,575) (368,632) (6,956) – (11,535) 17,647 (1,052) – – (114,634) 50,447 3,506,201 253,608 4,089,193 Net book value as at December 31, 2017 7,362,729 4,196,327 1,281,657 1,477,018 99,726 1,722,147 177,440 Net book value as at December 31, 2016 4,914,283 2,828,788 120,511 1,527,115 43,957 991,185 1,143,827 – – – – 7,901,150 – 7,291,465 16,317,044 11,569,666 Commercial Bank of Ceylon PLC Annual Report 2017 247
  249. Financial Reports Notes to the Financial Statements 39 .2 Group – 2016 Note Freehold land Freehold buildings Leasehold buildings Computer equipment Motor vehicles Office equipment, furniture and fixtures Capital work-inprogress Total 2016 Total 2015 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs.’000 Rs. ’000 Rs. ’000 Rs. ’000  Rs. ’000  4,924,702 2,635,938 1,080,861 3,880,784 335,180 4,514,891 358,439 17,730,795 16,810,952 1,501,070 1,086,405 Page No. Cost/valuation Balance as at January 1, Additions/transfers during the year – Transfer of accumulated depreciation on assets revalued – – – – – – – – Surplus on revaluation of property – – – – – – – – (905) – Disposals during the year (10,419) 379,169 2,507 643,084 44,457 (275,233) (31,768) 746,335 (314,482) – (390,405) (209,304) 19,671 42,742 – – – 4,772 1,964 12,935 – Transfers/adjustments – – – 11,666 – (11,666) – 4,914,283 3,014,202 – (72,080) Exchange rate variance Balance as at December 31, – – 43,957 18,861,131 – 1,083,368 4,265,073 349,833 5,190,415 17,730,795 2,973,701 217,350 3,204,730 – 6,549,362 5,676,091 514,983 – 1,093,088 1,024,162 Accumulated depreciation and impairment losses Balance as at January 1, Charge for the year 20 203 – 91,285 62,296 – 94,171 29,887 413,528 Impairment loss – – – Disposals during the year – (42) – Exchange rate variance – – – 4,351 Transfers/adjustments – – – 1,207 Balance as at December 31, – 185,414 Net book value as at December 31, 2016 4,914,283 2,828,788 Net book value as at December 31, 2015 4,924,702 2,544,653 92,183 – 40,519 – – – – (368,632) (187,573) 1,964 11,332 – 17,647 36,682 – (1,207) – 3,121,246 229,322 3,663,300 991,185 1,143,827 120,511 1,527,115 1,018,565 – – (66,538) (271,541) (30,511) 907,083 117,830 1,310,161 – 7,291,465 – 43,957 – 6,549,362 11,569,666 358,439 11,181,433 There were no capitalised borrowing cost related to the acquisition of property, plant and equipment during the year 2017 (2016 – Nil). The carrying amount of Group’s revalued assets that would have been included in the Financial Statements had the assets been carried at cost less depreciation/amortisation is as follows: 2017 As at December 31, 2016 Cost Accumulated depreciation Net book value Cost Accumulated depreciation Net book value Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 951,487 742,730 Class of asset Freehold land Freehold buildings Leasehold buildings Total 248 Commercial Bank of Ceylon PLC Annual Report 2017 951,487 – – 742,730 1,602,138 407,082 1,195,056 1,544,666 357,334 1,187,332 421,815 286,829 134,986 350,867 165,344 185,523 2,975,440 693,911 2,281,529 2,638,263 522,678 2,115,585
  250. Financial Reports Notes to the Financial Statements 39 .3 Bank – 2017 Freehold land Note Page No. Computer equipment Motor vehicles Office equipment, furniture and Fixtures Capital work-inprogress Total 2017 Total 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000  Rs. ’000  4,797,273 2,912,283 192,473 4,226,605 123,882 5,082,194 39,971 17,374,681 16,343,864 723,270 138,041 1,959,075 1,369,729 Rs. ’000 Freehold Leasehold buildings buildings Rs. ’000 Cost/valuation Balance as at January 1, Additions/transfers during the year 229,349 Transfer of accumulated depreciation on assets revalued 74,797 106 (277,190) – – – – – 2,151,512 1,390,702 – – – – – – Surplus on revaluation of property Disposals during the year (34,000) (21,263) 791,165 2,347 – (76,284) – (110,311) – (246,416) (358,526) (14,142) 19,614 – – – (3,645) (1,376) (9,121) – Transfers/adjustments – (5,351) (477) – – 5,828 – 7,144,134 4,073,978 192,102 – (4,558) Exchange rate variance Balance as at December 31, (277,190) 3,542,214 – – 22,338,222 17,374,681 – 7,066,856 6,374,879 – 1,097,096 1,022,648 4,937,841 124,853 5,691,860 173,454 107,331 3,626,172 Accumulated depreciation and impairment losses Balance as at January 1, Charge for the year 20 203 – 180,665 44,659 3,108,029 – 99,430 5,788 453,049 8,268 530,561 Impairment loss – Transfer of accumulated depreciation on assets revalued – (277,190) – Disposals during the year – (2,850) – (72,281) – (94,859) Exchange rate variance – – – (3,270) (1,376) (8,614) Transfers/adjustments – (55) – (1,052) Balance as at December 31, – – – – (2) – – – – 1,109 – – – – – (277,190) – (169,990) (348,273) – (13,260) 17,602 114,223 4,052,208 – 50,445 3,486,636 – Net book value as at December 31, 2017 7,144,134 4,073,978 141,657 1,451,205 10,630 1,639,652 173,454 Net book value as at December 31, 2016 4,797,273 2,731,618 147,814 1,118,576 16,551 1,456,022 39,971 – – – 7,703,512 – 7,066,856 14,634,710 10,307,825 Commercial Bank of Ceylon PLC Annual Report 2017 249
  251. Financial Reports Notes to the Financial Statements 39 .4 Bank – 2016 Note Freehold land Freehold buildings Leasehold buildings Computer equipment Motor vehicles Office equipment – furniture and fixtures Capital work-inprogress Total 2016 Total 2015 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000  Rs. ’000  4,797,273 2,534,238 189,966 3,864,859 127,798 4,475,277 Page No. Cost/valuation Balance as at January 1, 354,453 16,343,864 15,493,095 Additions/transfers during the year – Transfer of accumulated depreciation on assets revalued – – – – – – – – – Surplus on revaluation of property – – – – – – – – – Disposals during the year – – – (71,236) – (358,526) (177,835) Exchange rate variance – – – 4,772 1,964 12,878 – 19,614 41,869 Transfers/adjustments – – – 11,666 – (11,666) – Balance as at December 31, 378,045 4,797,273 2,912,283 2,507 620,541 6,177 (275,233) (12,057) 676,941 (314,482) 1,369,729 192,473 4,226,605 123,882 5,082,194 2,964,201 106,732 3,176,509 986,735 – – 39,971 17,374,681 16,343,864 Accumulated depreciation and impairment losses Balance as at January 1, Charge for the year 20 203 – 88,587 38,850 – 92,078 5,809 409,811 Impairment loss – – – Transfer of accumulated depreciation on assets revalued – – – Disposals during the year – – – Exchange rate variance – – – 4,351 Transfers/adjustments – – – 1,207 Balance as at December 31, – 180,665 44,659 Net book value as at December 31, 2016 4,797,273 2,731,618 Net book value as at December 31, 2015 4,797,273 2,445,651 9,485 – – – – 505,465 – 6,374,879 5,540,004 – 1,022,648 961,492 – – – – – – – – (65,882) – (348,273) (162,124) 1,964 11,287 – 17,602 35,507 – (1,207) – (271,541) (10,850) 3,108,029 107,331 3,626,172 147,814 1,118,576 16,551 1,456,022 151,116 900,658 21,066 1,298,768 – – 7,066,856 – 6,374,879 39,971 10,307,825 354,453 9,968,985 There were no capitalised borrowing cost related to the acquisition of property, plant and equipment during the year 2017 (2016 – Nil). The carrying amount of Bank’s revalued assets that would have been included in the Financial Statements had the assets been carried at cost less depreciation/amortisation is as follows: As at December 31, 2017 2016 Cost Accumulated depreciation Net book value Cost Accumulated depreciation Net book value Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 869,744 660,987 Class of asset Freehold land Freehold buildings Leasehold buildings Total 869,744 – Commercial Bank of Ceylon PLC Annual Report 2017 660,987 1,542,173 399,003 1,143,170 1,484,701 350,755 1,133,946 190,203 55,217 134,986 190,574 50,471 140,103 2,602,120 454,220 2,147,900 2,336,262 401,226 1,935,036 The maturity analysis of property, plant and equipment is given in Note 62 on pages 289 and 290. 250 –
  252. Financial Reports Notes to the Financial Statements 39 .5 (a) Information on freehold land and buildings of the bank – Extents and locations [As required by the Rule No. 7.6 (viii) of the “Continuing Listing Requirements” of the Colombo Stock Exchange] Location CEO’s Bungalow – No. 27, Queens Road, Colombo 3 Extent (perches) Buildings (square feet) Revalued amounts land Rs. ’000 Revalued amounts buildings Rs. ’000 Net book value/ revalued Rs. ’000 Net book value before revaluation Rs. ’000 64 5,616 961,000 39,000 1,000,000 550,910 Holiday Bungalow – Bandarawela, Ambatenne Estate, Bandarawela 423 5,649 72,100 17,000 89,100 66,613 Holiday Bungalow – Haputale, No. 23, Lilly Avenue, Welimada Road, Haputale 258 5,662 41,200 21,300 62,500 43,650 99,000 151,500 126,769 Branch Buildings Battaramulla – No. 213, Kaduwela Road, Battaramulla 14 11,216 52,500 Battaramulla – No. 213, Kaduwela Road, Battaramulla 13 Bare Land 50,000 Borella – No. 92, D S Senanayake Mawatha, Borella, Colombo 8 16 16,880 196,000 Chilaw – No. 44, Colombo Road, Chilaw 35 9,420 Duplication Road – Nos. 405, 407, R A De Mel Mawatha, Colombo 03 20 4,194 Galewela – No. 49/57, Matale Road, Galewela 99 5,632 7 3,675 100 Gampaha – No. 51, Queen Mary’s Road, Gampaha 50,000 50,000 216,000 412,000 333,711 91,754 42,390 134,144 98,672 220,400 10,000 230,400 231,814 29,700 16,300 46,000 36,358 54,000 9,150 63,150 47,850 11,625 255,650 45,000 300,650 247,000 33 4,775 74,025 11,595 85,620 67,208 Hikkaduwa – No. 217, Galle Road, Hikkaduwa 37 7,518 35,670 27,780 63,450 49,184 Ja-Ela – No. 140, Negombo Road, Ja-Ela 13 7,468 33,000 26,000 59,000 48,091 Jaffna – No. 474, Hospital Road, Jaffna 78 Bare Land 1,000,000 1,000,000 581,000 Kandy – No. 120, Kotugodella Veediya, Kandy 45 44,500 396,000 256,600 652,600 560,250 Kegalle – No. 186, Main Street, Kegalle 85 2,650 156,700 7,200 163,900 134,250 7 6,100 82,000 24,000 106,000 80,050 Kollupitiya – No. 285, Galle Road, Colombo 3 17 16,254 225,000 68,000 293,000 173,036 Kotahena – No. 198, George R De Silva Mawatha, Kotahena, Colombo 13 28 26,722 197,000 210,000 407,000 331,845 Kurunegala – No. 4, Suratissa Mawatha, Kurunegala 50 10,096 236,800 43,200 280,000 231,399 Maharagama – No. 154, High Level Road, Maharagama 18 8,440 93,000 47,000 140,000 82,619 Matale – No. 70, King Street, Matale 51 8,596 125,000 61,000 186,000 130,000 Matara – No. 18, Station Road, Matara 38 8,137 60,080 28,770 88,850 73,990 Minuwangoda – No. 9, Siriwardena Mawatha, Minuwangoda 25 5,550 56,250 17,483 73,733 47,541 Narahenpita – No. 201, Kirula Road, Narahenpita, Colombo 5 22 11,193 176,000 104,000 280,000 210,604 Narammala – No. 55, Negombo Road, Narammala 41 5,353 61,605 19,910 81,515 69,094 Negombo – Nos. 24, 26, Fernando Avenue, Negombo 37 11,360 136,000 36,000 172,000 100,280 Nugegoda – No. 100, Stanley Thilakaratne Mawatha, Nugegoda 39 11,150 150,000 60,000 210,000 193,925 Nuwara Eliya – No. 36/3, Buddha Jayanthi Mawatha, Nuwara Eliya 42 10,184 124,800 74,400 199,200 147,243 Panadura – No. 375, Galle Road, Panadura 12 6,168 36,900 42,400 79,300 64,828 Pettah – People’s Park Shopping Complex, Colombo 11 – 3,147 67,000 67,000 50,091 Galle City – No. 59, Wackwella Road, Galle Galle Fort – No. 22, Church Street, Fort, Galle Keyzer Street – No. 32, Keyzer Street, Colombo 11 Pettah – Stores – People’s Park Shopping Complex, Colombo 11 – Pettah – Main Street – No. 280, Main Street, Pettah, Colombo 11 20 22,760 Trincomalee – No. 474, Power House Road, Trincomalee 225 – – 360,000 – – 5,500 5,500 4,145 190,000 550,000 419,041 100 Bare Land 100,000 100,000 90,300 Union Place – No. 1, Union Place, Colombo 2 30 63,385 500,000 1,000,000 1,500,000 1,119,643 Wellawatte – No. 343, Galle Road, Colombo 6 45 51,225 650,000 1,100,000 1,750,000 715,791 Wennappuwa – Nos. 262, 264, Colombo Road, Wennappuwa 36 9,226 54,000 31,000 85,000 67,103 Total 7,144,134 – 4,073,978 11,218,112 7,675,898 Commercial Bank of Ceylon PLC Annual Report 2017 251
  253. Financial Reports Notes to the Financial Statements 39 .5 (b) Information on valuation of freehold land and buildings of the Bank [As required by the Rule No. 7.6 (viii) of the “Continuing Listing Requirements” of the Colombo Stock Exchange and the SLFRS 13 – “Fair Value Measurement”]. Date of Valuation: December 31, 2017 Name of professional valuer/ location and address of property Method of valuation and significant unobservable inputs Range of estimates for unobservable inputs Net book value before revaluation of Revalued amount of Revaluation gain/(loss) recognised on Land Buildings Land Buildings Land Buildings Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 63,522 35,150 91,754 42,390 28,232 7,240 57,575 9,633 74,025 11,595 16,450 1,962 31,250 16,291 56,250 17,483 25,000 1,192 56,000 24,050 82,000 24,000 26,000 115,000 58,036 225,000 68,000 110,000 9,964 140,000 191,845 197,000 210,000 57,000 18,155 52,500 74,269 52,500 99,000 H M N Herath Chilaw No. 44, Colombo Road, Chilaw Gampaha No. 51, Queen Mary’s Road, Gampaha Minuwangoda No. 9, Siriwardena Mawatha, Minuwangoda Market comparable method yy Price per perch for land Rs. 2,600,000 p.p. yy Price per square foot for building Rs. 5,000 p.sq.ft. yy Depreciation rate 10% Market comparable method yy Price per perch for land Rs. 2,250,000 p.p. yy Price per square foot for building Rs. 4,500 p.sq.ft. yy Depreciation rate 45% Market comparable method yy Price per perch for land Rs. 2,250,000 p.p. yy Price per square foot for building Rs. 4,500 p.sq.ft. yy Depreciation rate 30% P B Kalugalagedara Keyzer Street No. 32, Keyzer Street, Colombo 11 Market comparable method yy Price per perch for land Rs. 11,000,000 p.p. yy Price per square foot for building Rs. 500 to (50) Rs. 6,000 p.sq.ft. Kollupitiya No. 285, Galle Road, Colombo 3 Market comparable method yy Price per perch for land Rs. 15,000,000 p.p. yy Price per square foot for building Rs. 1,250 to Rs. 5,000 p.sq.ft. Kotahena No. 198, George R De Silva Mawatha, Kotahena, Colombo 13 Investment method yy Gross monthly rental Rs. 2,800,000 p.m. yy Years purchase (present value of one unit per period) 18.18 yy Void period 4 months p.a. Mr R S Wijesuriya Battaramulla Market comparable method No. 213, Kaduwela Road, yy Price per perch for land Battaramula yy Price per square foot for building Battaramulla Market comparable method No. 213, Kaduwela Road, yy Price per perch for land Battaramulla Panadura No. 375, Galle Road, Panadura 252 24,731 Rs. 8,500 p.sq.ft. 50,000 – 50,000 – – – Rs. 3,750,000 p.p. Market comparable method 30,750 yy Price per perch for land Rs. 3,000,000 p.p. yy Price per square foot for building Rs. 6,500 p.sq.ft. Commercial Bank of Ceylon PLC Annual Report 2017 – Rs. 3,750,000 p.p. 34,078 36,900 42,400 6,150 8,322
  254. Financial Reports Notes to the Financial Statements Name of professional valuer / location and address of property Method of valuation and significant unobservable inputs Range of estimates for unobservable inputs Net book value before revaluation of Revalued amount of Revaluation gain/(loss) recognised on Land Buildings Land Buildings Land Buildings Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 56,700 9,913 72,100 17,000 15,400 7,087 30,900 12,750 41,200 21,300 10,300 8,550 354,000 206,250 396,000 256,600 42,000 50,350 128,000 6,250 156,700 7,200 28,700 950 75,000 55,000 125,000 61,000 50,000 6,000 82,000 65,243 124,800 74,400 42,800 9,157 40,500 7,350 54,000 9,150 13,500 1,800 Sarath G Fernando Holiday Bungalow – Bandarawela Ambatenne Estate, Bandarawela Market comparable method yy Price per perch for land Rs. 75,000 to Rs. 250,000 p.p. yy Price per square foot for building Rs. 4,250 to Rs. 4,750 p.sq.ft. yy Depreciation rate Holiday Bungalow – Market comparable method Haputale yy Price per perch for land No. 23, Lilly Avenue, Welimada Road, Haputale yy Price per square foot for building yy Depreciation rate Kandy No. 120, Kotugodella Veediya, Kandy 35% Rs. 200,000 p.p. Rs. 3,500 to Rs. 6,500 p.sq.ft. 40% Market comparable method yy Price per perch for land Rs. 9,500,000 p.p. yy Price per square foot for building Rs. 6,500 to Rs. 10,000 p.sq.ft. yy Depreciation rate Kegalle No.186, Main Street, Kegalle Matale No. 70, Kings Street, Matale Nuwara Eliya No. 36/3, Buddha Jayanthi Mawatha, Nuwara Eliya 30% and 35% Market comparable method yy Price per perch for land Rs. 1,250,000 to Rs. 3,000,000 p.p. yy Price per square foot for building Rs. 6,000 p.sq.ft. yy Depreciation rate 55% Market comparable method yy Price per perch for land Rs. 750,000 to Rs. 2,500,000 p.p. yy Price per square foot for building Rs. 9,750 p.sq.ft. yy Depreciation rate 20% Market comparable method yy Price per perch for land Rs. 2,000,000 to Rs. 3,000,000 p.p. yy Price per square foot for building Rs. 9,750 p.sq.ft. yy Depreciation rate 25% Mr S A S Fernando Galle City Market comparable method No. 59, Wackwella Road, yy Price per perch for land Galle yy Price per square foot for building Rs. 8,000,000 p.p. Rs. 2,000 to Rs. 3,000 p.sq.ft. Commercial Bank of Ceylon PLC Annual Report 2017 253
  255. Financial Reports Notes to the Financial Statements Name of professional valuer / location and address of property Galle Fort No. 22, Church Street, Fort, Galle Hikkaduwa No. 217, Galle Road, Hikkaduwa Method of valuation and significant unobservable inputs Range of estimates for unobservable inputs Market comparable method yy Price per perch for land Rs. 3,000,000 p.p. yy Price per square foot for building Rs. 3,180 p.sq.ft. Market comparable method yy Price per perch for land Net book value before revaluation of Revalued amount of Revaluation gain/(loss) recognised on Land Buildings Land Buildings Land Buildings Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 210,000 37,000 255,650 45,000 45,650 8,000 26,370 22,814 35,670 27,780 9,300 4,966 50,695 23,295 60,080 28,770 9,385 5,475 Rs. 750,000 to Rs. 1,100,000 p.p. yy Price per square foot for building Rs. 3,000 to Rs. 4,000 p.sq.ft. Matara No. 18, Station Road, Matara Market comparable method yy Price per perch for land Rs. 1,000,000 to Rs. 2,000,000 p.p. yy Price per square foot for building Rs. 3,000 to Rs. 3,750 p.sq.ft. Trincomalee No. 474, Power House Road, Trincomalee Market comparable method yy Price per perch for land 90,300 – 100,000 – 9,700 – 581,000 – 1,000,000 – 419,000 – Rs. 1,000,000 p.p. S T Sanmuganathan Jaffna No. 474, Hospital Road, Jaffna Market comparable method yy Price per perch for land Rs. 5,000,000 p.p. Siri Nissanka Borella No. 92, D S Senanayake Mawatha, Colombo 08. CEO’s Bungalow No. 27, Queens Road, Colombo 03 Narahenpita No. 201, Kirula Road, Narahenpita, Colombo 05 Pettah – Main Street No. 280, Main Street, Pettah, Colombo 11 Union Place No. 1, Union Place, Colombo 02 Duplication Road Nos. 405, 407, R A De Mel Mawatha, Colombo 03 Market comparable method yy Price per perch for land Rs. 12,500,000 p.p. yy Price per square foot for building Rs. 12,750 p.sq.ft. Market comparable method yy Price per perch for land Rs. 15,000,000 p.p. yy Price per square foot for building Rs. 7,000 p.sq.ft. Market comparable method yy Price per perch for land Rs. 8,000,000 p.p. yy Price per square foot for building Rs. 9,350 p.sq.ft. Investment method yy Gross monthly rental 254 yy Price per perch for land Rs. 18,000,000 p.p. yy Price per square foot for building Rs. 16,500 p.sq.ft. Market comparable method yy Price per perch for land Rs. 11,000,000 p.p. yy Price per square foot for building Rs. 2,300 p.sq.ft. Commercial Bank of Ceylon PLC Annual Report 2017 177,411 196,000 216,000 39,700 38,589 544,850 6,060 961,000 39,000 416,150 32,940 132,300 78,304 176,000 104,000 43,700 25,696 280,000 139,041 360,000 190,000 80,000 50,959 450,000 669,643 500,000 1,000,000 50,000 330,357 229,349 2,465 220,400 10,000 (8,949) 7,535 53,250 29,369 93,000 47,000 39,750 17,631 Rs. 2,557,500 p.m. Market comparable method Market comparable method Maharagama No. 154, Highlevel Road, yy Price per perch for land Maharagama yy Price per square foot for building 156,300 Rs. 5,250,000 p.p. Rs. 5,600 p.sq.ft.
  256. Financial Reports Notes to the Financial Statements Name of professional valuer / location and address of property Nugegoda No. 100, Stanley Thilakaratne Mawatha, Nugegoda Wellawatte No. 343, Galle Road, Colombo 06 Method of valuation and significant unobservable inputs Range of estimates for unobservable inputs Market comparable method yy Price per perch for land Rs. 7,500,000 p.p. yy Price per square foot for building Rs. 8,350 p.sq.ft. Market comparable method yy Price per perch for land Rs. 15,000,000 p.p. yy Price per square foot for building Rs. 22,000 p.sq.ft. Ja-Ela Market comparable method No. 140, Negombo Road, yy Price per perch for land Ja-Ela yy Price per square foot for building Rs. 2,500,000 p.p. Net book value before revaluation of Revalued amount of Revaluation gain/(loss) recognised on Land Buildings Land Buildings Land Buildings Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 156,000 37,925 150,000 60,000 (6,000) 22,075 249,520 466,271 29,000 19,091 33,000 73,000 27,280 136,000 650,000 1,100,000 400,480 633,729 26,000 4,000 6,909 36,000 63,000 8,720 W D P Rupananda yy Depreciation rate Negombo Nos. 24, 26, Fernando Avenue, Negombo Rs. 5,000 p.sq.ft. 30% Market comparable method yy Price per perch for land Rs. 3,000,000 to Rs. 4,000,000 p.p. yy Price per square foot for building Rs. 4,000 to Rs. 5,250 p.sq.ft. yy Depreciation rate Pettah People’s Park Shopping Complex, Colombo 11 Pettah People’s Park Shopping Complex, Colombo 11 30% Investment method yy Gross monthly rental Rs. 460,000 p.m. yy Years purchase (Present value of 1 unit per period) 18.18 yy Void period 4 months p.a. Investment method yy Gross monthly rental Rs. 41,500 p.m. yy Years purchase (Present value of 1 unit per period) 18.18 yy Void period 4 months p.a. Wennappuwa Market comparable method Nos. 262, 264, Colombo yy Price per perch for land Road, Wennappuwa yy Price per square foot for building – 50,091 – 67,000 – 16,909 – 4,145 – 5,500 – 1,355 42,000 25,103 54,000 31,000 12,000 5,897 22,275 14,083 29,700 16,300 7,425 2,217 Rs. 1,500,000 p.p. Rs. 3,750 to Rs. 5,250 p.sq.ft. yy Depreciation rate 30% W S Pemaratne Galewela Market comparable method No. 49/57, Matale Road, yy Price per perch for land Galewela yy Price per square foot for building Rs. 300,000 p.p. Rs. 2,350 to Rs. 4,000 p.sq.ft. yy Depreciation rate 25% Commercial Bank of Ceylon PLC Annual Report 2017 255
  257. Financial Reports Notes to the Financial Statements Name of professional valuer / location and address of property Kurunegala No. 4, Suratissa Mawatha, Kurunegala Method of valuation and significant unobservable inputs Rs. 5,000,000 p.p. yy Price per square foot for building Rs. 3,500 to Revaluation gain/(loss) recognised on Land Buildings Land Buildings Land Buildings Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 199,325 32,074 236,800 43,200 37,475 11,126 53,391 15,703 61,605 19,910 8,214 4,207 4,992,622 2,683,276 Rs. 4,750 p.sq.ft. 12% Market comparable method yy Price per perch for land Rs. 1,500,000 p.p. yy Price per square foot for building Rs. 4,000 p.sq.ft. yy Depreciation rate 7% Total p.p. – per perch Revalued amount of Rs. ’000 Market comparable method yy Price per perch for land yy Depreciation rate Narammala No. 55, Negombo Road, Narammala Net book value before revaluation of Range of estimates for unobservable inputs p.sq.ft. – per square foot p.m. – per month 7,144,134 4,073,978 2,151,512 1,390,702 p.a. – per annum 39.5 (c) Valuation techniques and sensitivity of the fair value measurement of the freehold land and buildings of the Bank Description of the above valuation techniques together with narrative descriptions on sensitivity of the fair value measurement to changes in significant unobservable inputs are tabulated below: Valuation technique Significant unobservable valuation inputs (ranges of each property are given in the table above) Sensitivity of the fair value measurement to inputs Price per perch for land Estimated fair value would increase (decrease) if; Price per perch would increase (decrease) Price per square foot would increase (decrease) Depreciation rate for building would decrease (increase) Market comparable method This method considers the selling price of a similar property within a reasonably recent period of time in determining the fair value of the property being revalued. This involves evaluation of recent active market prices of similar assets, making appropriate adjustments for differences in size, nature, location, condition of specific property. In this process, outlier transactions, indicative of particularly motivated buyers or sellers are too compensated for since the price may not adequately reflect the fair market value. Price per square foot for building Depreciation rate for building Investment method This method involves the capitalisation of the expected rental income at an appropriate rate of years purchased currently characterised by the real estate market. 256 Commercial Bank of Ceylon PLC Annual Report 2017 Gross Annual Rentals Years purchase (Present value of 1 unit per period) Void period Estimated fair value would increase (decrease) if; Gross Annual Rentals would increase (decrease) Years purchase would increase (decrease) Void period would decrease (increase)
  258. Financial Reports Notes to the Financial Statements 39 .6 Title restriction on property, plant and equipment There were no restrictions existed on the title of the property, plant and equipment of the Group/Bank as at the reporting date. 39.7 Property, plant and equipment pledged as security for liabilities – Bank There were no items of property, plant and equipment pledged as securities for liabilities as at the reporting date. 39.8 Compensation from third parties for items of property, plant and equipment – Bank The compensation received/receivable from third parties for items of property, plant and equipment that were impaired, lost or given up as at the reporting date of the Bank is as follows: 2017 Rs. ’000 As at December 31, Total claims lodged Total claims received Total claims rejected 2016 Rs. ’000 17,096 4,832 (11,573) (1,643) – Total claims receivable – 5,523 3,189 2017 Rs. ’000 2016 Rs. ’000 Computer equipment 1,458,542 1,205,702 Office equipment, furniture and fixtures 2,044,143 1,748,517 39,566 20,765 39.9 Fully depreciated property, plant and equipment – Bank The cost of fully depreciated property, plant and equipment of the Bank which are still in use is as follows: As at December 31, Motor vehicles 39.10 Temporarily idle property, plant and equipment – Bank Following property, plant and equipment of the Bank were temporarily idle (until the assets are issued to the business units): 2017 Rs. ’000 2016 Rs. ’000 Computer equipment 121,472 128,136 Office equipment, furniture and fixtures 100,175 45,887 2017 Rs. ’000 2016 Rs. ’000 182,080 160,181 98,637 100,681 As at December 31, 39.11 Property, plant and equipment retired from active use – Bank Following property, plant and equipment of the Bank were retired from active use: As at December 31, Computer equipment Office equipment, furniture and fixtures 39.12 Borrowing costs There were no capitalised borrowing costs related to the acquisition of property, plant and equipment during the year 2017 (2016 – Nil). Commercial Bank of Ceylon PLC Annual Report 2017 257
  259. Financial Reports Notes to the Financial Statements 40 . Intangible Assets The Group’s intangible assets include the value of acquired goodwill, trademarks, and computer software. Basis of recognition An intangible asset is recognised if it is probable that future economic benefits associated with the asset will flow to the entity and the cost of the asset can be measured reliably in accordance with the Sri Lanka Accounting Standard – LKAS 38 on “Intangible Assets”. Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is their fair value as at the date of acquisition. Following initial recognition, these assets are stated in the Statement of Financial Position at cost, less accumulated amortisation and accumulated impairment losses, if any. Subsequent expenditure Subsequent expenditure on intangible assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred. Useful economic lives, amortisation and impairment The useful economic lives of intangible assets are assessed to be either finite or indefinite. Useful economic lives, amortisation and impairment of finite and indefinite intangible assets are described below: yy Intangible assets with finite lives and amortisation Intangible assets with finite lives are amortised over the useful economic lives. The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at least at each reporting date. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortisation period or method, as appropriate, and are treated as changes in accounting estimates, which require prospective application. The amortisation expense on intangible assets with finite lives is expensed as incurred. yy Goodwill Goodwill that arises on the acquisition of subsidiaries is presented with intangible assets. Goodwill is initially measured at cost, being the excess of the aggregate of the consideration transferred and the amount recognised for non-controlling interests, and any previous interest held, over the net identifiable assets acquired and liabilities assumed. Subsequent to initial recognition, goodwill is measured at cost less accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash-generating units that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units. yy Computer software Software acquired by the Group is measured at cost less accumulated amortisation and any accumulated impairment losses. Expenditure on internally developed software is recognised as an asset when the Group is able to demonstrate its intention and ability to complete the development and use the software in a manner that will generate future economic benefits, and can reliably measure the costs to complete the development. The capitalised costs of internally-developed software include all costs directly attributable to developing the software and capitalised borrowing costs, and are amortised over its useful life. Internally-developed software is stated at capitalised cost less accumulated amortisation and any accumulated impairment losses. Subsequent expenditure on software assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred. yy Research and development costs Research costs are expensed as incurred. Development expenditures on an individual project are recognised as an intangible asset when the Group can demonstrate: The technical feasibility of completing the intangible asset so that the asset will be available for use or sale. Its intention to complete and its ability to use or sell the asset. The asset will generate future economic benefits. The availability of resources to complete the asset. The ability to measure reliably the expenditure during development. The ability to use the intangible asset generated. 258 Commercial Bank of Ceylon PLC Annual Report 2017
  260. Financial Reports Notes to the Financial Statements Following initial recognition of the development expenditure as an asset , the asset is carried at cost less any accumulated amortisation and accumulated impairment losses. As at the reporting date, the Group does not have development costs capitalised as an internally-generated intangible asset. GROUP As at December 31, BANK 2017 2016 2017 2016 Note Page No. Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Computer software 40.1 259 539,408 506,134 473,390 423,851 Software under development 40.2 260 311,748 226,490 303,420 216,794 400,045 400,045 Goodwill arising on business combination Trademarks 25 Total 1,251,226 – – – – – 1,132,669 776,810 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Balance as at January 1, 1,682,677 1,731,169 1,589,301 1,719,589 Additions during the year 267,071 362,810 259,734 280,986 640,645 40.1 Computer software GROUP Note Page No. BANK Cost/valuation Disposals/write-off during the year (8,355) Exchange rate variance 1,522 Transfers/adjustments – Balance as at December 31, (413,059) 1,757 – – (1,450) (413,059) 1,785 – – 1,942,915 1,682,677 1,847,585 1,589,301 1,176,543 1,414,305 1,165,450 1,411,058 229,764 173,790 209,766 165,903 Accumulated amortisation and impairment losses Balance as at January 1, Amortisation for the year Impairment loss 20 203 – Disposals/write-off during the year (1,114) Exchange rate variance (1,686) Transfers/adjustments Balance as at December 31, Net book value as at December 31, – – (412,756) 1,204 – – – (1,021) – (412,756) 1,245 – – 1,403,507 1,176,543 1,374,195 1,165,450 539,408 506,134 473,390 423,851 Commercial Bank of Ceylon PLC Annual Report 2017 259
  261. Financial Reports Notes to the Financial Statements 40 .2 Software under development GROUP BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Balance as at January 1, 226,490 167,125 216,794 157,429 Additions during the year 189,620 135,830 189,620 135,830 (104,362) (76,465) (102,994) (76,465) 311,748 226,490 303,420 216,794 Cost/valuation Transfers/adjustments Balance as at December 31, There were no restrictions on the title of the intangible assets of the Group as at the reporting date. Further, there were no items pledged as securities for liabilities. There were no capitalised borrowing costs related to the acquisition of intangible assets during the year 2017 (2016 – Nil). The maturity analysis of intangible assets is given in Note 62 on pages 289 and 290. 41. Leasehold Property GROUP Note Page No. BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 128,700 128,700 84,840 84,840 Cost/valuation Balance as at January 1, Additions during the year – Balance as at December 31, – – – 128,700 128,700 84,840 84,840 22,732 21,280 11,304 10,362 1,452 1,452 942 942 24,184 22,732 12,246 11,304 104,516 105,968 72,594 73,536 Accumulated amortisation Balance as at January 1, 20 203 Amortisation for the year Balance as at December 31, Net book value as at December 31, The carrying amount of revalued assets that would have been included in the Financial Statements had the assets been carried at cost less amortisation is as follows: GROUP BANK Cost Accumulated amortisation Net book value Cost Accumulated amortisation Net book value Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Leasehold land 101,298 16,573 84,725 14,846 12,245 2,601 Total 101,298 16,573 84,725 14,846 12,245 2,601 As at December 31, 2017 Class of asset 260 Commercial Bank of Ceylon PLC Annual Report 2017
  262. Financial Reports Notes to the Financial Statements GROUP As at December 31 , 2016 BANK Cost Accumulated amortisation Net Book value Cost Accumulated amortisation Net book value Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Leasehold land 23,715 6,827 16,888 14,846 3,783 11,063 Total 23,715 6,827 16,888 14,846 3,783 11,063 Class of asset The maturity analysis of Leasehold Property is given in Note 62 on pages 289 and 290. 42. Other Assets GROUP As at December 31, Receivables BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 46,212 36,511 46,171 36,511 Deposits and prepayments 1,530,984 1,481,830 1,563,026 1,490,786 Clearing account balance 6,135,630 6,370,312 6,135,630 6,370,312 Unamortised cost on staff loans (Day 1 difference) 3,676,965 3,373,174 3,676,965 3,373,174 Other accounts Total 5,973,186 5,220,732 5,876,370 5,167,383 17,362,977 16,482,559 17,298,162 16,438,166 The maturity analysis of other assets is given in Note 62 on pages 289 and 290. 43. Due to Banks These represent call money borrowings, credit balances in Nostro Accounts and borrowings from banks. Subsequent to initial recognition, these are measured at amortised cost using the EIR method. Interest paid/payable on these borrowings is recognised in profit or loss. GROUP As at December 31, Borrowings Local currency borrowings Foreign currency borrowings Securities sold under repurchase (Repo) agreements (*) Total BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 54,538,743 58,406,994 51,414,842 54,917,414 8,939,723 3,714,684 5,815,822 225,104 45,599,020 54,692,310 45,599,020 54,692,310 5,706,149 12,691,397 5,706,149 12,691,397 60,244,892 71,098,391 57,120,991 67,608,811 (*) Securities sold under repurchase (Repo) agreements are shown on the face of the Statement of Financial Position except for the Repos with banks. The maturity analysis of Due to Banks is given in Note 62 on pages 289 and 290. Commercial Bank of Ceylon PLC Annual Report 2017 261
  263. Financial Reports Notes to the Financial Statements 44 . Derivative Financial Liabilities GROUP As at December 31, BANK 2017 2016 2017 2016 Note Page No. Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Derivative financial liabilities – Held for trading 44.1 262 3,674,032 1,515,035 3,674,032 1,515,035 Derivative financial liabilities – Cash flow hedges held for risk management 44.2 262 Total 4,462 3,678,494 – 1,515,035 4,462 3,678,494 – 1,515,035 44.1 Derivative financial liabilities – Held for trading Derivative financial liabilities are classified as held for trading, if they are incurred principally for the purpose of repurchasing in the near term or held as a part of a portfolio that is managed together for short-term profit or position taking. This category includes derivative financial instruments entered into by the Group that are not designated as hedging instruments in hedge relationships as per the Sri Lanka Accounting Standard – LKAS 39 on “Financial Instruments: Recognition and Measurement”. Separated embedded derivatives are also classified as held for trading unless they are designated as effective hedging instruments. These are recorded at fair value with corresponding gains or losses recognised in net gains/(losses) on trading in the Income Statement. GROUP BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Currency swaps 2,656,376 663,714 2,656,376 663,714 Forward contracts 1,015,648 849,011 1,015,648 849,011 As at December 31, Foreign currency derivatives Spot contracts Total 2,008 2,310 2,008 2,310 3,674,032 1,515,035 3,674,032 1,515,035 44.2 Derivative financial liabilities – cash flow hedges held for risk management The Group uses interest rate swaps to hedge the interest rate risk arising from a floating rate borrowing denominated in foreign currencies. The fair value of the derivative financial liability denominated as cash flow hedge is as follows. GROUP As at December 31, BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Interest rate swaps 4,462 – 4,462 – Total 4,462 – 4,462 – During the year, loss (net of tax) of Rs. 3.212 Mn. (2016 – Nil) relating to the effective portion of cash flow hedges were recognised in OCI. The maturity analysis of Derivative Financial Liabilities is given in Note 62 on pages 289 and 290. 262 Commercial Bank of Ceylon PLC Annual Report 2017
  264. Financial Reports Notes to the Financial Statements 45 . Due to Other Customers/Deposits from Customers These include non-interest-bearing deposits, savings deposits, term deposits, deposits payable at call and certificates of deposit. Subsequent to initial recognition deposits are measured at amortised cost using the EIR method, except where the Group designates liabilities at fair value through profit or loss. Interest paid/payable on these deposits is recognised in profit or loss. GROUP Local currency deposits Current account balances BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 649,709,858 564,036,848 650,161,430 564,194,443 As at December 31, 42,488,222 38,151,058 42,497,439 38,152,646 Savings deposits 212,687,511 197,136,502 213,055,712 197,244,642 Time deposits 394,357,770 328,382,343 394,431,924 328,430,210 176,355 366,945 176,355 366,945 207,560,123 179,273,765 199,966,081 175,369,051 23,401,770 19,516,806 18,954,618 17,908,311 Certificates of deposit Foreign currency deposits Current account balances Savings deposits 60,355,737 56,388,046 59,001,649 54,845,666 Time deposits 123,802,616 103,368,913 122,009,814 102,615,074 Total 857,269,981 743,310,613 850,127,511 739,563,494 Deposits – local currency – Bank Deposits – foreign currency – Bank Rs. Bn. Rs. Bn. 2016 2017 2016 400 125 320 100 240 75 160 50 80 25 0 Current account balances Savings deposits Time deposits 0 2017 Current account balances Savings deposits Time deposits Commercial Bank of Ceylon PLC Annual Report 2017 263
  265. Financial Reports Notes to the Financial Statements 45 .1 Analysis of due to other customers/deposits from customers GROUP As at December 31, BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 (a) By product Current account balances 65,889,992 57,667,864 61,452,057 56,060,957 Savings deposits 273,043,248 253,524,548 272,057,361 252,090,308 Time deposits 518,160,386 431,751,256 516,441,738 431,045,284 176,355 366,945 176,355 366,945 857,269,981 743,310,613 850,127,511 739,563,494 Sri Lankan Rupee 649,709,858 564,036,848 650,161,430 564,194,443 United States Dollar 133,126,818 119,220,744 127,914,412 115,932,891 Great Britain Pound 7,753,315 8,195,451 7,753,315 8,195,451 Euro 43,047,102 34,738,958 43,047,102 34,738,958 Australian Dollar 10,673,908 5,984,750 10,513,278 5,851,603 Bangladesh Taka 8,887,830 9,087,549 8,887,302 9,087,088 Maldivian Rufiyaa 2,271,481 504,726 Other currencies 1,799,669 1,541,587 1,850,672 1,563,060 857,269,981 743,310,613 850,127,511 739,563,494 12,153,761 5,678,189 12,153,761 5,678,189 6,666,165 14,908,797 6,705,055 14,888,958 Deposits from other customers 838,450,055 722,723,627 831,268,695 718,996,347 Subtotal 857,269,981 743,310,613 850,127,511 739,563,494 Certificates of deposit Subtotal (b) By currency Subtotal – – (c) By institution/customers Deposits from banks Deposits from finance companies The maturity analysis of deposits from customers is given in Note 62 on pages 289 and 290. 264 Commercial Bank of Ceylon PLC Annual Report 2017
  266. Financial Reports Notes to the Financial Statements 46 . Other Borrowings GROUP BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 6,624,731 5,425,666 6,624,731 5,425,666 Borrowings from International Finance Corporation (IFC) 17,161,363 3,844,488 17,161,363 3,844,488 Total 23,786,094 9,270,154 23,786,094 9,270,154 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 3,464,682 3,025,662 3,440,736 3,001,984 6,679,675 5,606,143 6,564,443 5,554,989 As at December 31, Refinance borrowings The maturity analysis of Other Borrowings is given in Note 62 on pages 289 and 290. 47. Current Tax Liabilities GROUP Note Page No. Balance as at January 1, Provision for the year Reversal of (over)/under provision 22.1 206 BANK (99,996) (100,000) – – Self-assessment payments (3,810,701) (4,014,741) (3,753,679) (3,966,831) Notional tax credits (*) (1,338,116) (918,062) (1,336,673) (916,767) (646,991) (291,257) (625,096) (289,576) Withholding tax/other credits Exchange rate variance (45,703) Balance as at December 31, 4,202,850 (45,820) 56,937 3,464,682 56,937 4,143,911 3,440,736 (*) Notional tax credit for withholding tax on Government securities on secondary market transactions As per Section 137 of the Inland Revenue Act No. 10 of 2006 and amendments thereto, a company engaged in secondary market transactions involving Government Securities, Treasury Bills and Treasury Bonds on which income tax had been deducted at 10% per annum at the time of issue of such securities, is entitled to a notional tax credit of one-ninth of Net Interest Income earned from such secondary market transactions. As per the Inland Revenue Act No. 24 of 2017, which will become effective from April 1, 2018 the Bank will not be entitled to accrue notional tax credit from April 1, 2018. The maturity analysis of Current Tax Liabilities is given in Note 62 on pages 289 and 290. 48. Deferred Tax Assets and Liabilities 48.1 Summary of net deferred tax liability GROUP 2017 Temporary Tax effect difference Note Page No. Balance as at January 1, Amount originating/(reversing) to Income Statement Amount originating/(reversing) to Statement of Profit or Loss and Other Comprehensive Income Exchange rate variance Balance as at December 31, Rs. ’000 (2,069,702) 22.1 206 254,859 Rs. ’000 (668,150) 74,138 14,850,829 4,158,232 – 995 13,035,986 3,565,215 BANK 2016 Temporary Tax effect difference Rs. ’000 Rs. ’000 1,815,596 467,632 303,341 42,017 (4,188,639) (1,172,819) – (2,069,702) (4,980) (668,150) 2017 Temporary Tax effect difference Rs. ’000 (3,126,090) 508,142 Rs. ’000 Rs. ’000 Rs. ’000 (963,935) 969,263 230,615 137,257 94,840 (16,317) 14,631,707 4,096,878 – 2016 Temporary Tax effect difference 4,626 12,013,759 3,274,826 (4,190,193) (1,173,254) – (3,126,090) (4,979) (963,935) Commercial Bank of Ceylon PLC Annual Report 2017 265
  267. Financial Reports Notes to the Financial Statements 48 .2 Reconciliation of net deferred tax liability – Group Statement of financial position For the year ended/as at December 31, Profit or loss Other comprehensive income 2017 2016 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Deferred tax liabilities on: Accelerated depreciation for tax purposes – Own assets 501,389 422,466 (78,923) (50,511) – – Accelerated depreciation for tax purposes – Leased assets 2,250,845 2,024,509 (226,336) (151,498) – – Revaluation surplus on freehold buildings 1,146,902 726,052 20,394 20,182 Revaluation surplus on freehold land (*) 1,762,741 Tax effect on actuarial gains on defined benefit plans Effective interest rate on deposits Effect of exchange rate variance – – – (21,569) 66,464 – – 1,432 1,986 554 599 – – 752 (5,888) 5,641,740 3,241,477 (283,559) (187,116) 434,236 386,144 85,738 61,179 48,092 53,950 737,639 2,875,685 – – 56,254 56,254 – – 181,231 179,216 83,159 13,444 (441,244) – (1,762,741) – 88,033 – 243 (2,115,709) (40,006) – 908 (39,098) Deferred tax assets on: Defined benefit plans Tax effect on actuarial losses on defined benefit plans Unrealised gain/(loss) on available-for-sale (AFS) portfolio Specific provision on lease receivable Leave encashment Tax effect on actuarial losses on leave encashment Straight lining of lease rentals – 2,015 – – 10,984 – – 24,559 (2,138,046) – – 69,715 – 37,204 1,196,218 – – (21,505) 47,740 39,236 8,504 10,773 – – De-recognition of commission income 131,046 110,633 20,413 29,617 – – Equity-settled share-based payments 148,349 117,679 30,670 55,147 – – Impairment provision 144,888 62,672 82,216 (22,857) Carried forward tax loss on leasing business Cash flow hedges Deferred tax on previous losses – 7,485 1,249 – 24,996 – 2,076,525 3,909,627 Deferred tax effect on Profit or Loss and Other Comprehensive Income for the year Net deferred tax liability as at December 31, 266 Commercial Bank of Ceylon PLC Annual Report 2017 (7,485) – 24,996 209,421 (74,138) 3,565,215 (668,150) 7,485 – – 145,099 (42,017) – – – – 1,249 – – – (2,042,523) 1,211,917 (4,158,232) 1,172,819
  268. Financial Reports Notes to the Financial Statements 48 .3 Reconciliation of net deferred tax liability – Bank Statement of financial position For the year ended/as at December 31, Profit or loss Other comprehensive income 2017 2016 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Deferred tax liabilities on: Accelerated depreciation for tax purposes – Own assets Accelerated depreciation for tax purposes – Leased assets Revaluation surplus on freehold buildings Revaluation surplus on freehold land (*) Tax effect on actuarial gains on defined benefit plans Effective interest rate on deposits Effect of exchange rate variance 448,849 379,184 (69,665) (47,142) – – 2,127,270 1,926,686 (200,584) (110,365) – – 857,785 493,791 19,930 19,930 1,756,155 – – – (22,492) 63,016 – – 1,432 1,986 554 599 – 4,383 – (5,887) 5,168,999 2,864,663 (245,382) (142,865) 422,019 375,497 85,461 60,946 46,522 – 52,662 – 737,665 2,875,694 – – (383,924) – (1,756,155) 85,508 – (39,715) – 243 (2,054,328) – 908 (38,807) Deferred tax assets on: Defined benefit plans Tax effect on actuarial losses on defined benefit plans Unrealised gain/(loss) on available-for-sale (AFS) portfolio Specific provision on lease receivable (2,138,029) – 37,326 1,196,240 56,254 56,254 181,231 179,216 Tax effect on actuarial losses on leave encashment 83,159 13,444 Straight lining of lease rentals 47,740 39,236 8,504 10,773 – – De-recognition of commission income 131,046 110,632 20,414 29,616 – – Equity-settled share-based payments 148,349 117,679 30,670 55,147 Leave encashment Cash flow hedges 1,249 1,894,173 – – 24,515 2,015 – 3,274,826 – – – 3,828,598 Deferred tax effect on Profit or Loss and Other Comprehensive Income for the year Net deferred tax liability as at December 31, – 10,984 – – – – – 69,715 (21,505) – – 1,249 – 108,125 159,182 (2,042,550) 1,212,061 (137,257) 16,317 (4,096,878) 1,173,254 (963,935) (*) As per the Inland Revenue Act No. 24 of 2017, which will become effective from April 1, 2018 Capital Assets/Business Assets will attract tax at applicable Corporate tax rate on the gains at the time of disposal. Accordingly, deferred tax liability has been recognised at 28% on the revaluation surplus relating to freehold land in these Financial Statements. The maturity analysis of Deferred Tax Liabilities is given in Note 62 on pages 289 and 290. 49. Other Provisions A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognised in “Interest Expense” in profit or loss. GROUP As at December 31, BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Provision for claims payable – 1,874 – 1,874 Total – 1,874 – 1,874 The maturity analysis of Other Provisions is given in Note 62 on pages 289 and 290. Commercial Bank of Ceylon PLC Annual Report 2017 267
  269. Financial Reports Notes to the Financial Statements 50 . Other Liabilities Other liabilities include provisions made on account of interest, fees and expenses, gratuity/pensions, leave encashment and other provisions. These liabilities are recorded at amounts expected to be payable as at the reporting date. GROUP BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Accrued expenditure 2,895,090 2,362,488 2,865,751 2,342,023 Cheques sent on clearing 6,119,528 6,358,679 6,119,528 6,358,679 As at December 31, Note Page No. Provision for gratuity payable 50.1 (b) 269 1,515,410 1,010,095 1,474,387 983,180 Provision for unfunded pension scheme 50.2 (b) 270 285,095 214,886 285,095 214,886 Provision for leave encashment 50.3 (b) 271 944,251 688,073 944,251 688,073 Payable on oil hedging transactions Other payables Total 952,929 929,044 952,929 929,044 6,795,812 6,465,637 6,583,423 6,194,509 19,508,115 18,028,902 19,225,364 17,710,394 The maturity analysis of other liabilities is given in Note 62 on pages 289 and 290. 50.1 Provision for gratuity payable An actuarial valuation of the retirement gratuity payable was carried out as at December 31, 2017 by Mr M Poopalanathan, AIA, of Messrs Actuarial & Management Consultants (Pvt) Ltd., a firm of professional Actuaries. The valuation method used by the actuaries to value the liability is the “Projected Unit Credit Method (PUC)”, the method recommended by the Sri Lanka Accounting Standard – LKAS 19 on “Employee Benefits”. 50.1 (a) Actuarial assumptions Type of assumption Criteria Description Demographic Mortality – In service A 67/70 Mortality table issued by the Institute of Actuaries, London Staff Turnover The staff turnover rate at an age represents the probability of an employee leaving within one year of that age due to reasons other than death, ill health and normal retirement. The same withdrawal rates which were used in the last valuation (as at December 31, 2016) to determine the liabilities of the active employees in the gratuity, were used in the actuarial valuation carried out as at December 31, 2017. Normal retirement age The employees who are aged over the specified retirement age have been assumed to retire on their respective next birthdays. Rate of discount Sri Lankan operation In the absence of a deep market in long-term bonds in Sri Lanka, a long-term interest rate of 11.00% p.a. (2016 – 11.50% p.a.) has been used to discount future liabilities considering anticipated long-term rate of inflation. Financial Bangladesh operation In the absence of long-term high quality corporate bonds or Government bonds with the term that matches liabilities a long-term interest rate of 8% p.a. (2016 – 8% p.a.) has been used to discount future liabilities considering anticipated long-term rate of inflation. Salary increases Sri Lankan operation A salary increment of 11.50% p.a. (2016 – 10% p.a.) has been used in respect of the active employees. Bangladesh operation A salary increment of 10% p.a. (2016 – 10% p.a.) has been used in respect of the active employees. 268 Commercial Bank of Ceylon PLC Annual Report 2017
  270. Financial Reports Notes to the Financial Statements 50 .1 (b) Movement in the provision for gratuity payable GROUP Note Page No. Balance as at January 1, Expense recognised in the Income Statement 50.1 (C) Exchange rate variance 269 BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 1,010,095 886,648 983,180 863,230 264,079 211,237 254,537 204,791 (7,279) 7,782 (7,279) 7,782 Amount paid during the year (67,216) (39,701) (62,607) (38,230) Actuarial (gain)/loss recognised in other comprehensive income 315,731 (55,871) 306,556 (54,393) Balance as at December 31, 1,515,410 1,010,095 1,474,387 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 983,180 50.1 (c) Expense recognised in the Income Statement – Gratuity GROUP For the year ended December 31, BANK Interest cost 105,960 91,149 102,993 88,801 Current service cost 158,119 120,088 151,544 115,990 Total 264,079 211,237 254,537 204,791 50.1 (d) Sensitivity analysis on actuarial valuation The following table illustrates the impact of the possible changes in the discount rate and salary increases in gratuity valuation of the Group and the Bank as at December 31, 2017. GROUP BANK Sensitivity effect on Statement of Financial Position (benefit obligation) Rs. ’000 Sensitivity effect on Statement of Financial Position (benefit obligation) Rs. ’000 1% increase in discount rate (225,654) (223,047) 1% decrease in discount rate 280,956 277,988 Variable 1% increase in salary 285,515 282,509 1% decrease in salary (231,506) (228,822) 50.2 Provision for unfunded pension scheme An actuarial valuation of the unfunded pension liability was carried out as at December 31, 2017 by Mr M Poopalanathan, AIA, of Messrs Actuarial & Management Consultants (Pvt) Ltd., a firm of professional actuaries. The valuation method used by the actuary to value the liability is the “Projected Unit Credit Method (PUC)”, the method recommended by the Sri Lanka Accounting Standard – LKAS 19 on “Employee Benefits”. Commercial Bank of Ceylon PLC Annual Report 2017 269
  271. Financial Reports Notes to the Financial Statements 50 .2 (a) Actuarial assumptions Type of assumption Criteria Description Demographic Mortality – In service A 1967/70 Mortality table issued by the Institute of Actuaries, London. After retirement A (90) Annuities table (Males and Females) issued by the Institute of Actuaries, London. Staff turnover The withdrawal rate at an age represents the probability of an active employee leaving within one year of that age due to reasons other than death, ill health and normal retirement. The same withdrawal rates which were used in the last valuation (as at December 31, 2016) to determine the liabilities of the active employees in the funded scheme, were used in the actuarial valuation carried out as at December 31, 2017. Disability Assumptions similar to those used in other comparable schemes for disability were used as the data required to do a “scheme specific” study was not available. Normal retirement age 55 or 60 years as decided employees. Rate of discount In the absence of a deep market in long-term bonds in Sri Lanka, a long-term interest rate of 11.00% p.a. (2016 – 11.50% p.a.) has been used to discount future liabilities considering anticipated long-term rate of inflation. Salary increases A salary increment of 11.50% p.a. (2016 – 10% p.a.) has been used in respect of the active employees. Post-retirement pension increase rate There is no agreed rate of increase even though the pension payments are subject to periodic increases, and increases are granted solely at the discretion of the Bank. Therefore, no specific rate was assumed for this valuation. Financial 50.2 (b) Movement in the provision for unfunded pension scheme GROUP Note Expense recognised in the Income Statement Amount paid during the year 50.2 (c) 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 214,886 219,283 214,886 219,283 24,712 23,025 24,712 23,025 (45,317) (34,134) (45,317) (34,134) 90,814 6,712 90,814 6,712 285,095 214,886 285,095 214,886 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 24,712 23,025 24,712 23,025 Page No. Balance as at January 1, 270 Actuarial loss recognised in other comprehensive income Balance as at December 31, BANK 2017 50.2 (c) Expense recognised in the Income Statement – Unfunded pension scheme GROUP For the year ended December 31, Interest cost Current service cost Total 270 – 24,712 Commercial Bank of Ceylon PLC Annual Report 2017 BANK – 23,025 – 24,712 – 23,025
  272. Financial Reports Notes to the Financial Statements 50 .2 (d) Sensitivity analysis on actuarial valuation – Unfunded pension scheme The following table illustrates the impact of the possible changes in the discount rate and salary increases in the unfunded pension scheme valuation of the Bank as at December 31, 2017. GROUP BANK Sensitivity effect on Statement of Financial Position (benefit obligation) Rs. ’000 Sensitivity effect on Statement of Financial Position (benefit obligation) Rs. ’000 1% increase in discount rate (10,811) (10,811) 1% decrease in discount rate 11,801 11,801 Variable 1% increase in salary – – 1% decrease in salary – – 50.3 Provision for leave encashment An actuarial valuation of the leave encashment liability was carried out as at December 31, 2017 by Mr M Poopalanathan, AIA, of Messrs Actuarial & Management Consultants (Pvt) Ltd., a firm of professional actuaries. The valuation method used by the actuaries to value the liability is the “Projected Unit Credit Method (PUC)”, the method recommended by the Sri Lanka Accounting Standard – LKAS 19 on “Employee Benefits”. 50.3 (a) Actuarial assumptions Type of assumption Criteria Description Demographic Mortality – In service A 1967/70 Mortality table issued by the Institute of Actuaries, London Staff turnover The probability of a member withdrawing from the scheme within a year of ages between 20 to 55 years. Disability The probability of a member becoming disabled within a year of ages between 20 to 55 years. Rate of discount In the absence of a deep market in long-term bonds in Sri Lanka, a long-term interest rate of 11.00% p.a. (2016 – 11.50% p.a.) has been used to discount future liabilities considering anticipated long-term rate of inflation. Salary increases A salary increment of 11.50% p.a. (2016 – 10.00% p.a.) has been used in respect of the active employees. Financial 50.3 (b) Movement in the provision for leave encashment GROUP Note Page No. Balance as at January 1, Expense recognised in the Income Statement BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 688,073 725,647 688,073 725,647 79,128 76,193 79,128 76,193 Amount paid during the year (71,931) (36,965) (71,931) (36,965) Actuarial (gain)/loss recognised in other comprehensive income 248,981 (76,802) 248,981 (76,802) Balance as at December 31, 944,251 688,073 944,251 688,073 50.3 (c) 272 Commercial Bank of Ceylon PLC Annual Report 2017 271
  273. Financial Reports Notes to the Financial Statements 50 .3 (c) Expense recognised in the Income Statement – Leave encashment GROUP For the year ended December 31, Interest cost Current service cost BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 79,128 76,193 79,128 76,193 – Total 79,128 – – 79,128 76,193 – 76,193 50.3 (d) Sensitivity analysis on actuarial valuation – Leave encashment The following table illustrates the impact of the possible changes in the discount rates and salary increases on account leave encashment liability of the Bank as at December 31, 2017. GROUP BANK Sensitivity effect on Statement of Financial Position (benefit obligation) Rs. ’000 Sensitivity effect on Statement of Financial Position (benefit obligation) Rs. ’000 1% increase in discount rate (118,563) (118,563) 1% decrease in discount rate 145,531 145,531 1% increase in salary 147,799 147,799 1% decrease in salary (122,412) (122,412) Variable 50.4 Employee retirement benefit 50.4.1 Pension fund – Defined benefit plan An actuarial valuation of the Retirement Pension Fund was carried out as at December 31, 2017 by Mr M Poopalanathan, AIA, of Messrs Actuarial and Management Consultants (Pvt) Ltd., a firm of professional actuaries. The valuation method used by the actuaries to value the fund is the “Projected Unit Credit Method (PUC)”, the method recommended by the Sri Lanka Accounting Standard – LKAS 19 on “Employee Benefits”. The assets of the fund, which are independently administered by the Trustees as per the provisions of the Trust Deed are held separately from those of the Bank. 50.4.1 (a) Actuarial assumptions Type of Assumption Criteria Description Demographic Mortality – in service A 67/70 Mortality table issued by the Institute of Actuaries, London After retirement A (90) Annuities table (Males and Females) issued by the Institute of Actuaries, London Staff Turnover The withdrawal rate at an age represents the probability of an active employee leaving within one year of that age due to reasons other than death, ill health and normal retirement. The same withdrawal rates which were used in the last valuation (as at December 31, 2016) to determine the liability on account of the active employees in the funded scheme, were used in the actuarial valuation carried out as at December 31, 2017. Disability Assumptions similar to those used in other comparable schemes for disability were used as the data required to do a “scheme specific” study was not available. Normal retirement age 55 or 60 years as indicated in the data file of active employees. Rate of discount In the absence of a deep market in long-term bonds in Sri Lanka, a long-term interest rate of 11.00% p.a. (2016 – 11.50% p.a.) has been used to discount future liabilities considering anticipated long-term rate of inflation. Salary increases A salary increment of 11.50% p.a. (2016 – 10% p.a.) has been used in respect of the active employees. Post-retirement pension increase rate There is no agreed rate of increase even though the pension payments are subject to periodic increases and increases are granted solely at the discretion of the Bank. Therefore, no specific rate was assumed for this valuation. Financial 272 Commercial Bank of Ceylon PLC Annual Report 2017
  274. Financial Reports Notes to the Financial Statements 50 .4.1 (b) Movement in the present value of defined benefit obligation – Bank Balance as at January 1, Interest cost Current service cost Benefits paid during the year Actuarial (gain)/loss Balance as at December 31, 2017 2016 Rs. ’000 Rs. ’000 160,833 163,821 18,496 17,201 3,518 2,686 (16,842) (15,879) 38,436 204,441 (6,996) 160,833 50.4.1 (c) Movement in the fair value of plan assets Fair value as at January 1, Expected return on plan assets Contribution paid into plan Benefits paid by the plan Actuarial gain/(loss) on plan assets Fair value as at December 31, 2017 2016 Rs. ’000 Rs. ’000 160,752 137,308 18,486 14,418 1,710 1,624 (16,842) (15,879) (3,576) 23,281 160,530 160,752 50.4.1 (d) Liability recognised in the statement of financial position Present value of defined benefit obligations as at December 31, Fair value of plan assets Net liability recognised under other liabilities 2017 2016 Rs. ’000 Rs. ’000 204,441 160,833 (160,530) (160,752) 43,911 81 50.4.1 (e) Plan assets consist of the following: 2017 2016 Rs. ’000 Rs. ’000 Deposits held with the Bank 160,530 160,752 Total 160,530 160,752 Commercial Bank of Ceylon PLC Annual Report 2017 273
  275. Financial Reports Notes to the Financial Statements 50 .4.2 W&OP Fund – Defined benefit plan An actuarial valuation of the Retirement Pension W&OP Fund was carried out as at December 31, 2017 by Mr M Poopalanathan, AIA, of Messrs Actuarial & Management Consultants (Pvt) Ltd., a firm of professional actuaries. The valuation method used by the actuaries to value the fund is the “Projected Unit Credit Method (PUC)”, the method recommended by the Sri Lanka Accounting Standard – LKAS 19 on “Employee Benefits”. The assets of the fund, which are independently administered by the Trustees as per the provisions of the Trust Deed are held separately from those of the Bank. 50.4.2 (a) Actuarial assumptions Type of assumption Criteria Description Demographic Mortality – in service A 67/70 Mortality table issued by the Institute of Actuaries, London After retirement A (90) Annuities table (Males and Females) issued by the Institute of Actuaries, London Staff Turnover The withdrawal rate at an age represents the probability of an active employee leaving within one year of that age due to reasons other than death, ill health and normal retirement. The same withdrawal rates which were used in the last valuation (as at December 31, 2016) to determine the liability on account of the active employees in the funded scheme, were used in the actuarial valuation carried out as at December 31, 2017. Disability Assumptions similar to those used in other comparable schemes for disability were used as the data required to do a “scheme specific” study was not available. Normal retirement age 55 or 60 years as indicated in the data file of active employees. Rate of discount In the absence of a deep market in long-term bonds in Sri Lanka, a long-term interest rate of 11.00% p.a. (2016 – 11.50% p.a.) has been used to discount future liabilities considering anticipated long-term rate of inflation. Salary increases A salary increment of 11.50% p.a. (2016 – 10% p.a.) has been used in respect of the active employees. Post-retirement pension increase rate There is no agreed rate of increase even though the pension payments are subject to periodic increases and increases are granted solely at the discretion of the Bank. Therefore, no specific rate was assumed for this valuation. Financial 50.4.2 (b) Movement in the present value of defined benefit obligation – Bank Balance as at January 1, Interest cost Current service cost 2017 2016 Rs. ’000 Rs. ’000 48,419 49,853 5,568 5,235 409 310 Benefits paid during the year (5,003) Actuarial (gain)/loss 18,141 (3,651) Balance as at December 31, 67,534 48,419 274 Commercial Bank of Ceylon PLC Annual Report 2017 (3,328)
  276. Financial Reports Notes to the Financial Statements 50 .4.2 (c) Movement in the fair value of plan assets Fair value as at January 1, Expected return on plan assets Contribution paid into plan Benefits paid by the plan 2017 2016 Rs. ’000 Rs. ’000 50,182 44,320 5,771 4,654 212 (5,003) 200 (3,328) Actuarial gain/(loss) on plan assets (2,892) 4,336 Fair value as at December 31, 48,270 50,182 50.4.2 (d) Liability recognised in the Statement of Financial Position Present value of defined benefit obligations as at December 31, Fair value of plan assets Net liability recognised under other liabilities 2017 2016 Rs. ’000 Rs. ’000 67,534 48,419 (48,270) (50,182) 19,264 (1,763) 50.4.2 (e) Plan assets consist of the following: 2017 2016 Rs. ’000 Rs. ’000 Deposits held with the Bank 48,270 50,182 Total 48,270 50,182 50.4.3 Pension fund – Defined contribution plan During 2006, the Bank restructured its pension scheme which was a Defined Benefit Plan (DBP) to a Define Contribution Plan (DCP). This restructured plan was offered on a voluntary basis to the eligible employees of the Bank. The scheme provided for lump sum payments instead of commuted/monthly pension 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 future service package. The cost to be incurred 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, estimated to increase for this purpose at 10% p.a. In addition, interest to be earned on the assets of the DCP is also allocated to the employees who joined the restructured scheme. Commercial Bank of Ceylon PLC Annual Report 2017 275
  277. Financial Reports Notes to the Financial Statements 51 . Due to Subsidiaries GROUP As at December 31, BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Local subsidiaries Commercial Development Company PLC – – 42,732 9,260 ONEzero Company Ltd. – – 31,791 10,801 Serendib Finance Ltd. – – Subtotal – – Commex Sri Lanka S.R.L. – Italy – – – – Commercial Bank of Maldives Private Limited – – – – CBC Myanmar Microfinance Co. Limited – – – – Subtotal – – – – Total – – – – 74,523 20,061 Foreign subsidiaries 74,523 20,061 52. Subordinated Liabilities These represent the funds borrowed by the Group for long-term funding requirements. Subsequent to initial recognition these are measured at their amortised cost using the EIR method, except where the Group designates them at fair value through profit or loss. Interest paid/payable is recognised in profit or loss. GROUP Note Page No. Balance as at January 1, Amount borrowed during the year (*) Repayments/redemptions during the year 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 24,410,680 11,798,910 24,410,680 11,783,910 – Exchange rate variance Balance as at December 31, (before adjusting for amortised interest and transaction cost) 2016 – Subtotal 52.1 277 BANK 2017 13,179,430 (987,660) – – 13,179,430 (972,660) 24,410,680 23,990,680 24,410,680 23,990,680 288,750 420,000 288,750 420,000 24,699,430 24,410,680 24,699,430 24,410,680 Unamortised transaction cost (63,594) (75,805) (63,594) (75,805) Net effect of amortised interest payable 530,088 514,664 530,088 514,664 25,165,924 24,849,539 25,165,924 24,849,539 Adjusted balance as at December 31, (*) Funds raised through Debenture issues during the year has been utilised to finance the enhancing lending portfolio of the Bank. The Bank has followed and adhered to all conditions as laid down in Debenture prospectus. New Debenture issues are qualified to be treated under Tier 2 capital and thereby improving the total capital adequacy ratio of the Bank. Outstanding subordinated liabilities of the Bank as at December 31, 2017, consisted of 131,794,300 (2016 – 131,794,300) unsecured subordinated redeemable debentures of Rs. 100/- each and a subordinated loan of USD 75.0 Mn. (2016 – USD 75.0 Mn.) from International Finance Corporation (IFC). 276 Commercial Bank of Ceylon PLC Annual Report 2017
  278. Financial Reports Notes to the Financial Statements 52 .1 Categories of subordinated liabilities Colombo Stock Exchange Listing Interest payable frequency Allotment date 2016/2021 – 10.75% p.a. Listed Bi-annually 09.03.2016 2016/2021 – 12.00% p.a. Listed Bi-annually 28.10.2016 2016/2026 – 11.25% p.a. Listed Bi-annually 2016/2026 – 12.25% p.a. Listed Categories Maturity date GROUP Effective annual yield BANK 2017 2016 2017 2016 2017 2016 % % Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 08.03.2021 11.04 11.04 4,430,340 4,430,340 4,430,340 4,430,340 27.10.2021 12.36 12.36 5,071,800 5,071,800 5,071,800 5,071,800 09.03.2016 08.03.2026 11.57 11.57 1,749,090 1,749,090 1,749,090 1,749,090 Bi-annually 28.10.2016 27.10.2026 12.63 12.63 1,928,200 1,928,200 1,928,200 1,928,200 Bi-annually 13.03.2013 14.03.2023 7.013 7.013 Fixed Rate Debentures Floating Rate Subordinated Loans IFC Borrowings – 6 month LIBOR + 5.75% Total 11,520,000 11,231,250 11,520,000 11,231,250 24,699,430 24,410,680 24,699,430 24,410,680 52.2 Subordinated liabilities by maturity GROUP BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 As at December 31, Payable within one year – – – – Payable after one year 24,699,430 24,410,680 24,699,430 24,410,680 Total 24,699,430 24,410,680 24,699,430 24,410,680 In the event of the winding-up of the issuer, the above liabilities would be subordinated to the claims of depositors and all other creditors of the issuer. The Bank has not had any defaults of principal, interest or other breaches with respect to its subordinated liabilities during the year ended December 31, 2017. The maturity analysis of subordinated liabilities is given in Note 62 on pages 289 and 290. Commercial Bank of Ceylon PLC Annual Report 2017 277
  279. Financial Reports Notes to the Financial Statements 53 . Stated Capital Ordinary shares in the Bank are recognised at the amount paid per ordinary share net of directly attributable issue cost. GROUP Balance as at January 1, Issue of ordinary voting shares under the Employee Share Option Plan Issue of ordinary shares as part of the final dividend satisfied in the form of issue and allotment of new shares Ordinary voting shares Ordinary non-voting shares Rights issue of ordinary voting shares Rights issue of ordinary non-voting shares Balance as at December 31, BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 24,978,003 23,254,605 24,978,003 23,254,605 415,117 144,804 415,117 144,804 1,606,549 1,578,594 1,606,549 1,578,594 1,503,566 1,477,179 1,503,566 1,477,179 102,983 101,415 102,983 101,415 9,616,179 – 9,616,179 – 527,693 – 527,693 – 37,143,541 24,978,003 37,143,541 24,978,003 53.1 Movement in number of shares No. of ordinary voting shares Balance as at January 1, Issue of ordinary voting shares under the Employee Share Option Plan 2016 2017 2016 833,521,887 820,567,115 57,212,653 56,299,686 3,278,537 1,136,732 Issue of ordinary shares as part of the final dividend satisfied in the form of issue and allotment of new shares 10,521,802 11,818,040 Rights issue of ordinary shares 84,649,465 Balance as at December 31, No. of ordinary non-voting shares 2017 931,971,691 – 833,521,887 – – 903,357 912,967 5,811,601 63,927,611 – 57,212,653 The shares of Commercial Bank of Ceylon PLC are quoted on the Colombo Stock Exchange. The non-voting ordinary shares of the Bank, rank pari passu in respect of all rights with the ordinary voting shares of the Bank except voting rights on Resolutions passed at General Meetings. The holders of ordinary shares are entitled to receive dividends declared from time to time and are entitled to one vote per share at General Meetings of the Bank. The Bank has offered an Employee Share Option Plan. Please refer Note 53.2 on page 279 for details. 278 Commercial Bank of Ceylon PLC Annual Report 2017
  280. Financial Reports Notes to the Financial Statements 53 .2 Employee share option plan – 2008 The Bank obtained the approval of the shareholders at an Extraordinary General Meeting held on April 16, 2008, to introduce an Employee Share Option Plan for the benefit of all the Executive Officers in Grade III and above by creating up to 3% of the ordinary voting shares at the rate of 1% shares each year over a period of three to five years, upon the Bank achieving specified performance targets. Option price is determined on the basis of the weighted average market price of Bank’s voting shares, during the period of ten market days immediately prior to each option offer date. Number of options offered under each tranche is based on the overall performance of the Bank and the individual performance of the eligible employees in the preceding year. In the event of a rights issue of shares, capitalisation of reserves, stock splits or stock dividends by the Bank during the vesting period, the number of options offered and the price are suitably adjusted as per the applicable rules of ESOP – 2008 which have been drafted in line with the accepted market practices. 1/3 of the options offered under each tranche is vested to eligible employees after one year from the date of offer, second 1/3 of the options after two years from the date of offer and final 1/3 after three years from the date of offer as detailed below : Tranche I Date granted April 30, 2008 April 30, 2008 46.91 46.91 46.91 1/3 of Options 1/3 of Options 1/3 of Options April 30, 2009 to April 29, 2013 April 30, 2010 to April 29, 2014 April 30, 2011 to April 29, 2015 Original number of options 777,308 777,308 777,308 2,331,924 Additions consequent to share splits and rights issues 692,095 789,320 1,057,059 2,538,474 Number of options cancelled before vesting (52,943) (52,943) Price (Rs.) – (*) Exercisable between Number of options vested Options cancelled due to non-acceptance Number of options exercised up to December 31, 2017 Number of options to be exercised as at December 31, 2017 1,416,460 1,513,685 – (1,416,460) – (1,513,685) – – April 30, 2008 (52,943) 1,781,424 Total (158,829) 4,711,569 – (1,781,424) – (4,711,569) – – (*) Adjusted on account of the dividends declared in the form of issue and allotment of new shares, rights issue of shares and sub-division of shares. Tranche II Date granted April 30, 2011 April 30, 2011 129.78 129.78 129.78 1/3 of Options 1/3 of Options 1/3 of Options April 30, 2012 to April 29, 2016 April 30, 2013 to April 29, 2017 April 30, 2014 to April 29, 2018 Original number of options 1,213,370 1,213,386 1,230,817 3,657,573 Additions consequent to share splits and rights issues 1,213,370 1,213,386 1,230,817 3,657,573 Price (Rs.) Exercisable between Number of options cancelled before vesting Number of options vested (30,980) (41,307) 2,395,760 2,385,465 Options cancelled due to non-acceptance (1,337,809) (1,020,819) Number of options exercised up to December 31, 2017 (1,057,951) (1,364,646) Number of options to be exercised as at December 31, 2017 – – April 30, 2011 (95,236) 2,366,398 – (738,900) 1,627,498 Total (167,523) 7,147,623 (2,358,628) (3,161,497) 1,627,498 Commercial Bank of Ceylon PLC Annual Report 2017 279
  281. Financial Reports Notes to the Financial Statements Tranche III Date granted Price (Rs.) Exercisable between Original number of options Number of options cancelled before vesting April 30, 2012 April 30, 2012 102.69 102.69 102.69 1/3 of Options 1/3 of Options 1/3 of Options April 30, 2013 to April 29, 2017 April 30, 2014 to April 29, 2018 April 30, 2015 to April 29, 2019 2,596,558 2,616,965 2,623,341 – Number of options vested Number of options exercised up to December 31, 2017 Number of options to be exercised as at December 31, 2017 (49,706) April 30, 2012 (79,964) Total 7,836,864 (129,670) 2,596,558 2,567,259 2,543,377 7,707,194 (2,596,558) (1,642,358) (1,199,193) (5,438,109) 1,344,184 2,269,085 – 924,901 The Employee Share Option Plan – 2008 was exempted from the requirements of the SLFRS 2 on “Share-based Payment” as it was granted prior to January 1, 2012, the effective date of the aforesaid accounting standard. The details of Employee Share Option Plans within the scope of the SLFRS 2 on “Share-based Payment” are reported in Note 54 to the Financial Statements below. 54. Share-based Payment 54.1 Description of the share-based payment arrangement As at the reporting date, the Group had the following equity settled share-based payment arrangement which was granted after January 1, 2012, the effective date of the Accounting Standard SLFRS 2 on “Share-based Payment”. Employee share option plan – 2015 The Bank obtained the approval of the shareholders at an Extraordinary General Meeting held on March 31, 2015, to introduce an Employee Share Option Plan for the benefit of all executive officers in Grade 1A and above by creating up to 2% of the ordinary voting shares at the rate of 0.5% shares in the first two years and 1% share in the last year over a period of three to five years, upon the Bank achieving specified performance targets. The performance conditions include minimum performance targets over the budget and over the industry peers and the service conditions include the fulfilment of the minimum service period at vesting dates of each tranche. Key terms and conditions related to the offer are detailed below: Tranches Tranche 1 % of voting shares issued (Maximum) Tranche 2 Tranche 3 0.5 0.5 1.0 April 1, 2015 April 1, 2015 April 1, 2015 Exercisable between October 1, 2016 to September 30, 2019 October 1, 2017 to September 30, 2020 October 1, 2018 to September 30, 2021 Date of vesting September 30, 2016 September 30, 2017 September 30, 2018 1½ years of service from the grant date and the fulfilment of performance conditions stated above for the financial year 2015 2½ years of service from the grant date and the fulfilment of performance conditions stated above for the financial year 2016 3½ years of service from the grant date and the fulfilment of performance conditions stated above for the financial year 2017 81,869 85,912 – Options granted to other executive officers 4,073,989 4,142,949 – Total options vested on the date of vesting 4,155,858 4,228,861 – Option grant date Vesting conditions No. of options vested on the date of vesting Options granted to Key Management Personnel 280 Commercial Bank of Ceylon PLC Annual Report 2017
  282. Financial Reports Notes to the Financial Statements All options are to be settled by physical delivery of ordinary voting shares of the Bank . There are neither cash settlement alternatives nor the Bank has a past practice of cash settlement for these types of options. The exercise price of each tranche is computed based on a volume-weighted average market price of the Bank’s ordinary (voting) shares, during the period of thirty (30) market days, six months prior to the date of vesting. 54.2 Measurement of fair value As required by SLFRS 2 on “Share-based Payment”, the fair value of the ESOP 2015 was estimated at the grant date using the Binomial Valuation Model taking into consideration various terms and conditions upon which the share options are granted. The inputs used in measurement of fair value at the grant date of ESOP 2015 were as follows: Tranches Description of the valuation input Tranche 1 Tranche 2 Tranche 3 Expected dividend rate (%) 3.50 3.50 3.50 Risk free rate (%) 8.00 8.00 8.00 Probability of share price increase (%) 80.00 80.00 80.00 Probability of share price decrease (%) 20.00 20.00 20.00 Size of annual increase of share price (%) 20.00 20.00 20.00 Size of annual reduction in share price (%) Exercise price (Rs.) 10.00 10.00 10.00 122.73 227.54 250.24 Growths in share prices stated above have been based on evaluation of the historical volatility of the Bank’s share price over past 10 years, adjusted for post war growth in All Share Price Index published by the Colombo Stock Exchange. 54.3 Reconciliation of outstanding share options The number and weighted-average exercise prices of share options are as follows: Tranche 1 2017 No. of voting shares vested and to be vested as at January 1, No. of shares granted from the right issue Granted during the year 2016 No. of options WAEP* No. of options WAEP* 16,203,130 213.55 16,445,375 212.29 297,177 191.41 – – Exercised during the year – Before right issue (456,776) 122.73 Exercised during the year – After right issue (303,197) 126.42 No. of voting shares vested and to be vested as at December 31, Exercisable as at December 31, 15,740,334 7,447,408 190.67 – (242,245) – 122.73 – 16,203,130 – 213.63 3,913,613 *Weighted Average Exercise Price 54.4 Expense recognised in Income Statement The cumulative expense recognised for equity-settled transactions at each reporting date until the vesting date, reflects the extent to which the vesting period has expired and the Group’s best estimate of the number of equity instruments that will ultimately vest. Accordingly, the expense in the Income Statement represents the movement in cumulative expense recognised as at the beginning and end of that period and is recognised in employee benefits expense [Refer Note 19] on page 203. Commercial Bank of Ceylon PLC Annual Report 2017 281
  283. Financial Reports Notes to the Financial Statements Several statutory and voluntary reserves are maintained by the Group in order to meet various legal and operational requirements . The details of these reserves including the nature and purpose of maintaining them are given in Notes 55, 56 and 57 on pages 282 to 285. 55. Statutory Reserves GROUP As at December 31, Statutory reserve fund BANK 2017 2016 2017 2016 Note Page No. Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 55.1 282 6,492,552 5,647,993 6,476,952 5,647,890 6,492,552 5,647,993 6,476,952 5,647,890 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 5,647,993 4,922,367 5,647,890 4,922,264 852,024 725,626 829,062 725,626 Subtotal 55.1 Statutory reserve fund GROUP Balance as at January 1, Transfers made during the year Statutory reserve attributable to non-controlling Interest Balance as at December 31, BANK (7,465) 6,492,552 – 5,647,993 – – 6,476,952 5,647,890 The statutory reserve fund is maintained as per the requirements under Section 20 (1) of the Banking Act No. 30 of 1988. Accordingly, the fund is built up by allocating a sum equivalent to not less than 5% of the profit after tax, but before declaring any dividend or any profits that are transferred elsewhere until the reserve is equal to 50% of the Bank’s stated capital and thereafter a further sum equivalent to 2% of such profit until the amount of the said reserve fund is equal to the stated capital of the Bank. The balance in the statutory reserve fund will be used only for the purposes specified in the Section 20 (2) of the Banking Act No. 30 of 1988. 56. Retained Earnings GROUP Balance as at January 1, Total comprehensive income Profit for the year Other comprehensive income, net of tax Dividends paid Revaluation gain on disposal of freehold land and building BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 4,553,778 4,467,807 4,464,077 4,388,867 16,073,373 14,654,924 16,051,342 14,652,274 16,605,963 14,510,333 16,581,244 14,512,511 (532,590) 144,591 (529,902) 139,763 (5,955,851) (5,720,913) (5,955,851) (5,720,913) 36,940 – 36,940 Write back of unclaimed dividends – 624 – De-recognition of revaluation reserve – 5,628 – Transfers to other reserves Profit on sale of partial disposal of subsidiary Reinstatement of non-controlling interest due to partial disposal of subsidiary Balance as at December 31, 282 Commercial Bank of Ceylon PLC Annual Report 2017 (9,624,559) 5,262 (2,334) 5,086,609 (8,856,151) 3,047 (1,188) 4,553,778 (9,609,062) – – 4,987,446 – – – (8,856,151) – – 4,464,077
  284. Financial Reports Notes to the Financial Statements 57 . Other Reserves 57. (a) Current year – 2017 GROUP BANK Balance as at January 1, Movement/ transfers Balance as at December 31, Balance as at January 1, Movement/ transfers Balance as at December 31, Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Note Page No. Revaluation reserve 57.1 283 6,250,554 1,583,449 7,834,003 5,722,859 1,365,195 7,088,054 General reserve 57.2 284 43,490,003 8,780,000 52,270,003 43,490,003 8,780,000 52,270,003 Available-for-sale reserve 57.3 284 (7,208,805) 5,501,319 (1,707,486) (7,208,796) 5,501,302 (1,707,494) Foreign currency translation reserve 57.4 284 860,502 (511,529) 348,973 839,346 (525,093) 314,253 Employee share option reserve 57.5 285 420,282 109,535 529,817 420,282 109,535 529,817 Hedging reserve 57.6 285 Total – (3,212) 43,812,536 15,459,562 Balance as at January 1, Movement/ transfers Rs. ’000 Rs. ’000 (3,212) 59,272,098 – (3,212) (3,212) 43,263,694 15,227,727 58,491,421 Balance as at December 31, Balance as at January 1, Movement/ transfers Balance as at December 31, Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 57. (b) Previous year – 2016 GROUP Revaluation reserve [Refer Note 57.1] 6,258,939 (8,385) BANK 6,250,554 5,722,859 General reserve [Refer Note 57.2] 35,359,478 8,130,525 43,490,003 35,359,478 8,130,525 – 43,490,003 5,722,859 Available-for-sale reserve [Refer Note 57.3] (3,955,376) (3,253,429) (7,208,805) (3,955,367) (3,253,429) (7,208,796) Foreign currency translation reserve [Refer Note 57.4] 432,489 428,013 860,502 424,768 414,578 Employee share option reserve [Refer Note 57.5] 223,330 196,952 420,282 223,330 196,952 420,282 38,318,860 5,493,676 43,812,536 37,775,068 5,488,626 43,263,694 Total 839,346 57.1 Revaluation reserve The revaluation reserve relates to revaluation of freehold land and buildings and represents the fair value changes of the land and buildings, net of tax, as at the date of revaluation. The Bank carried out a revaluation of all its freehold lands and buildings as at December 31, 2017 and recognised Rs. 1,396.663 Mn., as revaluation surplus, net of tax. GROUP BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Balance as at January 1, 6,250,554 6,258,939 5,722,859 5,722,859 Surplus on revaluation of freehold land and building 3,828,390 – 3,542,214 – (2,205,823) – (2,145,551) – (31,468) – Deferred tax effect on revaluation surplus on freehold buildings Revaluation gain on disposal of freehold land and building Movement due to changes in equity Balance as at December 31, (31,468) (5,628) (7,650) (2,757) 7,834,003 6,250,554 – 7,088,054 – 5,722,859 Commercial Bank of Ceylon PLC Annual Report 2017 283
  285. Financial Reports Notes to the Financial Statements 57 .2 General reserve The Bank transfers the surplus profit, after payment of interim dividend and after retaining sufficient profits to pay final dividends proposed, from the retained earnings account to the general reserve account. The purpose of setting up the general reserve is to meet potential future unknown liabilities. GROUP Balance as at January 1, Transfers during the year Balance as at December 31, BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 43,490,003 35,359,478 43,490,003 35,359,478 8,780,000 8,130,525 8,780,000 8,130,525 52,270,003 43,490,003 52,270,003 43,490,003 57.3 Available-for-sale reserve The available-for-sale reserve comprises the cumulative net change in fair value of financial investments available for sale until such investments are derecognised or impaired. GROUP Balance as at January 1, Net fair value gains/(losses) on remeasuring financial investments available for sale Balance as at December 31, BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 (7,208,805) (3,955,376) (7,208,796) (3,955,367) 5,501,319 (3,253,429) 5,501,302 (3,253,429) (1,707,486) (7,208,805) (1,707,494) (7,208,796) 57.4 Foreign currency translation reserve The foreign currency translation reserve comprises of all foreign currency differences arising from the translation of the Financial Statements of foreign operations. As at the reporting date, the assets and liabilities of the Bank’s Bangladesh Operation and Commex – Sri Lanka S.R.L. Italy and Commercial Bank of Maldives Private Limited and CBC Myanmar Microfinance Co. Limited a subsidiary of the Bank were translated into the presentation currency (Sri Lankan Rupee) at the exchange rate ruling at the reporting date and the Statement of Profit or Loss and Other Comprehensive Income was translated at the average exchange rate for the period. The exchange differences arising on the translation of these Financial Statements are taken to foreign currency translation reserve through other comprehensive income. GROUP Balance as at January 1, Net gains/(losses) arising from translating the Financial Statements of foreign operations Foreign currency translation reserve attributable to non-controlling interest Balance as at December 31, 284 Commercial Bank of Ceylon PLC Annual Report 2017 BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 860,502 432,489 839,346 424,768 (503,140) 438,565 (525,093) 414,578 (8,389) 348,973 (10,552) 860,502 – 314,253 – 839,346
  286. Financial Reports Notes to the Financial Statements 57 .5 Employee share option reserve The employee share option reserve is used to recognise the value of equity-settled share-based payments to be provided to employees, including Key Management Personnel, as part of their remuneration. GROUP Note Page No. 19 203 Balance as at January 1, Transfers during the year BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 420,282 223,330 420,282 223,330 138,341 206,174 138,341 206,174 Transfers to stated capital (28,806) Balance as at December 31, 529,817 (9,222) 420,282 (28,806) 529,817 (9,222) 420,282 57.6 Hedging reserve The hedging reserve comprises the effective portion of the cumulative net change in the fair value of hedging instruments used in cash flow hedges pending subsequent recognition in profit or loss as the hedged cash flows affect profit or loss. GROUP Balance as at January 1, BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 – – – – Transfers during the year (3,212) – (3,212) – Balance as at December 31, (3,212) – (3,212) – 58. Non-Controlling Interest Non-Controlling Interest (NCI) are measured at their proportionate share of the acquiree’s identifiable net assets at the date of acquisition. Changes in the Group’s interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions. Accordingly, the Bank has non-controlling interest of two subsidiaries namely, Commercial Development Company PLC (NCI of 7.03%) and Commercial Bank of Maldives Private Limited (NCI of 45%) as at the reporting date as follows: Balance as at January 1, 2017 2016 Rs. ’000 Rs. ’000 823,113 50,208 Profit for the year 20,544 (43,909) Other comprehensive income, net of tax 21,955 10,594 Dividends paid for the year (3,690) (3,432) Write-back of unclaimed dividends Reinstatement of non-controlling interest due to partial disposal of subsidiary Acquisition of subsidiary with non-controlling Interest Balance as at December 31, – 9,984 – 871,906 38 3,945 805,669 823,113 59. Contingent Liabilities and Commitments Contingent liabilities are possible obligations whose existence will be confirmed only by uncertain future events or present obligations where the transfer of economic benefit is not probable or cannot be readily measured as defined in the Sri Lanka Accounting Standard – LKAS 37 on “Provisions, Contingent Liabilities and Contingent Assets”. Commercial Bank of Ceylon PLC Annual Report 2017 285
  287. Financial Reports Notes to the Financial Statements To meet the financial needs of customers , the Bank enters into various irrevocable commitments and contingent liabilities. These consist of financial guarantees, letters of credit and other undrawn commitments to lend. Letters of credit and guarantees commit the Bank to make payments on behalf of customers in the event of a specific act, generally related to the import or export of goods. Guarantees and standby letters of credit carry a similar credit risk to loans. Contingent liabilities are not recognised in the Statement of Financial Position but are disclosed unless its occurrence is remote. Operating lease commitments of the Group (as a lessor and as a lessee) form part of commitments and pending legal claims against the Group form part of contingencies. Even though these obligations may not be recognised on the Statement of Financial Position, they do contain credit risk and are therefore part of the overall risk of the Bank as disclosed in Note 59.1 on page 286. In the normal course of business, the Bank makes various irrevocable commitments and incurs certain contingent liabilities with legal recourse to its customers. Even though these obligations may not be recognised on the date of the Statement of Financial Position, they do contain credit risk and are therefore form part of the overall risk profile of the Bank. GROUP BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 438,543,821 365,862,605 438,454,025 365,853,920 Guarantees 64,869,807 33,267,170 64,869,608 33,258,485 Performance bonds 30,604,509 22,553,060 30,601,521 22,553,060 Documentary credits 45,146,266 36,222,394 45,078,313 36,222,394 297,923,239 273,819,981 297,904,583 273,819,981 As at December 31, Note Page No. Contingencies Other contingencies 59.1 286 126,734,000 132,705,895 126,340,860 132,450,607 Undrawn commitments 59.2 287 124,977,782 131,628,622 124,594,675 131,381,356 Capital commitments 59.3 287 1,756,218 1,077,273 1,746,185 1,069,251 565,277,821 498,568,500 564,794,885 498,304,527 Commitments Total 59.1 Other contingencies GROUP BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Forward exchange contracts: 68,436,909 70,646,854 68,436,909 70,646,854 Forward exchange sales 24,380,254 26,084,323 24,380,254 26,084,323 Forward exchange purchases 44,056,655 44,562,531 44,056,655 44,562,531 164,800,830 158,012,034 164,800,830 158,012,034 As at December 31, Interest Rate Swap agreements/Currency Swaps: Interest rate swaps Currency swaps – – – – 164,800,830 158,012,034 164,800,830 158,012,034 Others: 64,685,500 45,161,093 64,666,844 45,161,093 Acceptances 40,336,138 25,281,037 40,321,501 25,281,037 Bills for collection 23,310,642 19,260,765 23,306,623 19,260,765 1,030,549 616,341 1,030,549 616,341 Stock of Travellers’ Cheques Bullion on consignment Subtotal 286 Commercial Bank of Ceylon PLC Annual Report 2017 8,171 2,950 8,171 2,950 297,923,239 273,819,981 297,904,583 273,819,981
  288. Financial Reports Notes to the Financial Statements 59 .2 Undrawn commitments GROUP On direct advances On indirect advances Subtotal BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 105,053,514 97,459,750 104,670,407 97,212,484 19,924,268 34,168,872 19,924,268 34,168,872 124,977,782 131,628,622 124,594,675 131,381,356 As at December 31, 59.3 Capital commitments The Group has commitments for acquisition of property, plant and equipment and intangible assets incidental to the ordinary course of business which have been approved by the Board of Directors, the details of which are as follows: GROUP BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Commitments in relation to property, plant and equipment 1,539,657 647,677 1,529,624 647,677 Approved and contracted for 1,425,307 511,667 1,415,274 511,667 Approved but not contracted for 114,350 136,010 114,350 136,010 Commitments in relation to intangible assets 216,561 429,596 216,561 421,574 Approved and contracted for 216,561 429,596 216,561 421,574 As at December 31, Approved but not contracted for Subtotal – – 1,756,218 1,077,273 – – 1,746,185 1,069,251 59.4 Contingent liabilities and commitments of subsidiaries and associates 59.4 (a) Contingent liabilities and commitments of subsidiaries Contingent liabilities and commitments of the subsidiary, Commercial Bank of Maldives Private Limited have been included in the Consolidated Financial Statements of the Group while other subsidiaries of the Group do not have any contingencies or commitments as at the reporting date. 59.4 (b) Contingent liabilities and commitments of associates The associates of the Group do not have any contingencies as at the reporting date. 60. Net Assets Value per Ordinary Share GROUP As at December 31, BANK 2017 2016 2017 2016 107,994,800 78,992,310 107,099,360 78,353,664 995,899,302 890,734,540 995,899,302 890,734,540 108.44 88.68 107.54 87.97 Amounts used as the numerator: Total equity attributable to equity holders of the Bank (Rs. ’000) Number of ordinary shares used as the denominator: Total number of shares Net assets value per share (Rs.) Commercial Bank of Ceylon PLC Annual Report 2017 287
  289. Financial Reports Notes to the Financial Statements 61 . Litigation Against the Bank Litigation is a common occurrence in the banking industry due to the nature of the business. The Bank has an established protocol for dealing with such legal claims. In respect of pending legal claims where the Bank had already made provisions for possible losses in its Financial Statements or has a realisable security to cover the damages are not included below as the Bank does not expect cash outflows from such claims. However, further adjustments are made to the Financial Statements if necessary on the adverse effects of legal claims based on the professional advice obtained on the certainty of the outcome and also based on a reasonable estimate. Set out below are the unresolved legal claims against the Bank as at December 31, 2017 for which, adjustments to the Financial Statements have not been made due to the uncertainty of its outcome. In addition, there are cases filed against the Bank that has not been listed here on the basis of non-materiality to operations, aggrieved party had obtained injunctions prior to acquiring the property by the Bank etc. (i) Court action has been initiated by a customer in High Court proceeding No. 236/2011/MR, challenging the Bank on transfer of title of a vehicle upon settlement of a lease facility. The Bank had transferred the title of a vehicle in the name of a relative of the customer on the strength of a letter issued by him which is now being disputed. The value of the action is Rs. 3.500 Mn. Plaintiff and the 1st defendant have closed their case. Evidence of an officer of the Bank was led and further trial fixed for March 28, 2018. (ii) Court action has been initiated by a customer in District Court, Colombo under proceeding No. DMR 3/2014 for Rs. 14.000 Mn. to recover a sum of Rs. 13.063 Mn. including interest on cheques paid with a fraudulent signature. The case which was initially filed at the District Court was later referred to the Commercial High Court under case No. 315/2015/MR. The matter is fixed for trial on June 13, 2018. (iii) Court action has been initiated in District Court, Colombo under case No. 03034/14/DMR to claim a sum of Rs. 27.870 Mn. being the total amount withdrawn from the Company account with forged signatures by an employee of the company in a number of transactions during a period of two years. Further trial fixed for May 25, 2018. (iv) Court action has been initiated in District Court, Colombo under proceeding No. DMR/974/2016 to recover a sum of Rs. 26.237 Mn. together with interest as damages incurred by the plaintiff due to the delay by the Bank in refunding the amount with regard to a duplicated telegraphic transfer for USD 25,000. Further trial fixed for May 21, 2018. (v) Court action has been initiated in District Court, Colombo under proceeding No. DMR/2274/2015 to recover a sum of Rs. 3.374 Mn. as parking charges and interest thereon due to a dispute over parking facility provided to the Bank. Trial is due on March 29, 2018. (vi) Court action has been initiated District Court, Kaduwela under proceeding No. 584/L for Rs. 15.000 Mn. and interest thereon in seeking declaration that the plaintiff is the lawful owner of the property mortgaged by her daughter as security for a loan (currently in the past-due section) obtained from the Bank. Replication on February 23, 2018. (vii) Court action has been initiated by a third party in District Court Colombo under proceeding No. DMR/873/17 to recover a sum of Rs. 15.300 Mn. as damages for accepting three stale cheques amounting to Rs. 2.500 Mn. drawn by the plaintiff and deposited to an account of a customer, which was returned as “Account Closed”. Customer has taken criminal action against the plaintiff in this regard and the latter had initiated action against the Bank successively. Answer by the Bank due on May 8, 2018. (viii)An appeal was filed by the Bank under proceedings No. HCALT 405/2014 in Provincial High Court of the Eastern Province against the order of the Labour Tribunal for payment of compensation and reinstatement in employment of an outsourced office helper. The office helper too filed a case in Provincial High Court in proceedings No. HCALT 404/2014 refusing compensation and asking for reinstatement. Appeal made by the Bank was dismissed and case filed by outsourced office helper was decided in favour of him. Bank has appealed in the Supreme Court against the judgement of both cases under proceeding No. SC/SPL/LA/220/15 and SC/SPL/LA/221/15. Next hearing of the cases fixed for June 1, 2018. (ix) Court action has been initiated in Colombo High Court under proceedings No. 112/2005 (1) to claim Rs. 5.584 Mn. and Rs. 10.000 Mn. as damages for disposing of shares owned by the plaintiff which were held under lien to the Bank. Plaintiff alleges that the transaction has taken place without obtaining her consent. Judgement was delivered in favour of the Plaintiff. Bank has appealed in the Supreme Court (Appeal No. 09/2010) against the judgement delivered. Appeal is fixed for argument on May 11, 2018. (x) Court action has been initiated by a customer in Colombo High Court under proceedings No. 36/96 (1) to claim a sum of Rs. 183.050 Mn. regarding a forward exchange contract. Judgement was delivered in favour of the Bank dismissing the plaintiff’s action, but the plaintiff has appealed against the judgement in the Supreme Court (Appeal No. 38/2006). Next hearing on February 26, 2018. (xi) Court action has been initiated in the Commercial High Court of the Western Province under proceedings No. 571/2008/MR to prevent the Bank from exercising the inherent rights of the Bank to set-off a deposit of the plaintiff amounting to USD 15.000 Mn. against a sum due from the plaintiff in terms of a hedging agreement. Commercial High Court issued the judgement in favour of the Bank and dismissed plaintiff’s application for an interim injunction. Presently the case is at the Trial stage. Further trial fixed for March 7, 2018. 288 Commercial Bank of Ceylon PLC Annual Report 2017
  290. Financial Reports Notes to the Financial Statements 62 . Maturity Analysis Group (i) Remaining contractual period to maturity as at the date of Statement of Financial Position of the assets employed by the Group is detailed below: As at December 31, Up to 3 months 3 to 12 months 1 to 3 years 3 to 5 years More than 5 years Total as at 31.12.2017 Total as at 31.12.2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 – 3,660,584 8,291,413 – 1,900,891 560,669 17,633,269 11,718,499 Interest earning assets: Financial assets Cash and cash equivalents 3,660,584 Balances with Central Banks 1,632,454 Placements with banks – 263,830 17,633,269 – – – 4,607 – – – – Securities purchased under resale agreements – – – – – – Derivative financial assets – – – – – – – – – – Other financial instruments – Held for trading Loans and receivables to banks 4,096,168 – – – – Loans and receivables to other customers 232,293,546 Financial investments – Available for sale 13,224,706 67,787,547 59,124,910 14,229,518 Financial investments – Held to maturity 6,966,556 12,785,739 12,885,249 29,661,652 199,536,025 171,769,829 94,461,959 – 44,382,771 – 7,066,600 Financial investments – Loans and receivables 2,521,780 5,188,975 16,430,329 24,571,393 Total interest earning assets as at 31.12.2017 282,029,063 285,562,116 260,210,317 162,929,129 51,449,371 Total interest earning assets as at 31.12.2016 278,177,314 177,445,705 270,732,533 114,198,779 79,932,594 – 4,096,168 – – 4,693,989 – – 742,444,130 620,129,488 154,366,681 159,642,243 69,365,796 63,626,598 48,712,477 51,824,026 1,042,179,996 920,486,925 Non-interest earning assets: Financial assets Cash and cash equivalents 31,012,840 Balances with central banks 26,999,348 – 14,321,349 – 783,669 – 730,063 – 811,029 31,012,840 24,632,814 43,645,458 43,374,589 Placements with banks – – – – – – Securities purchased under resale agreements – – – – – – – – – Derivative financial assets 959,937 Other financial instruments – Held for trading 314,745 1,374,599 – – 2,334,536 – – 1,052,829 – – 314,745 293,809 – – 640,512 624,458 Loans and receivables to banks – – Loans and receivables to other customers – – – Financial investments – Available for sale – – – Financial investments – Held to maturity – – – – – – – Financial investments – Loans and receivables – – – – – – – Investments in subsidiaries – – – – Investments in associates – – – – 109,844 109,844 108,859 Property, plant and equipment – – – – 16,317,044 16,317,044 11,569,666 Intangible assets – – – – 1,251,226 1,251,226 1,132,669 Leasehold property – – – – 104,516 104,516 105,968 Deferred tax assets – – – – 640,512 – 17,491 – 529,471 – 546,962 – 450,279 Non-financial assets – – – – Other assets 12,335,522 257,173 1,245,002 506,177 3,019,103 17,362,977 Total non-interest earning assets as at 31.12.2017 71,622,392 15,953,121 2,669,183 1,253,731 22,142,233 113,640,660 Total non-interest earning assets as at 31.12.2016 64,361,841 14,616,440 3,826,664 991,974 16,699,730 Total assets – as at 31.12.2017 353,651,455 301,515,237 262,879,500 164,182,860 73,591,604 Total assets – as at 31.12.2016 342,539,155 192,062,145 274,559,197 115,190,753 96,632,324 Percentage – as at 31.12.2017 (*) 30.60 26.09 22.74 14.20 6.37 Percentage – as at 31.12.2016 (*) 33.56 18.81 26.89 11.28 9.46 – 668,150 16,482,559 100,496,649 1,155,820,656 1,020,983,574 100.00 100.00 (*) Total assets of each maturity bucket as a percentage of total assets employed by the Group. Commercial Bank of Ceylon PLC Annual Report 2017 289
  291. Financial Reports Notes to the Financial Statements (ii) Remaining contractual period to maturity as at the date of Statement of Financial Position of the liabilities and shareholders’ funds employed by the Group is detailed below: Up to 3 months 3 to 12 months 1 to 3 years 3 to 5 years More than 5 years Total as at 31.12.2017 Total as at 31.12.2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 33,084,091 4,622,936 13,243,490 1,086,634 41,224 52,078,375 67,012,968 Interest-bearing liabilities: Financial liabilities Due to banks Derivative financial liabilities Securities sold under repurchase agreements – 35,806,750 Other financial liabilities – Held for trading Due to other customers/deposits from customers – – 10,978,972 – – 2,746,663 – – – – – – – – – 49,532,385 69,628,961 – – 13,783,280 792,237,948 7,503,789 8,511,679 23,786,094 9,270,154 9,477,720 15,170,326 25,165,924 24,849,539 39,503,405 31,118,593 37,506,509 942,800,726 32,826,512 23,143,483 29,807,918 456,843,445 290,068,614 18,492,159 13,050,450 Other borrowings 657,813 2,091,720 5,021,093 Subordinated liabilities 203,326 314,552 Total interest-bearing liabilities as at 31.12.2017 526,595,425 308,076,794 Total interest-bearing liabilities as at 31.12.2016 506,171,295 264,521,678 – 685,709,264 856,470,886 Non-interest-bearing liabilities: Financial liabilities Due to banks 8,166,517 Derivative financial liabilities 2,488,462 – 1,185,570 – – – – – 4,462 8,166,517 4,085,423 3,678,494 1,515,035 Securities sold under repurchase agreements – – – – – – Other financial liabilities – Held for trading – – – – – – – – – – Due to other customers/deposits from customers 65,032,033 – – 65,032,033 57,601,349 Other borrowings – – – – – – – Subordinated liabilities – – – – – – – Non-financial liabilities Current tax liabilities 857,023 3,345,827 Deferred tax liabilities 472,934 153,861 Other provisions Other liabilities – 3,354,484 – 9,738,767 – 588,908 – 2,943,111 – 261,930 – 2,087,582 – 1,374,896 – 4,202,850 3,464,682 3,565,215 – – 1,874 2,096,857 19,508,115 18,028,902 Equity Stated capital – – – – 37,143,541 37,143,541 24,978,003 Statutory reserves – – – – 6,492,552 6,492,552 5,647,993 Retained earnings – – – – 5,086,609 5,086,609 4,553,778 Other reserves – – – – 59,272,098 59,272,098 43,812,536 871,906 871,906 823,113 113,055,607 213,019,930 Non-controlling interest Total non-interest-bearing liabilities as at 31.12.2017 Total non-interest-bearing liabilities as at 31.12.2016 80,371,453 14,424,025 3,532,019 1,636,826 78,625,428 3,058,595 1,529,112 309,278 80,990,275 Total liabilities and equity – as at 31.12.2017 606,966,878 322,500,819 43,035,424 32,755,419 150,562,116 Total liabilities and equity – as at 31.12.2016 584,796,723 267,580,273 34,355,624 23,452,761 110,798,193 Percentage – as at 31.12.2017(*) 52.52 27.90 3.72 2.83 13.03 Percentage – as at 31.12.2016(*) 57.28 26.21 3.36 2.30 10.85 164,512,688 1,155,820,656 1,020,983,574 100.00 (*) Total liabilities and shareholders’ funds of each maturity bucket as a percentage of total liabilities and shareholders’ funds employed by the Group. Bank Maturity analysis of the assets and liabilities of the Bank is given in Note 69.2.2 on “Financial Risk Review” on pages 319 to 322. 290 Commercial Bank of Ceylon PLC Annual Report 2017 100.00
  292. Financial Reports Notes to the Financial Statements 63 . Operating Segments An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group’s other components, whose operating results are reviewed regularly by the Corporate Management Team headed by the Managing Director/Chief Executive Officer (being the chief operating decision-maker) to make decisions about resources allocated to each segment and assess its performance, and for which discrete financial information is available. The Group has five strategic divisions which are reportable segments, namely: Operating segment Types of products and services offered Personal banking Corporate banking Refer pages 61 to 72 for details on product portfolio by Business Lines International operations Investment banking Dealing and treasury Segment performance is evaluated based on operating profits or losses which, in certain respects, are measured differently from operating profits or losses in the Consolidated Financial Statements. Income taxes are managed on a Group basis and are not allocated to operating segments. The following table presents the income, profit, asset and liability information on the Group’s strategic business divisions for the year ended December 31, 2017 and comparative figures for the year ended December 31, 2016. Personal banking Corporate banking International operations Investment banking Dealing/treasury Unallocated/eliminations Total/consolidated 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000  Rs. ’000 Rs. ’000  26,884,392 23,255,124 4,639,252 4,528,344 4,044,558 3,214,891 381,502 1,026,278 1,559,382 (125,417) 2,058,212 1,229,056 (1,335,721) 795,504 For the year ended December 31, External operating income: Net interest income Foreign exchange profit 217,330 198,679 699,565 822,894 1,015,851 509,081 – Net fee and commission income 6,135,191 4,857,448 1,803,963 1,594,813 934,398 609,430 45,242 23,505 5,672 3,981 Other income 454,232 779,594 334,100 353,668 125,674 190,003 42,303 8,984 213,662 64,252 514,857 458,138 33,691,145 29,090,845 7,476,880 7,299,719 6,120,481 4,523,405 469,047 1,058,767 442,995 738,320 2,573,069 1,687,194 Total operating income – Impairment loss expenses (2,471,052) Net operating income 31,220,093 29,293,287 8,041,374 5,573,344 5,801,125 4,464,012 469,047 1,058,767 442,995 Segment result 16,281,986 14,328,813 5,414,227 4,874,706 4,086,117 3,148,044 287,326 126,225 202,442 564,494 (1,726,375) Profit from operations Share of profit of associates – net of tax Income tax expense Non-controlling interest Net profit for the year, attributable to equity holders of the parent (319,356) (59,393) – – 625,923 – – 738,320 (4,086) – – – 2,573,069 39,567,298 33,128,276 – 597,025 2,326,158 – 8,924,466 7,089,177 1,684,828 1,854,639 – 1,687,194 (2,919,235) (2,865,270) 50,773,617 44,398,250 (2,225,914) (1,583,326) 48,547,703 42,814,924 23,276,646 20,108,130 23,276,646 20,108,130 3,678 6,454 (6,653,817) (5,648,160) (20,544) 43,909 16,605,963 14,510,333 Commercial Bank of Ceylon PLC Annual Report 2017 291
  293. Financial Reports Notes to the Financial Statements Total operating income 1 % 1% Investment banking 2% Dealing/treasury 2% Investment banking Dealing/treasury 13% 11% International operations International operations 2017 2016 15% 70% Corporate banking 17% Personal banking 68% Corporate banking Personal banking Segment result 1% 1% Investment banking 3% Dealing/treasury 0% Investment banking Dealing/treasury 15% 14% International operations International operations 2017 2016 21% 62% Corporate banking Personal banking As at December 31, 21% Personal banking Corporate banking 62% Corporate banking International operations Investment banking Personal banking Dealing/treasury Unallocated/eliminations Total/consolidated 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000  Rs. ’000 Rs. ’000  Other information Segment assets 443,643,154 340,853,854 240,649,838 229,759,156 128,456,896 112,387,766 17,270,623 19,644,842 262,780,975 257,143,130 Investment in associates – – – – – – – – – – Unallocated assets – – – – – – – – – – Total assets 443,643,154 340,853,854 240,649,838 229,759,156 128,456,896 112,387,766 17,270,623 19,644,842 262,780,975 257,143,130 Segment liabilities 690,860,560 601,064,166 151,728,410 145,104,008 103,813,211 86,181,038 Unallocated liabilities – – Total liabilities 690,860,560 601,064,166 292 – – 151,728,410 145,104,008 Commercial Bank of Ceylon PLC Annual Report 2017 – – 103,813,211 86,181,038 17,380,467 12,444,122 – – 17,380,467 12,444,122 75,403,237 – 75,403,237 92,910,135 – 92,910,135 62,909,326 61,085,967 109,844 – 108,859 – 63,019,170 61,194,826 7,768,065 – 7,768,065 3,464,682 – 3,464,682 1,155,710,812 1,020,874,715 109,844 – 108,859 – 1,155,820,656 1,020,983,574 1,046,953,950 – 1,046,953,950 941,168,151 – 941,168,151
  294. Financial Reports Notes to the Financial Statements Total assets 24 % 27% Dealing/treasury Dealing/treasury 41% 1% Personal banking 2017 Investment banking 12% 22% International operations Corporate banking 35% 2% Personal banking 2016 Investment banking 12% 24% International operations Corporate banking Total liabilities 1% 7% Investment banking Dealing/treasury 10% 1% 10% Investment banking 9% International operations 67% International operations 16% Corporate banking Corporate banking Corporate banking International operations Personal banking 2016 15% Personal banking 64% Personal banking 2017 For the year ended Dealing/treasury Investment banking Dealing/treasury Unallocated/eliminations Total/consolidated 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000  Rs. ’000 Rs. ’000  322,609 (491,909) Information on cash flows Cash flows from operating activities 3,977,097 48,260,328 Cash flows from investing activities Cash flows from financing activities – – (2,274,217) (1,298,062) (7,219,784) (20,442,140) – – – – – – – – 140,802 (40,710) 3,362,948 1,124,546 – – (191,366) (21,391,095) – – (88,053) 12,191,770 – – (2,970,642) 5,894,474 – – 3,362,948 1,124,546 3,814,921 7,689,208 6,177,191 (3,204,500) Capital expenditure Property, plant and equipment Intangible assets Net cash flow generated during the year (2,105,701) (1,468,902) (352,329) (422,175) 1,749,197 12,817,151 Commercial Bank of Ceylon PLC Annual Report 2017 293
  295. Financial Reports Notes to the Financial Statements 64 . Related Party Disclosures The Bank carried out transactions in the ordinary course of business on an arm’s length basis at commercial rates with parties who are defined as Related Parties as per the Sri Lanka Accounting Standard – LKAS 24 – “Related Party Disclosures”, other than, transactions that the Key Management Personnel (KMP) have availed under schemes uniformly applicable to all staff at concessionary rates. 64.1 Parent and ultimate controlling party The Bank does not have an identifiable parent of its own. 64.2 Key Management Personnel (KMP) KMP are those persons having authority and responsibility for planning, directing and controlling the activities of the entity directly or indirectly. KMP of the Bank The Board of Directors of the Bank has been classified as KMP of the Bank. KMP of the Group As the Bank is the ultimate parent of the subsidiaries listed out on page 173, the Board of Directors of the Bank has the authority and responsibility for planning, directing and controlling the activities of the Group directly or indirectly. Accordingly, the Board of Directors of the Bank is also KMP of the Group. Therefore, officers who are only Directors of the subsidiaries and not of the Bank have been classified as KMP only for that respective subsidiary. 64.2.1 Transactions with KMP 64.2.1.1 Compensation of KMP – Bank For the year ended December 31, Short-term employment benefits Post-employment benefits Total 2017 2016 Rs. ’000 Rs. ’000 159,190 124,478 7,831 6,984 167,021 131,462 64.2.1.2 Compensation of KMP – Group For the year ended December 31, Short-term employment benefits Post-employment benefits Total 2017 2016 Rs. ’000 Rs. ’000 161,282 125,648 7,831 6,984 169,113 132,632 64.2.2 Transactions, arrangements and agreements involving KMP and their Close Family Members (CFM) CFM of a KMP are those family members who may be expected to influence, or be influenced by, that KMP in their dealings with the entity. They may include KMP’s domestic partner and children, children of the KMP’s domestic partner and dependants of the KMP or the KMP’s domestic partner. CFM are related parties to the Group/Bank. 294 Commercial Bank of Ceylon PLC Annual Report 2017
  296. Financial Reports Notes to the Financial Statements 64 .2.2.1 Statement of Financial Position – Bank Year-end balance As at December 31, Average balance 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 18,890 10,229 9,282 9,462 Assets Loans and advances Credit cards Total 427 238 19,005 115 10,229 9,709 9,700 228,579 145,701 167,137 79,474 7,844 35,062 30,123 31,198 – Liabilities Deposits Securities sold under repurchase agreements Debentures Total 2,000 2,000 2,000 355 238,423 182,763 199,260 111,027 64.2.2.2 Commitments and contingencies – Bank Year-end balance Average balance 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Undrawn facilities 18,035 10,380 13,024 11,716 Total 18,035 10,380 13,024 11,716 As at December 31, 64.2.2.3 Direct and indirect accommodation – Bank Year-end balance As at December 31, Direct and indirect accommodation as a % of the Bank’s Regulatory Capital 2017 2016 % % 0.03 0.02 No impairment losses have been recorded against balances outstanding with KMP and CFM. 64.2.2.4 Income Statement For the Year Ended December 31, Note Page No. Interest income Interest expense Other income Compensation to KMP 2017 2016 Rs. ’000 Rs. ’000 777 626 17,226 7,747 – 64.2.1.1 & 64.2.1.2 294 167,021 20 131,462 Commercial Bank of Ceylon PLC Annual Report 2017 295
  297. Financial Reports Notes to the Financial Statements 64 .2.2.5 Share-based transactions of KMP and CFM As at the year end Number of ordinary shares held Dividends paid (in Rs. ’000) 2017 2016 1,206,569 810,939 6,304 4,762 Number of cumulative exercisable options under the Employee Share Option Plan (ESOP) 2008 Tranche II 50,270 98,678 Tranche III 105,695 155,603 81,869 Number of cumulative exercisable options under the Employee Share Option Plan (ESOP) 2015 Tranche I 83,416 Tranche II 85,912 – 64.2.3 Transactions, arrangements and agreements involving entities which are controlled, and/or significantly influenced by the KMP or their CFM 64.2.3.1 Statement of Financial Position Year-end balance Average balance 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 3,693,085 266,349 2,220,358 80,967 Assets Loans and advances Credit cards Total 777 – 596 – 3,693,862 266,349 2,220,954 80,967 1,305,617 977,122 986,253 276,411 119,000 126,237 74,093 426 24,310 24,310 24,310 4,317 1,448,927 1,127,669 1,084,656 281,154 Liabilities Deposits Securities sold under repurchase agreements Debentures Total 64.2.3.2 Commitments and contingencies Year-end balance Average balance 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 76,530 71,280 74,055 71,280 Undrawn facilities 354,901 379,266 218,930 279,891 Total 431,431 450,546 292,985 351,171 Guarantees 296 Commercial Bank of Ceylon PLC Annual Report 2017
  298. Financial Reports Notes to the Financial Statements 64 .2.3.3 Direct and indirect accommodation Year-end balance Direct and indirect accommodation as a % of the Bank’s Regulatory Capital 2017 2016 % % 3.37 0.69 64.2.3.4 Income Statement 2017 2016 Rs. ’000 Rs. ’000 Interest income 233,786 10,451 Interest expense 39,411 9,916 For the year ended December 31, Other income 118 – 64.3 Transactions with group entities The Group entities include the subsidiaries and the associates of the Bank. 64.3.1 Transactions with subsidiaries 64.3.1.1 Statement of Financial Position Year-end balance Average balance 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 841,060 786,000 879,790 564,749 Assets Loans and advances Lease receivables Other receivables Impairment for other receivables Total – 31,439 – – 92,857 (55,684) – 62,148 – – 91,727 (54,554) 872,499 823,173 941,938 601,922 Deposits 502,575 178,827 120,953 108,269 Securities sold under repurchase agreements Liabilities 142,550 238,508 202,877 145,944 Other 74,523 20,061 47,292 23,137 Total 719,648 437,396 371,122 277,350 Commercial Bank of Ceylon PLC Annual Report 2017 297
  299. Financial Reports Notes to the Financial Statements 64 .3.1.2 Commitments and contingencies Year-end balance Letters of credit Average balance 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 – – – 1,126 Undrawn facilities 100,000 62,565 84,881 113,165 Total 100,000 62,565 84,881 114,291 64.3.1.3 Direct and indirect accommodation Year-end balance Direct and indirect accommodation as a % of the Bank’s Regulatory Capital 2017 2016 % % 0.79 0.72 64.3.1.4 Income Statement 2017 2016 Rs. ’000 Rs. ’000 Interest income 143,796 58,002 Interest expense 32,695 26,731 182,826 103,569 For the Year Ended December 31, Other income Impairment charges Expenses – 523,214 3,306 454,126 64.3.1.5 Other transactions For the year ended December 31, Payments made to OneZero Company Ltd. in relation to purchase of computer hardware and software 298 Commercial Bank of Ceylon PLC Annual Report 2017 2017 2016 Rs. ’000 Rs. ’000 29,738 8,253
  300. Financial Reports Notes to the Financial Statements 64 .3.2 Transactions with associates 64.3.2.1 Statement of Financial Position Year-end balance Average balance 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 29 Assets Loans and advances – – 32 Lease receivables – – – – Total – – 32 29 19,945 38,967 Liabilities Deposits Securities sold under repurchase agreements Total 35,468 48,606 – 35,468 – 48,606 16,228 36,173 – 38,967 64.3.2.2 Commitments and contingencies Year-end balance Average balance 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Undrawn facilities 1,000 – – – Total 1,000 – – – 64.3.2.3 Direct and indirect accommodation Year end Balance Direct and indirect accommodation as a % of the Bank’s Regulatory Capital 2017 2016 % % 0.00 0.00 64.3.2.4 Income Statement For the year ended December 31, Interest income 2017 2016 Rs. ’000 Rs. ’000 8 7 3,666 3,310 Other income 21,213 22,698 Expenses 71,194 Interest expense Commercial Bank of Ceylon PLC Annual Report 2017 – 299
  301. Financial Reports Notes to the Financial Statements 64 .3.2.5 Other transactions Number of ordinary shares of the Bank held by the associates as at the year-end Dividend paid (Rs. ’000) 2017 2016 46,154 4,605 278 29 64.4 Transactions with other related entities Other related entities include significant investors (either entities or individuals) that have control, joint control or significant influence, post-employment benefit plans for the Bank’s employees. 64.4.1 Transactions with the post-employment benefit plans for the employees of the Bank 64.4.1.1 Statement of Financial Position Year-end balance Average balance 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Assets Loans and advances – – 474 – Total – – 474 – Liabilities Deposits Securities sold under repurchase agreements Total 9,427,494 – 9,427,494 12,681,135 8,452,541 7,615,681 386,447 83,265 293,317 13,067,582 8,535,806 7,908,998 64.4.1.2 Income Statement For the year ended December 31, Interest income 2017 2016 Rs. ’000 Rs. ’000 114 30 Interest expense 1,075,241 821,179 Contribution made/taxes paid by the Bank 1,005,342 1,007,451 300 Commercial Bank of Ceylon PLC Annual Report 2017
  302. Financial Reports Notes to the Financial Statements 65 . Non-Cash Items Included in Profit Before Tax GROUP As at December 31, Depreciation of property, plant and equipment Amortisation of leasehold property Amortisation of intangible assets Impairment losses on loans and advances Other impairment Contributions to defined benefit plans – Unfunded schemes Provision made o/a of leave encashment Equity-settled Share-based payments Unamortised interest payable o/a subodinated liabilities Mark to market on other financial instruments – held for trading Loss on write-off intangible assets Effect of exchange rate variances on investment in subsidiaries Effect of exchange rate variances on loans and receivables to banks Effect of exchange rate variances on property, plant and equipment Effect of exchange rate variances on intangible assets Effect of exchange rate variances on defined benefit plans Effect of exchange rate variances on subordinated liabilities Net effect of exchange rate variances on net deferred tax liability Net effect of exchange rate variances on income tax liability Grossed up notional tax and withholding tax credits Total BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 1,185,698 1,093,088 1,097,096 1,022,648 1,452 1,452 942 942 229,764 173,790 209,766 165,903 2,225,914 1,583,326 1,956,725 1,511,158 – – (42,484) 18,656 227,816 288,791 234,262 279,249 79,128 76,193 79,128 76,193 138,341 206,174 138,341 206,174 12,211 12,210 12,211 12,210 (85,627) 129,562 (85,627) 129,562 7,241 303 – – – 303 (26,349) (30,136) (16,054) (23,352) (16,054) (23,352) (168) (2,024) 882 (2,012) (3,208) (553) 429 (540) (7,279) 7,782 288,750 420,000 995 (4,980) (45,703) 56,937 (7,279) 7,782 288,750 420,000 4,626 (4,979) (45,820) 56,937 (1,985,107) (1,209,319) (1,961,769) (1,206,343) 2,315,139 2,754,851 1,882,763 2,588,922 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 66. Change in Operating Assets GROUP As at December 31, BANK Net (increase)/decrease in derivative financial instruments (1,281,707) 3,065,340 Net (increase)/decrease in balances with central banks (1,611,091) (15,714,241) Net (increase)/decrease in placements with banks (5,914,770) 5,475,040 Net (increase)/decrease in securities purchased under resale agreements Net (increase)/decrease in other financial assets – Held for trading Net (increase)/decrease in loans and receivables to customers – 683,448 8,002,100 2,556,114 (124,540,556) (111,789,686) (1,281,707) (928,241) (5,914,770) – 683,448 3,065,340 (15,652,188) 5,475,040 8,002,100 2,556,114 (123,385,064) (109,414,259) Net (increase)/decrease in financial investments – Available for sale 12,820,870 39,672,872 12,951,296 39,724,256 Financial investments – Held-to-maturity (5,739,198) (63,626,598) (2,581,454) (60,981,298) Net (increase)/decrease in financial investments – Loans and receivables (263,047) 4,815,666 (263,047) 4,815,666 Net (increase)/decrease in other assets (880,418) (4,385,542) (859,996) (4,346,881) Total (126,726,469) (131,928,935) (121,579,535) (126,756,110) Commercial Bank of Ceylon PLC Annual Report 2017 301
  303. Financial Reports Notes to the Financial Statements 67 . Change in Operating Liabilities GROUP Net increase/(decrease) in due to banks Net increase/(decrease) in derivative financial instruments BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 As at December 31, (10,853,499) 39,308,995 2,158,997 (375,735) (10,487,820) 37,289,692 2,158,997 (375,735) Net increase/(decrease) in securities sold under repurchase agreements (20,096,576) (42,620,742) (20,190,702) (42,517,343) Net increase/(decrease) in deposits from banks, customers and debt securities issued 113,959,368 119,289,396 110,564,017 115,461,684 Net increase/(decrease) in other borrowings 14,515,940 Net increase/(decrease) in other provisions (1,874) Net increase/(decrease) in other liabilities – 583,523 Net increase/(decrease) in due to subsidiaries Total (715,483) 2,236,019 – 100,265,879 – 117,122,450 14,515,940 (715,483) (1,874) – 633,847 2,122,523 54,462 97,246,867 (6,151) 111,259,187 68. Operating Leases 68.1 Operating lease commitments (payables) A number of branches and office premises occupied by the Group are under operating leases. These leases have an average life of three to six years. Lease agreements include clauses to enable upward revision of the rental payments on a periodic basis to reflect market conditions. There are no restrictions placed upon the Group by entering into these leases. Future minimum rentals payable under non-cancellable operating leases are as follows: GROUP Less than one year BANK 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 As at December 31, 937,070 760,677 890,519 707,066 Between one to five years 2,510,540 1,889,163 2,352,812 1,762,161 Over five years 2,186,383 1,066,952 2,076,645 927,007 Total 5,633,993 3,716,792 5,319,976 3,396,234 68.2 Operating lease commitments (receivables) The Group has entered into operating leases to rent its own properties (mainly consisting of areas not currently occupied by the branches). Lease agreements include clauses to enable upward revision of rental income on a periodic basis to reflect market conditions. These leases have an average life of three to five years. There are no restrictions placed upon the Group by entering into these leases. Future minimum rentals receivable under non-cancellable operating leases are as follows: GROUP As at December 31, Less than one year Between one to five years Over five years Total 302 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 6,007 6,042 1,820 3,218 10,289 12,167 2,440 3,469 – 16,296 Commercial Bank of Ceylon PLC Annual Report 2017 BANK 2017 – 18,209 – 4,260 – 6,687
  304. Financial Reports Notes to the Financial Statements 69 . Financial Risk Review This note presents information about the Bank’s exposure to financial risks and the Bank’s management of capital. For information on the Bank’s Financial Risk Management Framework Page No. Introduction 69.1 Credit risk 69.1.1 Credit quality analysis 304 69.1.2 Impaired loans and receivables and investment in debt securities 312 69.1.3 Collaterals held 313 69.1.4 Concentration of credit risk 313 69.1.5 Exposures to unrated countries 317 69.2 Liquidity risk 69.2.1 Exposure to liquidity risk 318 69.2.2 Maturity analysis of financial assets and financial liabilities 319 69.2.3 Liquidity reserves 322 69.2.4 Financial assets available to support future funding 323 69.3 Market risk 69.3.1 Exposure to market risk – Trading and non-trading portfolios 324 69.3.2 Exposure to interest rate risk – Sensitivity analysis 326 69.3.3 Exposure to currency risk – Non-trading portfolio 329 69.3.4 Exposure to equity price risk 330 69.4 Operational risk 69.5 Capital management and Pillar III disclosures as per Basel III 69.5.1 Regulatory capital 331 69.5.2 Capital allocation 332 69.5.3 Pillar III disclosures as per Basel III 333 Introduction As a financial intermediary, the Bank is exposed to various types of risks including credit, market, liquidity and operational risks which are inherent in the Bank’s activities. Managing these risks is critical for the sustainability of the Bank and plays a pivotal role in all activities of the Bank. Risk Management function strives to identify potential risks in advance, analyse them and take precautionary steps to mitigate the impact of risk whilst optimising through risk adjusted returns within the risk appetite of the Bank. Risk Management framework The overall responsibility and oversight of the Risk Management framework of the Bank is vested with the Board of Directors (BOD). The Board Integrated Risk Management Committee (BIRMC), a mandatory Subcommittee set up by the Board, in turn is entrusted with the development of the Bank’s Risk Management Policies and monitoring of due compliance of same through the Executive Integrated Risk Management Committee (EIRMC). The Risk Management Policies spell out the risk appetite of the Bank and has incorporated risk exposure limits and controls to monitor adherence to the limits in force. These Policies and Systems are reviewed regularly to reflect the changing market conditions and the products and services offered. The Bank strives to inculcate a Risk Management Culture through continuous training, work ethics and standards. Refer Note 3 on pages 178 and 179 for more information on the Risk Management Framework of the Bank. Commercial Bank of Ceylon PLC Annual Report 2017 303
  305. Financial Reports Notes to the Financial Statements Integrated Risk Management Department (IRMD) Business Units are the Risk Owners and have the primary responsibility for Risk Management. The IRMD acts as the second line of defence in managing the Risk. The IRMD through Chief Risk Officer reports to the BIRMC thus ensuring its independence. Risk measurement and reporting The Bank uses robust risk measurement techniques based on the type of risk and industry best practices. The Bank also carries out Stress Testing which is a key aspect of the Internal Capital Adequacy Assessment Process ( ICAAP ) and the Risk Management Framework provides an insight on the impact of extreme, but plausible scenarios on the Bank’s risk profile. The results are reported to the EIRMC and to the BIRMC on a periodic basis. The Bank establishes policies, limits and thresholds within the Risk appetite. These limits reflect the business strategy and market environment of the Bank as well as the level of risk that the Bank is willing to accept (risk appetite). The monitoring and control mechanism therefore, is based on risk appetite of the Bank. 69.1 Credit risk The financial loss resulting from a borrower or counterparty to a financial instrument failing or delaying to meet its contractual obligations is referred to as credit risk. It arises principally from the loans and receivables to banks and other customers and investments in debt securities. In addition to the credit risk from direct funding exposure i.e., On-Balance Sheet exposure, indirect liabilities such as Letters of Credit, Guarantees etc. also would expose the Bank to credit risk. The Bank considers and consolidates all elements of credit risk exposure (such as individual obligour default risk, country and sector concentration risks) to ensure stringent Credit Risk Management. 69.1.1 Credit quality analysis 69.1.1 (a) Maximum exposure to credit risk by risk rating Loans and receivables to other customers As at December 31, Notes Page No. Loans and receivables to banks Financial investments Lending commitments and contingencies 2017 2016 2017 2016 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000  737,446,567 616,018,228 640,512 624,458 271,400,274 277,816,593 563,048,700 497,235,276 Maximum exposure to credit risk Carrying amount Amount committed/ contingencies 31-36 59 285 At amortised cost – Loans and receivables Government securities (Risk free investments) Rating 0-4: Investment grade(*) 476,843,647 382,276,912 Rating 5-6: Moderate risk 249,066,153 222,439,065 Rating S: High risk Rating 7-9: Extreme risk Gross carrying amount Less: Provision for impairment (Individual and collective) Net carrying amount 304 – 640,512 – 2,035,633 1,696,932 – – 26,977,998 – – 17,261,410 17,372,679 737,446,567 616,018,228 Commercial Bank of Ceylon PLC Annual Report 2017 640,512 – 640,512 40,076,392 8,145,775 11,747,634 48,712,477 51,824,026 624,458 26,762,544 754,707,977 633,390,907 40,566,702 624,458 – 624,458 – 48,712,477 – 51,824,026 – – – – – –
  306. Financial Reports Notes to the Financial Statements Loans and receivables to other customers As at December 31 , Notes Page No. Loans and receivables to banks Financial investments Lending commitments and contingencies 2017 2016 2017 2016 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000  154,167,169 159,573,316 546,963 450,155 Financial investments – Available for sale Government securities (Risk free investments) Rating 0-4: Investment grade Rating 5-6: Moderate risk – – Rating S: High risk Rating 7-9: Extreme risk Gross/net carrying amount 34 232 – – – – 154,714,132 160,023,471 – – – – Financial investments – Held to maturity Government securities (Risk free investments) 53,555,302 50,980,717 Rating 0-4: Investment grade Rating 5-6: Moderate risk 10,007,450 10,000,581 Rating S : High risk Rating 7-9: Extreme risk Gross/net carrying amount 35 238 – – – – 63,562,752 60,981,298 Other financial instruments – Held for trading Government securities (Risk free investments) 2,357,876 Rating 0-4: Investment grade Rating 5-6: Moderate risk 3,505,335 314,745 293,809 1,738,292 1,188,654 Rating S: High risk Rating 7-9: Extreme risk Gross/net carrying amount 31 222 Total net carrying amount – 737,446,567 – 616,018,228 – 640,512 – 624,458 4,410,913 4,987,798 – – 271,400,274 277,816,593 – – Off-Balance Sheet(**) Maximum exposure Lending commitments Grade 0-6: Investment grade to moderate risk 124,594,675 131,381,356 438,454,025 365,853,920 563,048,700 497,235,276 Contingencies Grade 0-6: Investment grade to moderate risk Total exposure 59 285 – – – – – – (*) Investment grade also includes cash, gold. (**) Amounts reported above does not include capital commitments disclosed in Note 59 on “Contingent Liabilities and Commitments” on pages 285 to 287. Commercial Bank of Ceylon PLC Annual Report 2017 305
  307. Financial Reports Notes to the Financial Statements 69 .1.1 (b) Age analysis by class of financial assets The maximum exposure to credit risk for class of financial assets by risk rating and by age are given below: Loans and receivables to other customers As at December 31, Loans and receivables to banks Financial investments Lending commitments and contingencies 2017 2016 2017 2016 2017 2016 2017 2016 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000  Government securities (Risk free investments) – – Gross carrying amount – – – – 250,647,049 254,135,760 250,647,049 254,135,760 – – Neither past due nor individually impaired Rating 0-4: Investment grade 472,230,045 377,513,301 9,007,483 12,491,598 282,344,809 268,186,647 Rating 5-6: Moderate risk 244,352,749 218,392,511 640,512 624,458 11,745,742 11,189,235 280,703,891 229,048,629 Gross carrying amount 716,582,794 595,905,812 640,512 624,458 20,753,225 23,680,833 563,048,700 497,235,276 Past due but not individually Impaired Less than 3 months 8,160,289 8,484,516 3 to 6 months 856,410 507,450 6 to 12 months 724,801 859,216 12 to 18 months 469,520 490,692 More than 18 months 4,870,915 5,041,144 Gross carrying amount 15,081,935 15,383,018 12,533,705 11,145,557 1,292,185 748,471 404,605 598,082 – – – – – – Individually impaired Less than 3 months 3 to 6 months 6 to 12 months 12 to 18 months 1,209,297 893,546 More than 18 months 7,603,456 8,716,421 Gross carrying amount 23,043,248 22,102,077 754,707,977 633,390,907 Individual 7,853,654 8,453,457 Collective 9,407,756 8,919,222 17,261,410 17,372,679 Total gross carrying amount – 640,512 – – 624,458 271,400,274 – 277,816,593 – 563,048,700 – 497,235,276 Less: Provision for impairment Total provision for impairment Total net carrying amount 737,446,567 616,018,228 – 640,512 – – 624,458 The methodology of the impairment assessment is explained in the Note 18 on pages 201and 202. 306 Commercial Bank of Ceylon PLC Annual Report 2017 – 271,400,274 277,816,593 – – 563,048,700 497,235,276
  308. Financial Reports Notes to the Financial Statements 69 .1.1 (c) Credit risk exposure for each internal credit rating on facilities and probability of historical default rates Through adoption of a robust risk grading system that falls in line with Basel requirements, the Bank maintains accurate and consistent risk ratings across the credit portfolio in accordance with the established policy framework to ensure the quality of its credit portfolio. The risk grading framework consists of several ratings of risks to represent varying degrees of risks as an indicator for Lending Officers to evaluate the overall risk profile of counterpart and to arrive at an acceptable risk return trade-off. It also provides a tool for the Management to assess the credit exposures across all lines of business, geographic regions and products. The risk gradings of the borrowers are reviewed at least annually or more frequently in a deteriorating risk profile of the counterparties. The Bank’s internal credit rating of the loans and receivable portfolio together with historical default rates and respective gross carrying amounts are given in the table below: 2017 As at December 31, 2016 Probability of historical default rates Gross carrying amount Probability of historical default rates Gross carrying amount % Rs. ’000 % Rs. ’000 9.50 1,337,133 10.34 1,246,374 Rating – 0 0.10 100,062,702 0.21 74,103,326 Rating – 1 0.19 11,494,072 0.17 8,137,933 Rating – 2 0.22 39,968,653 0.22 32,231,244 Rating – 3 0.35 145,571,878 0.42 124,005,233 Rating – 4 0.55 173,795,607 0.60 137,789,192 Bank’s Internal Credit Rating Note Page No. Gold Investment grade Subtotal 472,230,045 377,513,302 Moderate risk Rating – 5 0.68 207,167,645 0.75 183,723,935 Rating – 6 0.98 37,185,104 1.31 34,668,576 Subtotal 244,352,749 218,392,511 Past due but not individually impaired High risk Rating – S 21.51 1,272,065 23.57 1,081,476 47.52 6,804,251 54.78 7,474,654 Extreme risk Rating – 7 Rating – 8 68.45 1,042,713 71.22 630,680 Rating – 9 100.00 5,962,906 100.00 6,196,207 Subtotal 15,081,935 15,383,017 Impaired Individually Impaired(*) Total – 33 226 23,043,248 754,707,977 – 22,102,077 633,390,907 (*) Probability of historical default rates are not calculated for individually impaired loans and receivables. Commercial Bank of Ceylon PLC Annual Report 2017 307
  309. Financial Reports Notes to the Financial Statements 69 .1.1 (d) Credit quality by class of financial assets The table below shows the credit quality by the class of asset for all financial assets exposed to credit risk, based on the Bank’s internal credit rating: Neither past due nor individually impaired As at December 31, 2017 Note Page No. Cash and cash equivalents 27 219 Balances with central banks 28 219 Placements with banks 29 221 Derivative financial assets 30 221 Other financial instruments – Held for trading 31 222 Loans and receivables to banks 32 225 Loans and receivables to other customers 33 226 Government guarantee Investment grade Moderate risk Past due but not individually impaired Individually impaired Total Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 – 44,801,446 – Securities purchased under resale agreements – – 2,357,876 33,224,619 – 17,633,269 – 2,334,536 314,745 – – – – 33,224,619 – – – 44,801,446 – – – 17,633,269 – – – – – – 2,334,536 – – 4,410,913 1,738,292 – 640,512 640,512 – 469,669,456 242,786,716 9,800,801 15,189,594 737,446,567 Corporate banking – 249,817,145 86,639,832 5,776,899 3,931,899 346,165,775 Amortised cost – 251,613,579 87,342,167 6,116,798 6,517,529 351,590,073 Less – Provision for impairment – 1,796,434 702,335 339,899 2,585,630 5,424,298 Personal banking – 219,852,311 156,146,884 4,023,902 11,257,695 391,280,792 Amortised cost – 220,616,463 157,010,582 8,965,140 16,525,719 403,117,904 Less – Provision for impairment – 764,152 863,698 4,941,238 5,268,024 11,837,112 Financial investments – Available for sale 34 232 Government securities 154,167,169 154,167,169 Quoted shares 500,278 Unquoted shares 46,685 Investment in unit trust Financial investments – Held to maturity – 35 238 Government securities Government securities 36 239 – – 154,714,132 – – – 154,167,169 – – – 500,278 46,685 – – – – – – – 63,562,752 – – – – 63,562,752 – – – – 63,562,752 – – – – 40,566,702 40,566,702 Other investments Total – 63,562,752 Other investments Financial investments – Loans and receivables 546,963 8,145,775 – 8,145,775 305,455,945 531,869,363 – – – – 48,712,477 – – – 40,566,702 – – – 8,145,775 245,165,520 9,800,801 15,189,594 1,107,481,223 Definition of “Past Due” – The Bank considers that any amounts uncollected one day or more beyond their contractual due date. 308 Commercial Bank of Ceylon PLC Annual Report 2017
  310. Financial Reports Notes to the Financial Statements Neither past due nor individually impaired As at December 31 , 2016 Note Page No. Government guarantee Investment grade Moderate risk Past due but not individually impaired Individually impaired Total Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Cash and cash equivalents 27 219 Balances with central banks 28 219 Placements with banks 29 221 – Derivative financial assets 30 221 – Other financial instruments – Held for trading 31 222 Loans and receivables to banks 32 225 Loans and receivables to other customers 33 226 Securities purchased under resale agreements – 43,873,205 – 3,505,335 30,193,589 – 11,718,499 – 1,052,829 293,809 – – – – 30,193,589 – – – 43,873,205 – – – 11,718,499 – – – – – – 1,052,829 – – 4,987,798 1,188,654 624,458 – 624,458 – 375,317,855 216,881,465 10,170,288 13,648,620 616,018,228 Corporate banking – 194,301,767 69,668,628 6,354,171 4,144,273 274,468,839 Amortised cost – 195,783,488 70,296,607 6,850,195 7,095,590 280,025,880 Less – Provision for impairment – 1,481,721 627,979 496,024 2,951,317 5,557,041 Personal banking – 181,016,088 147,212,837 3,816,117 9,504,347 341,549,389 Amortised cost – 181,729,813 148,095,904 8,532,823 15,006,487 353,365,027 Less – Provision for impairment – 713,725 883,067 4,716,706 5,502,140 11,815,638 Financial investments – Available for sale 34 232 Government securities 159,573,316 159,573,316 450,155 – – – 160,023,471 – – – 159,573,316 246,548 – – – 246,548 – Quoted shares – Unquoted shares – 47,147 – – – 47,147 Investment in unit trust – 156,460 – – – 156,460 Financial investments – Held to maturity 35 238 Government securities 60,981,298 – – – – 60,981,298 60,981,298 – – – – 60,981,298 – – – – Other investments Financial investments – Loans and receivables Government securities 36 239 40,076,392 40,076,392 Other investments Total 11,747,634 – 11,747,634 308,009,546 430,774,370 – – – – 51,824,026 – – – 40,076,392 – – – 11,747,634 218,694,577 10,170,288 13,648,620 981,297,401 Definition of “Past Due” – The Bank considers that any amount uncollected one day or more beyond their contractual due date. Commercial Bank of Ceylon PLC Annual Report 2017 309
  311. Financial Reports Notes to the Financial Statements 69 .1.1 (e) Trading assets Held-for-trading investments in debt and equity securities The table below sets out the credit quality of debt and equity securities classified as held for trading securities which include investments made by the Bank in Government Securities of Sri Lanka and Bangladesh. The analysis of equity securities is based on Fitch Ratings Nomenclature or Equivalent Ratings, where applicable. As at December 31, Note Page No. 2017 2016 Rs. ’000 Rs. ’000 654,438 1,761,970 1,703,438 1,743,365 278,618 705,251 Government securities Government securities – Sri Lanka Treasury bills Treasury bonds Government securities – Bangladesh Treasury bills Treasury bonds 1,459,674 483,403 Total – Government sec