FIN3322 : Bank Management PDF

FIN3322: Bank Management
Group Assignment 2016
Analyzing Bank Performance
By
Department of Finance
2016

FIN3322: Bank Management
Group Assignment 2016
Analyzing Bank Performance -Hatton
National Bank & Commercial Bank
By
Department of Finance
This Report submitted to the Department of Finance,
Faculty of Management Studies and Commerce, University of Sri Jayewardenepura, as a
partial fulfillment of the requirement of FIN:3322 Bank Management course
2016

Declaration
We certify that this project report does not incorporate without acknowledgement, any material
previously submitted for a course or a degree in any university, and to the best of our knowledge
and belief it does not contain any material previously published or written by another person,
except where reference is made in the text.
No. CPM Number MC Number Name of the Member Signature
01 10473 70155 M.L.N. Premarathne
02 11966 73973 W.K.A. Wanniarachchi
03 12002 73388 C.A Halambaarachchi
04 12079 73264 K.P.M Kumari De Silva
05 12089 73551 G.C. Lakshika
06 12096 73649 P.I. Nilmini
07 12225 73248 D.S.Dahanayake
08 12361 73775 R.A.V. Ransinghe
09 12386 73818 K.V.D.Sakunika
10 12521 73393 K.W.C. Harshima

Acknowledgment
First and foremost, we would like to thank our Bank Management lecturer Mr. Wickrama
Narayana and our tutorial coordinator Ms. Gayani Kaushalya for the guidance and the
understanding provided towards achieving this assignment as a successful one.
Then we take this opportunity to convey our sincere gratitude to our beloved parents for
being with us.
Last but not least, we should acknowledge our group members who work together to get
this assignment as a successful one.
i

Contents
Commercial Bank of Ceylon PLC.........................................................................................................1
Products.............................................................................................................................................1
Achievements....................................................................................................................................2
Hatton National Bank PLC....................................................................................................................3
Produts...............................................................................................................................................3
Achievements....................................................................................................................................4
Ratio Analysis.......................................................................................................................................5
Ratio calculation of Hatton National Bank........................................................................................5
Ratio calculation of Commercial Bank..............................................................................................9
Common size Financial Statements.................................................................................................12
Interpretation of Ratios....................................................................................................................18
Interpretation of Common Size Statements.....................................................................................22
Due Pont Analysis...............................................................................................................................25
Commercial Bank............................................................................................................................25
Hatton National Bank......................................................................................................................26
CAMELS Framework..........................................................................................................................28
Capital Adequacy............................................................................................................................29
Asset Quality...................................................................................................................................29
Management Quality.......................................................................................................................31
Smart Schools’ initiative..................................................................................................................32
Earnings...........................................................................................................................................33
Liquidity..........................................................................................................................................34
Sensitivity Analysis.........................................................................................................................34
Risk Management Framework.............................................................................................................35
Credit Risk.......................................................................................................................................39
Market risk......................................................................................................................................44
Liquidity risk...................................................................................................................................45
Operational Risk..............................................................................................................................48
Reputational risk..............................................................................................................................50
Legal and Documentation Risk........................................................................................................50
Capital Adequacy Ratio.......................................................................................................................52
Liquidity Management........................................................................................................................54
Non-Performing Loans Management...................................................................................................56
ii

Table of Figures
Figure 1 Commercial Bank Logo 1
Figure 2 HNB Logo 3
Figure 3 Duepont Analysis for Commercial Bank 25
Figure 4 Duepont ANalysis for Commercial Bank 26
Figure 5 Sectoral Distribution of Loans -Commercial Bank 30
Figure 6 - Sectoral Distribution of Loans as a percentage 30
Figure 7 Risk Government Strucute for HNB 37
Figure 8 HNB's Risk Profile 38
Figure 9 Commercial Bank Financial Risk Management Framework 39
Figure 10 Non-performing Advances 40
Figure 11 Credit Risk Management Cycle 41
Figure 12 Loan Portfolio 44
Figure 13 HNB Liquidity Gap Analysis 46
Figure 14 Liquidity Ratios 47
Figure 15 Exposure to Liquidity Risk 47
Figure 16 Liquidity Ratios 48
Figure 17 Liquidity Reserves 48
Figure 18 Key Risk Indicators 50
Figure 19 NPA Ratio 57
iii

Executive Summary
Our report concentrates on analyzing the financial performance of two most private leading
commercial banks in Sri Lanka, namely commercial Bank of Ceylon PLC and Hatton
National Bank PLC.
Instead of comparing two time periods of the same commercial bank, in our report we have
comparatively analyzed the same time duration of two different award winning commercial
banks in Sri Lanka. Our analysis on commercial bank and HNB bank has covered the areas
of,
 Financial position statement ratios and numbers
 Comprehensive income statement ratios and numbers
 Due Pont analysis for each bank
 CAMELS Framework
 Risk management framework of each bank
 Capital adequacy calculation
 Liquidity management
iv

Commercial Bank of Ceylon PLC.
Commercial Bank of Ceylon PLC is an award winning Commercial Bank in Sri Lanka with
205 branches and an ATM network of 625 ATMs. It established under the vision of,
"To be the most technologically advanced, innovative and customer friendly financial
services organization in Sri Lanka, poised for further expansion in South Asia".
The birth of the bank occurred in 1920s, during the pre-independence era and currently
expanded its operations to Bangladesh as well. The bank has won several awards including
‘The Strongest Bank in Sri Lanka in 2016’award by the Asian Banker and “The Most
Respected Bank in Sri Lanka – 2016” by LMD rankings. With the commitment of the bank
current Chairman Mr. K. G. D. D. Dheerasinghe and his team, the bank is moving forward
being a successful Commercial Bank in Sri Lanka.
Products
 Savings
o Regular Savings Account
o Super Saver Account
o RFC Savings Account
o Power Savings Account
o Udara Senior Citizens Account
o Arunalu Children’s Savings Account
o Isuru Minor’s Savings Account
o DotCom Youth Savings Account
 Deposits and Investments
o Millionaire Account
o Money Market Accounts
o Treasury Bonds
o Treasury Bills
o Fixed Deposits
o Call Deposits
o RFC Fixed Deposits
 Current Accounts
o Current Accounts
o Achiever Current Accounts
 Loans
o Home Loans
o Foreign Currency Home Loans
o Personal Loans
Figure 1 Commercial Bank Logo

o Education Loans
o Professionals’ Loans
o Pensioners’ Loans
o Gold Loans
 Cards
o Platinum Credit Cards
o Credit Cards
o Debit Cards
 Services
o Online Banking
o Mobile Banking
 Islamic Banking
 Elite Banking
Achievements
Declared Best Private Sector Bank in Sri Lanka and best for CSR, Brand Excellence and
Sustainability in the Banking industry
The Commercial Bank of Ceylon won four top awards including Best Private Sector Bank in
Sri Lanka at the 2016 South Asian Partnership Summit & Business Awards presented by
World HRD Congress and endorsed by the Asian Confederation of Businesses.
Ranked amongst ‘500 Strongest Banks’ in Asia Pacific region by The Asian Banker
The Commercial Bank of Ceylon PLC has been adjudged ‘The Strongest Bank in Sri Lanka
in 2016’ following a detailed and transparent scorecard compiled and analyzed by The Asian
Banker, a leading provider of strategic intelligence on the financial services industry.
Wins Sector Award for Banking, leads all listed companies in total assets; placed second
overall on PAT
The Commercial Bank of Ceylon has topped the LMD 100 ranking of Sri Lanka’s leading
listed companies in terms of Assets, taken second place overall on Profit After Tax (PAT)
and fifth place overall on Turnover in the magazine’s just published rankings for 2014-15.
The Bank also won the Sector Award for Banking at the ceremony.
The Commercial Bank of Ceylon PLC has become the only Sri Lankan bank to be ranked
among the Top 1000 Banks of the World for the sixth year running, setting yet another
benchmark for consistency.
This prestigious ranking is published annually by ‘The Banker’ magazine of the UK, and the
2016 list is based on the Bank’s key performance indicators for FY 2015.
2

Hatton National Bank PLC.
Hatton National Bank PLC is also an award winning private commercial bank in Sri Lanka
currently operating with 249 branches island wide. It has been internationally recognized as
the “Best Retail Bank in Sri Lanka” by Asian Banker Magazine many times as well as “The
Bank of the Year” in both 2012 and 2013 by The Banker Magazine of UK. It operates under
the vision of,
“To be the acknowledged leader and chosen partner in providing financial solutions through
inspired people.”
Its 1st branches were opened at Pussellawa, Gampola and Maskeliya and the Recently opened
HNB bank in Jaffna became the 1st green building of Northern Region.
HNB was able to achieve an international credit rating by becoming the first Sri Lankan bank
to obtain an international credit rating while maintaining a national long-term rating by Fitch
Ratings (Lanka) Ltd as AA-.
Produts
 Savings
o General Savings
 Regular Savings
 Capital Savings
 HNV Adhishtana
o Minor Savings
 Singithi Kirikatiyo
 Singithi Lama
 Singithi Surakum
 Diri Daru
o Youth Savings
 HNB Teen
 HNB Yauwanabhimana
 HNB You
o Senior Citizens
 Senior Citizens Scheme
 Sathkara for Gov. Servants
o Term Deposits
 Fixed Deposits
 Call Deposits
o Foreign Currency Savings
3
Figure 2 HNB Logo

 Loans
o Vehicle Loans
o Personal Loans
o Shanthi Home Loans
o Educational Loans
o Sathkara for Gov. Servants
o Debt Consolidation Loans
 Cards
o International Debit Cards
o HNB Credit Cards
o HNB Travel Cards
o HNB Affinity Cards
 Remittance
 Current Accounts
o Privilege Current Account
o Shareline Current Account
o Current Account
 Promotions
o General Promotions
o Card Promotions
o Shanthi Loyalty Card Discounts
 Leasings
Achievements
'The Best Retail Bank' for the 8th time by the 'Asian Banker'
HNB was once again recognized as 'The Best Retail Bank', in Sri Lanka at the 'Asia at the
'Asian Banker' International Excellence in Retail Financial Services 2016 Awards ceremony
held in Hong Kong recently. This is the 8th time that HNB has been bestowed with the 'Best
Retail Bank Award' by the 'Asian Banker'.
The 'Best Retail Bank in Sri Lanka'
HNB was once again recognized as the 'Best Retail Bank in Sri Lanka' for the seventh time
by the prestigious ‘The Asian Banker’ at the Asian Banker Excellence in Retail Financial
Services Awards ceremony held recently in Singapore.
The International Excellence in Retail Financial Services programme is the most rigorous,
prestigious and transparent awards programme for retail banking in Asia Pacific, Central
Asia, the Middle East and Africa. The programme evaluates over 250 banks in 42 countries
in a thorough evaluation process.
HNB MOMO wins international award for Marketing Campaign of the Year
4

HNB won the 'Marketing Campaign of The Year' category award for the marketing and
communications campaign developed for HNB MOMO the mobile POS solution introduced
by the bank for the first time in Sri Lanka in 2013.
Ratio Analysis
Ratio calculation of Hatton National Bank
Profitability Ratios
Return on Assets = Profit for the yr = 10,448,786 = 1.61%
Ave total assets 649029529
Return on Equity = Profit for the yr = 10,448,786 = 16.59%
Ave Equity 62974858
Net Income Ratio = Profit for the yr = 10,448,786 = 17.09%
Gross Income 61,153,466
Cost to Income = Operating Exp. = 15,978,634 = 45.95%
Operating Income 34,774,910
Net Interest Margin = Net Interest Income = 26,335,529 = 4.49%
Ave Earning Assets 586,695,42
2
Spread = Interest Income - Interest Exp
Ave Earning Assets Ave Interest
bearing
Liabilities
52,615,463 - 26,279,934 = 4.10%
586,695,422 539,499,588
5

Burden Ratio = Non-Interest Expense - Non-Interest
Income
Ave Total Assets
18,891,590 - 7,937,568 = 1.69%
649029529
Efficiency Ratio = Non-Interest Expense
Net Interest Income + Non-Interest
Income
18,891,590 = 55.12%
26,335,529 + 7,937,568
Activity Ratios
Credit to Deposit Ratio = Net L/A to Customers = 498,341,628 = 94.54%
Deposits by Customers 527,126,181
NPA to Total Loans = NPA =
6,597,000,000
= 1.29%
L/A to
customers(Gross)
509,525,467,00
0
NPA to Total Assets = NPA =
6,597,000,000
= 0.91%
Total Assets 725,207,710,00
0
Earning Base = Ave Earning Assets = 586,695,422 = 90.40%
Ave Total Assets 649029529
Leverage Ratio
Debt to Equity Ratio = Total Debt = 660,156,657 = 10.15
Total Equity 65,051,053
Debt to Total Assets = Total Debt = 660,156,657 = 91.03%
6

Total Assets 725,207,710
Market Ratios and per
share Ratios
EPS = Profit Attributable to
Share holders
= 10,448,786 = 25.83
W/A# of O/Shares O/S 404,496,000
DPS = Total dividend for the
yr
= 3,449,298,000 = 8.50
# of O/Share O/S 405,821,370
Net assets value per share = Total Net Value = 65,051,053 = 160.29
# of O/Share O/S 405,821,370
P/E Ratio = Market price per share
(voting shares)
= 210.6 = 8.15
EPS 25.83
Workings
Ave Earning Assets 2015 2014 2015 2014
Cash & cash equivalents 2,352,739 1,095,646
Financial investments-fair value through
profit or loss 593,390 551,371
less: Quoted Shares (593,390) (544,283) 0 7,088
Loans & receivables to customers 498,341,628 396,277,166
Financial Investments-Loans &
receivables 84,206,702 35,369,035
Reverse repurchase agreements 4,869,219 16,930,572
Financial investments-available for sale 78,046,505 67,842,229
less: Quoted Shares (6,635,080) (8,324,444)
Quoted units (280,800) (270,300)
Unquoted shares (25,405) (34,644)
Unquoted units (193,377) 0 70,911,843 59,212,841
Placements with banks 26,827 3,789,538
Financial investments-held to maturity 0 0
660,708,958 512,681,886
Ave 586,695,422
7

Ave Interest bearing Liabilities 2015 2014
Due to banks 58,232,034 43,428,762
Due to customers 527,126,181 419,327,123
less: current deposits 33,958,697 32,608,645 493,167,484 386,718,478
Other borrowings 26,833,109 4,345,285
Debt securities issued 4,490,742 4,451,407
Subordinated term debts 12,064,370 11,653,759
Securities sold under repurchase
agreements 16,630,201 16,983,545
611,417,940 467,581,236
Ave 539,499,588
Non-Interest Expense 2015
Free & commission expense 98,622
Personnel expenses 7,927,695
Benefit, claims & underwriting
expenditure 0
Other expenses 8,050,939
VAT & NBT on financial services 2,814,334
18,891,590
Non-Interest Income
Free & commission income 5,874,928
Other operating income 2,062,640
7,937,568
8

Ratio calculation of Commercial Bank
Profitability Ratios
Return on Assets = Profit for the yr = 11,903,224 = 1.421%
Ave total assets 837,707,349
Return on Equity = Profit for the yr = 11,903,224 = 16.90%
Ave Equity 70426267
Net Income Ratio = Profit for the yr = 11,903,224 = 15.29%
Gross Income 77,867,952
Cost to Income = Operating Exp. = 17,305,429 = 41.92%
Operating Income 41,281,590
Net Interest Margin = Net Interest Income = 30,345,284 = 3.93%
Ave Earning Assets 772,066,532
Spread = Interest Income - Interest Exp
Ave Earning Assets
Ave Interest
bearing Liabilities
66,030,456 - 35,685,172 = 2.37%
772,066,532 577,586,957
Burden Ratio = Non-Interest Expense -
Non-Interest
Income
Ave Total Assets
19,954,170 - 10,330,187 = 1.15%
837707349
Efficiency Ratio = Non-Interest Expense
Net Interest Income +
Non-Interest
Income
19,954,170 = 49.06%
30,345,284 + 10,330,187
9

Activity Ratios
Credit to Deposit Ratio = Net L/A to Customers = 508,115,127 = 81.42%
Deposits by Customers 624,101,810
NPA to Total Loans = NPA =
L/A to customers(Gross)
NPA to Total Assets = NPA =
Total Assets
Earning Base = Ave Earning Assets = 766,509,837 = 91.50%
Ave Total Assets 837707349
Leverage Ratio
Debt to Equity Ratio = Total Debt = 809,464,264 = 11.51
Total Equity 70,340,804
Debt to Total Assets = Total Debt = 809,464,264 = 92.00%
Total Assets 879,805,068
Market Ratios and
per share Ratios
EPS =
Profit Attributable to
Share holders = 11,903,224 = 13.59
W/A# of O/Shares O/S 875,962,769
DPS = Total dividend for the yr = 6.5
# of O/Share O/S
Net assets value per
share = Total Net Value = 70,340,804 = 80.22
# of O/Share O/S 876,866,801
Workings
Ave Earning Assets 2015 2014 2015 2014
10

Cash & cash equivalents 4,170,033 6,943,357
Loans & receivables to
customers
508,115,12
7 405,431,457
Financial Investments-Loans &
receivables 57,724,369 50,436,064
Reverse repurchase agreements 8,002,100 41,198,266
Other Financial Instruments-
Held for trading 7,656,349 6,326,636
less: Equity Sec (326,263) (367,732) 7,330,086 5,958,904
Financial investments-available
for sale 204244289 214208370
less: Equity sec (281,450) (230,313)
Unit trust (205,554) (613,441)
203,757,28
5 213,364,616
Placements with banks 17,193,539 14,507,861
Financial investments-held to
maturity - -
806,292,53
9 737,840,525
Ave Earning Assets 772,066,532
Ave Interest bearing Liabilities 2015 2014 2015 2014
Due to banks 30,319,119 25,260,976
Due to customers
624,101,81
0
529,361,48
4
less: current deposits
-
53,388,877
-
45,120,866
570,712,93
3 484,240,618
Other borrowings 9,985,637 11,636,583
Debt securities issued - -
Subordinated term debts 11,973,272 11,044,775
622,990,96
1 532,182,952
Ave Interest bearing Liabilities
577,586,956.5
0
Non-Interest Expenses
Free & commission expense 901,190
Personnel expenses 10,180,537
Benefit, claims & underwriting
expenditure -
11

Other expenses 5,983,088
VAT & NBT on financial
services 2,889,355
19,954,170
Non-Interest Income
Free & commission income 6,275,276
Other operating income 4,054,911
10,330,187
Common size Financial Statements
Hatton National Bank
Statement of Profit and Loss
2015 2014 Change
Gross Income
61,153,46
6
59,500,49
5
Interest Income
52,615,46
3 100.00%
51,868,33
3 100.00% 0.00%
Less: Interest Expense
26,279,93
4 49.95%
26,966,82
6 51.99% -2.04%
Net Interest Income
26,335,52
9 50.05%
24,901,50
7 48.01% 2.04%
Free & commission income 5,874,928 11.17% 4,976,212 9.59% 1.57%
Less: Free & commission
expense 98,622 0.19% 98,329 0.19% 0.00%
Net fee & commission
income 5,776,306 10.98% 4,877,883 9.40% 1.57%
Net interest, fee &
commission income
32,111,83
5 61.03%
29,779,39
0 57.41% 3.62%
Net gain(loss) from trading 346,577 0.66% -570,720 -1.10% 1.76%
Net gain from financial
investments 253,858 0.48% 1,398,025 2.70% -2.21%
Net insurance premium
income 0 0.00% 0 0.00% 0.00%
Other operating income 2,062,640 3.92% 1,828,645 3.53% 0.39%
Total operating income
34,774,91
0 66.09%
32,435,34
0 62.53% 3.56%
Less: Impairment
change/reversal for loans and
other losses 931,925 1.77% 2,491,520 4.80% -3.03%
Net operating income
33,842,98
5 64.32%
29,943,82
0 57.73% 6.59%
12

Less: operating expenses
Personnel expenses 7,927,695 15.07% 7,407,015 14.28% 0.79%
Benefit, claims &
underwriting expenditure 0 0.00% 0 0.00% 0.00%
Other expenses 8,050,939 15.30% 7,971,000 15.37% -0.07%
Total operating expenses
15,978,63
4 30.37%
15,378,01
5 29.65% 0.72%
Operating profit before VAT
& NBT on financial services
17,864,35
1 33.95%
14,565,80
5 28.08% 5.87%
Less: VAT & NBT on
financial services 2,814,334 5.35% 2,501,876 4.82% 0.53%
Operating profit after VAT &
NBT on financial services
15,050,01
7 28.60%
12,063,92
9 23.26% 5.35%
Share of profits of associate &
joint venture (net of income
tax) 0 0.00% 0 0.00% 0.00%
Profit before income tax
15,050,01
7 28.60%
12,063,92
9 23.26% 5.35%
Less: Income tax expense 4,601,231 8.75% 3,058,655 5.90% 2.85%
Profit for the year
10,448,78
6 19.86% 9,005,274 17.36% 2.50%
Statement of Financial Position
2015 2014 Change
ASSETS
Cash & cash equivalents 14,909,598 2.056% 13,141,295 2.294% -0.24%
Balances with central
bank of SL 20,096,090 2.771% 16,907,538 2.951% -0.18%
Placements with banks 26,827 0.004% 3,789,538 0.662% -0.66%
Reverse repurchase
agreements 4,869,219 0.671% 16,930,572 2.955% -2.28%
Derivative financial
instruments 1,302,872 0.180% 178,370 0.031% 0.15%
Financial investments-fair
value through profit or
loss 593,390 0.082% 551,371 0.096% -0.01%
Noncurrent assets held for
sale 20,151 0.003% 30,238 0.005% 0.00%
Loans & receivables to
customers
498,341,62
8 68.717%
396,277,16
6 69.176% -0.46%
Financial Investments-
Loans & receivables 84,206,702 11.611% 35,369,035 6.174% 5.44%
Financial investments-
available for sale 78,046,505 10.762% 67,842,229 11.843% -1.08%
Financial investments- 0 0.000% 0 0.000% 0.00%
13

held to maturity
Investment in joint
venture 655,000 0.090% 655,000 0.114% -0.02%
Investment in subsidiaries 3,017,285 0.416% 3,017,285 0.527% -0.11%
Investment properties 386,643 0.053% 392,088 0.068% -0.02%
Property, plant &
equipment 11,473,569 1.582% 9,304,665 1.624% -0.04%
Intangible assets &
goodwill 659,309 0.091% 802,728 0.140% -0.05%
Deferred tax assets 0 0.000% 287,384 0.050% -0.05%
Other assets 6,602,922 0.910% 7,374,846 1.287% -0.38%
Total assets
725,207,71
0
100.000
%
572,851,34
8
100.000
% 0.00%
LIABILITIES
Due to banks 58,232,034 8.030% 43,428,762 7.581% 0.45%
Derivative financial
instruments 304,485 0.042% 630,598 0.110% -0.07%
Securities sold under
repurchase agreements 16,630,201 2.293% 16,983,545 2.965% -0.67%
Due to customers
527,126,18
1 72.686%
419,327,12
3 73.200% -0.51%
Dividends payable 764,771 0.105% 587,078 0.102% 0.00%
Other borrowings 26,833,109 3.700% 4,345,285 0.759% 2.94%
Debt securities issued 4,490,742 0.619% 4,451,407 0.777% -0.16%
Current tax liabilities 4,542,977 0.626% 3,297,530 0.576% 0.05%
Deferred tax liabilities 378,820 0.052% 0 0.000% 0.05%
Insurance provision-life 0 0.000% 0 0.000% 0.00%
Insurance provision-
general 0 0.000% 0 0.000% 0.00%
Other provisions 2,538,111 0.350% 1,810,893 0.316% 0.03%
Other liabilities 6,205,856 0.856% 5,436,705 0.949% -0.09%
Subordinated term debts 12,064,370 1.664% 11,653,759 2.034% -0.37%
Total liabilities
660,111,65
7 91.024%
511,952,68
5 89.369% 1.65%
Equity
Stated capital 13,826,873 1.907% 13,289,992 2.320% -0.41%
Statutory reserves 3,760,000 0.518% 3,160,000 0.552% -0.03%
Retained earnings 5,270,848 0.727% 7,808,059 1.363% -0.64%
Other reserves 42,193,332 5.818% 36,640,612 6.396% -0.58%
Total equity attributable to
equity holders of the bank 65,051,053 8.970% 60,898,663 10.631% -1.66%
Non-controlling interests 0 0.000% 0 0.000% 0.00%
Total equity 65,051,053 8.970% 60,898,663 10.631% -1.66%
Total liabilities and equity 725,162,71 100.0% 572,851,34 100.000 0.00%
14

0 8 %
Commercial Bank
Statement of Profit and Loss
2015 2014
Rs.'000 Rs.'000
Gross Income 77,867,952 72,752,229
Interest Income 66,030,456 100.00% 61,832,018 100.00% 0.00%
Less: Interest Expenses 35,685,172 54.04% 34,610,179 55.97% -1.93%
Net Interest Income 30,345,284 45.96% 27,221,839 44.03% 1.93%
Fees & Commission
Income 6,275,276 9.50% 5,592,744 9.05% 0.46%
less: Fees & Commission
exp 901,190 1.36% 761,527 1.23% 0.13%
Net Fees & Commission
Income 5,374,086 8.14% 4,831,217 7.81% 0.33%
Net gains/(losses) from
trading 813,376 1.23% (305,492) -0.49% 1.73%
Net gains/(losses) from fin
inv 693,933 1.05% 2,272,575 3.68% -2.62%
Other income (net) 4,054,911 6.14% 3,360,384 5.43% 0.71%
Total Operating Income 41,281,590 62.52% 37,380,523 60.45% 2.06%
15

less: Impairment charges
for loans & other losses 3,943,196 5.97% 3,229,144 5.22% 0.75%
Net Operating Income 37,338,394 56.55% 34,151,379 55.23% 1.31%
less: Exp
Personnel exp 10,180,537 15.42% 8,903,048 14.40% 1.02%
Dep and Amort 1,141,804 1.73% 1,200,546 1.94% -0.21%
Other Op Exp 5,983,088 9.06% 5,622,578 9.09% -0.03%
Total Operating Exp 17,305,429 26.21% 15,726,172 25.43% 0.77%
Op Profit before VAT &
NBT 20,032,965 30.34% 18,425,207 29.80% 0.54%
less: VAT on fin services
& NBT 2,889,355 4.38% 2,688,991 4.35% 0.03%
Op Profit after VAT &
NBT 17,143,610 25.96% 15,736,216 25.45% 0.51%
Share of profits of
associates, net tax - -
PBT 17,143,610 25.96% 15,736,216 25.45% 0.51%
less: Income tax 5,240,386 7.94% 4,556,035 7.37% 0.57%
Profit for the year 11,903,224 18.03% 11,180,181 18.08% -0.05%
Statement of Financial Position
2015 2014 Change
Rs.'000 Rs.'000
Assets
Cash and cash equivalents 20,043,512 2.28% 20,591,867 2.59% -0.31%
Balances with CB 28,221,017 3.21% 19,633,746 2.47% 0.74%
Placements with banks 17,193,539 1.95% 14,507,861 1.82% 0.13%
Securities purchased under
release agreements 8,002,100 0.91% 41,198,266 5.18% -4.27%
Derivative fin assets 4,118,169 0.47% 459,510 0.06% 0.41%
Other fin instruments -
held for trading 7,656,349 0.87% 6,326,636 0.80% 0.08%
loans & receivables to
banks 601,106 0.07% 551,066 0.07% 0.00%
loans & receivables to 57.75% 50.96% 6.79%
16

other customers
508,115,12
7
405,431,45
7
Fin inv - Available for sale
204,244,28
9 23.21%
214,208,37
0 26.92% -3.71%
Fin inv - held to maturity - - 0.00%
Fin inv - loans &
receivables 57,724,369 6.56% 50,436,064 6.34% 0.22%
Inv in subsidiaries 1,237,146 0.14% 1,211,000 0.15% -0.01%
Inv in associates 44,331 0.01% 44,331 0.01% 0.00%
PPE 9,968,985 1.13% 9,953,091 1.25% -0.12%
Intangible assets 465,960 0.05% 439,128 0.06% 0.00%
Leasehold property 74,478 0.01% 75,420 0.01% 0.00%
Other assets 12,094,591 1.37% 10,541,817 1.32% 0.05%
Total Assets
879,805,06
8
795,609,63
0
Liabilities
Due to banks 30,319,119 3.45% 25,260,976 3.18% 0.27%
Derivative Financial
liabilities 1,890,770 0.21% 1,193,139 0.15% 0.06%
Securities sold under
repurchase agreements
112,384,81
2 12.77%
124,564,49
9 15.66% -2.88%
Other fin liabilities- held
for trading - - 0.00%
Due to other
customers/deposits from
customers
624,101,81
0 70.94%
529,361,48
4 66.54% 4.40%
Other borrowings 9,985,637 1.13% 11,636,583 1.46% -0.33%
Current Tax liabilities 3,001,984 0.34% 1,997,990 0.25% 0.09%
Differed Tax liabilities 230,615 0.03% 2,573,760 0.32% -0.30%
Other provisions 1,874
0.0002
% 1,874 0.0002% 0.00%
Other liabilities 15,548,159 1.77% 17,443,531 2.19% -0.43%
Due to subsidiaries 26,212
0.0030
% 19,289 0.00% 0.00%
17

Subordinated liabilities 11,973,272 1.36% 11,044,775 1.39% -0.03%
Total liabilities
809,464,26
4 92.00%
725,097,90
0 91.14% 0.87%
Equity
Stated Capital 23,254,605 2.64% 21,457,501 2.70% -0.05%
Statutory reserves 4,922,264 0.56% 4,327,103 0.54% 0.02%
Retailed earnings 4,388,867 0.50% 4,258,287 0.54% -0.04%
Other reserves 37,775,068 4.29% 40,468,839 5.09% -0.79%
Total equity attributable
to equity holders of the
bank 70,340,804 8.00% 70,511,730 8.86% -0.87%
NCI - -
Total equity 70,340,804 8.00% 70,511,730 8.86% -0.87%
Total liabilities and
equity
879,805,06
8
795,609,63
0
Interpretation of Ratios
HNB Commercial
ROA 1.61% > 1.421%
ROE 16.59% < 16.90%
Net Income ratio 17.09% > 15.29%
CTI 45.95% > 41.92%
NIM 4.49% > 3.96%
Spread 4.10% > 2.44%
Burden ratio 1.69% > 1.15%
Efficiency ratio 55.12% > 49.06%
Credit ratio 94.54% > 81.42%
NPA to TL 1.29% -
NPA to TA 0.91% -
18

Earning base 90.40% 91.50%
Debt to Equity 10.15 11.51
Debt to TA 91.03% 92%
EPS 25.83 13.59
DPS 8.5 6.5
Net asset value 160.29 80.22
P/E ratio 8.15
 ROA
In HNB return from the assets they have is 1.61% and in Commercial Bank it takes 1.4%
which is much lower than that of HNB. Large number of average total assets may be the
reason become the Commercial bank ratio little down than HNB. That has reduced because
Commercial bank return is little bit higher than HNB. HNB is in a good position than
Commercial Bank according to this ratio.
 ROE
In HNB return for the equity /return that equity holder get is 16.59% & in Commercial Bank
16.90%. In Commercial bank, they have a higher return comparing to HNB in 2015. That is
the main reason to increase the ratio. Therefore, according to this ratio, Commercial Bank is
in a good position.
 Net Income Ratio
This ratio explains the profit to total revenue of the bank. In HNB it shows higher amount of
17.09% than Commercial Bank. In Commercial it is 15.29%. That means HNB earns more
profit from its gross income than Commercial bank.
 CTI
In HNB Bank, this ratio is 45.95%. When Commercial Bank takes 41.92% it explains HNB
incur much higher expense to earn operating income than Commercial Bank. It appears that
keeping the ratio at a lower level is better.
 NIM
This ratio shows how efficient assets/interest contribute in earning assets to generate a source
for the income. In HNB Bank it takes is 4.49% where it is 3.96% that in Commercial Bank.
Commercial bank has a higher interest income than HNB. But its denominator of average
interest bearing assets also take a higher amount than HNB. HNB is more efficient according
19

to this ratio and changes of the interest rates applies in two banks also may be a reason for
this.
 Spread
According to this ratio HNB is considerably in a better position than Commercial Bank. It
proves by the ratios maintain by both banks, such as HNB 4.10% and commercial Bank
2.44% which is nearly a half of the HNB’s ratio. This ratio explains the difference of what
bank earn from loan and what pay for deposits.
According to the Commercial Bank ratio we can observe that the bank has not positioned its
assets and liabilities in a manner of taking advantages of changed rates.
 Burden Ratio
This ratio explains how non-interest expense is covered by non- interest income. This ratio
should be at a very low level because after covering non-interest expenses there should be an
excess of non-interest income to run the activities. In HNB it is 1.69% which is higher than
that of Commercial Bank’s rate 1.15%. This shows that the Commercial bank is in a position
to cover its non-interest expense through non- interest income than HNB.
 Efficiency ratio
In HNB this ratio takes 55.12% where the Commercial Bank takes it as 49.06%. This
explains the bank’s ability to control its non-interest expenses or what is the interest expense
per rupee of operating income.
It is worth to keep this ratio at a lower level. Therefore, we can say Commercial bank is in a
good position since it keeps non-interest expense at lower level to earn operating income than
HNB.
o With the above ratios, we have measured the profitability of two banks.
According to the result, we observed that both banks are in a good level in
some ratios. But HNB is leading in special ratios of Net interest margin and
spread ratios. With regard to these profitability ratios, we can conclude that the
HNB is in a good position.
 Credit deposit ratio
Credit deposit ratio shows how much has given as bank loans from the deposits made by
customers.
When we consider this ratio HNB contributes to loans 94.54% out of its deposits while
Commercial bank contributes 81.42% and both banks have kept the remaining as working
capital. According to the credit deposit ratios both banks can be considered maintain a good
20

position. But when we consider the liquidity side Commercial bank is good because they
keep 18.58% with them without giving loans when HNB keeps only 5.46%.
 NPA to total loans
This shows how much of non-performing advances are there from total loans. In HNB this
ratio takes 1.29% and since Commercial Bank has not disclosed about their non-performing
advances, it is unable to calculate this ratio. It is better to keep this ratio as much as lower
because having non-performing advances would interrupt the operations of a bank.
Currently HNB maintains a low-level ratio and it would be much better if they could decrease
further.
 NPA to total assets
The amount of non-performing advances of a bank for the total assets is explained by this
ratio. In HNB it is 0.91% which is very low. Because there are less number of non-
performing advances in the bank. It is a good indication. Commercial Bank has not disclosed
the NPA and it is unable to calculate the ratio.
 Earning Base
In HNB 90.40% of assets are earnings assets where it is 91.50% in Commercial bank. It is
good to have a higher ratio because without having assets with no earning capacity it is good
to have interest earning assets. According to that both banks are in a good position but
Commercial bank is better.
o According to activity ratios calculated above, both banks are efficient in the
operation.
 Debt to equity ratio
This ratio explains how much of debt/liabilities available comparing with equity held in the
bank. In another way, how much of equity capital is financed by debt capital. Here liabilities
mean deposit with the bank. In HNB it takes 10.15 and in Commercial bank it is 11.51.
When comparing these rates of two banks it is obvious that Commercial bank has more
deposits with the bank than HNB’s equity capital.
 Debt to total asset
In HNB this ratio takes 91.03% & Commercial bank takes 92% which is much closer to
HNB. This shows how much of assets are financed by liabilities. In HNB 91.03% of assets
(loans) are financed by liabilities (deposits). In Com bank 92% of loans are financed by their
deposits.
o The above two ratios explains how much of leverage it is there in these two
banks. Both banks are operated in a good manner.
21

 Earnings per share
This explains how much has been earned by an ordinary share outstanding. In HNB bank it
is Rs 25.83 that is much of better than Commercial bank where EPS is Rs 13.59. Commercial
bank has less value because their weighted number of ordinary shares are more twice than
HNB. Therefore, the profit of the year distributes within more shareholders. According to that
HNB is in a good position because it gives some higher earnings per share.
 Dividends per share
Dividend declared for a share of HNB is Rs. 8.5. In Commercial bank, it is Rs.6.5. In
Commercial bank, it is a less amount comparing to HNB because Commercial bank’s number
of ordinary shareholders take a large amount.
 Net asset value per share
This shows the value of an ordinary share in the bank. In HNB it takes Rs. 160.29 where it is
Rs. 80.22 for Commercial bank and that is a half of HNB. There Commercial bank has a
higher total net value comparing to HNB, but their number of ordinary shares are large and
then the final value becomes lower. According to that HNB’s share values are in a good
position than Commercial bank.
 Price to earnings ratio
This means how much of earnings per share are required to cover the market price of a share.
In HNB it is 8.15 times of its EPS are required to cover its Rs.210.6 worth of share.
Unfortunately, that value has not disclosed in Commercial bank statements to compare it with
HNB.
Interpretation of Common Size Statements
Common size financial statement analysis can be used to evaluate the financial health of an
organization.
Using common size financial statement, there are two possible ways in analysis.
 To evaluate from one period to next within a company
 To evaluate a company relative to its competitors
In our report, we made common size financial statement for both HNB and Commercial
Bank. Using these common size financial statements, we can interpret what they tell us about
their banks as follows.
When we made common size financial statement, we used interest income as based for the
common size income statement and total asset as based for the of common size statement of
financial position.
22

Interpretation for HNB
According to the common size income statement of HNB, we can see changes in item of
income statement as percentage of interest income. Net interest income as percentage of
interest income increased from 2014 to 2015 (48.01% in 2014 versus 50.05% in 2015) as a
net of 2.04%. This positive change mainly happened because of less interest expense incurred
in 2015 than the 2014 as percentage of interest income (51.99% in 2014 versus 49.95% in
2015).
As well as net operating income of the HNB bank increased from 2014 to 2015 (57.73% in
2014 versus 64.32% in 2015) as a net of 3.56%. This positive changed happened in the net
operating income may be a result of positive changed arise in the net gain from trading (-
1.10% in 2014 versus 0.66% in 2015) as a net of 1.76%, free & commission income (9.59%
in 2014 versus 11.17% in 2015) as net of 1.57% than the 2014 and negative changes
happened in the expenses & losses category like reversal for loan and other losses, other
losses and other expenses.
Finally, these are also likely caused the increase profit before tax, Tax expenses and net
profit.
Considering all the above fact, we can conclude that our common size income statement
analysis within company shows that HNB bank has little progress in their operations.
Next, we can analyze the common size statement of financial position of the HNB in order to
get an idea about their composition of asset, liability and shareholder equity accounts
changed from 2014 to 2015.
According to the common size statement of financial position of HNB, it’s notable that
changes happened in the asset side is positive changed occurred for financial investment
(loans & receivables 6.174% in 2014 versus 11.611% in 2015) as a net of 5.44%. It is a
significant positive change arose in the asset side and all other item of the asset side shows
negative changes from 2014 to 2015. However, they are negligible changes compared to
2014.
As well as, total liabilities of HNB shows little percentage of net changed (1.65%) when
compare the liabilities as percentage of asset in 2015 with the liabilities as percentage of asset
in 2014 (89.369% in 2014 versus 91.024% in 2015). This small positive change can be a
result of increment in due to banks (7.581% in 2014 versus 8.030% in 2015), in current tax
liabilities and deferred tax liabilities (0.576% in 2014 versus 0.626% in 2015 and 0% in 2014
versus 0.052% in 2015 respectively) and also in other provision. However total positive
change reduces up to 1.65 % as a net because of the arise reduction in derivative financial
investment (0.110% in 2014 versus o.042% in 2015), securities sold under repurchase
agreement (2.695% in 2014 versus 2.293% in 2015), due to customer (73.2% in 2014 versus
72.686% IN 2015), debt security issued (0.777% in 2014 versus 0.619% in 2015) and etc.
Total equity has reduced from 10.631% to 8.97%. This is mainly happened because of reduction
arise in the stated capital, statutory reserves, retained earnings and other reserves.
Interpretation for Commercial Bank
23

According to the common size income statement of Commercial Bank, we can see changes in
item of income statement as percentage of interest income. Net interest income as percentage
of interest income increased from 2014 to 2015 (44.03% in 2014 versus 45.96% in 2015) as a
net of 1.93% This positive change mainly happened because of less interest expense incurred
in 2015 than the 2014 as percentage of interest income (55.97% in 2014 versus 54.04% in
2015).
As well as net operating income of the Commercial bank increased from 2014 to 2015
(55.23% in 2014 versus 56.55% in 2015) as a net of 1.31%. This positive change happened in
the net operating income can be a result of positive changed arise in the net gain from trading
(-0.49% in 2014 versus 1.23% in 2015) as a net of 1.73%, free & commission income (7.81%
in 2014 versus 8.14% in 2015) as net of 0.33% than the 2014. However total operating
expenses increased as a net of 0.77% (25.43% in 2014 versus 26.21% in 2015). Even though
there is net incremental in profit before tax, it is small amount of 0.51%. And finally, Commercial
bank’s profit after tax as a percentage of interest income shows decrement from 2014 to
2015(18.08% in 2014 versus 18.03% in 2015).
Considering all the above facts, we can conclude that our common size income statement
analysis within company shows that Commercial bank has little recession in their operations.
According to the common size statement of financial position of HNB, the most notable
positive changed occurred with loans & receivables to other customers (50.96% in 2014 versus
57.75% in 2015) as a net of 6.79%, Balances with CB (2.47% in 2014 versus 3.21% in 2015),
derivative Financial asset (0.06% in 2014 versus 0.47% in 2015), other Financial Investment held
for maturity (0.80% in 2014 versus 0.87% in 2015) and etc.
As well as, total liabilities of Commercial bank show little percentage of net changed
(0.87%)when compare the liabilities as percentage of asset in 2015 with the liabilities as
percentage of asset in 2014(91.14% in 2014 versus 92.00% in 2015). This small positive
changed may a result of increment in due to banks (0.27% in 2014 versus 3.45% in 2015), in
derivative financial investment (0.15% in 2014 versus 0.21% in 2015), in due to customers
(66.54% in 2014 versus 70.94% in 2015), in current tax liabilities (0.25% in 2014 versus 0.34%
in 2015). However, totals positive change reduce up to 0.87% as a net because of arise
reduction in deferred tax liabilities (0.32% in 2014 versus 0.03% in 2015), securities sold
under repurchase agreement (15.66% in 2014 versus 12.77% in 2015), other liabilities (2.19%
in 2014 versus 1.77% in 2015) and etc.
Total equity has reduced from 8.86% to 8.00%. This is mainly happened because of the reduction
arise in the stated capital, retained earnings and other reserves.
24

Due Pont Analysis
Commercial Bank
25

Figure 3 Duepont Analysis for Commercial Bank
Hatton National Bank
26
Return on Equity
16.68%
Equity Multiplier
11.89
Return on Assets
1.40%
Income Ratio
9.295%
Interst Income Ratio
7.882%
Non-Interest
Income Ratio
1.233%
Securities
Gain/Losses Ratio
0.18%
Expense Ratio
7.267%
Interest Expense
Ratio
4.26%
Non-Interest
Expense Ratio
2.382%
PLL Ratio
0.626%
Tax Ratio
0.626%

Figure 4 Duepont ANalysis for Commercial Bank
Performance of banks can be easily evaluated by calculating ratios, ratios can be further
organized and interpreted using the Dupont analysis model.
HNB’s Return on Equity ratio is 16.59% and Commercial Bank’s ROE is 16.68%. when
compare these two ratios of both banks, we can conclude that Commercial Bank has achieved
higher ROE than HNB. In order to calculate ROE, we have to calculate Equity multiplier and
Return on Assets ratios. ROA and Equity multiplier of Commercial Bank are 1.40% and
11.89% respectively for the year 2015, where HNB shows 1.61% and 10.31% respectively.
Normally ROA of financial institutions are relatively lower than non-financial businesses.
However irrespective of the company or industry investors expect a higher return to their
investments. Therefore, HNB has a higher level of gearing (Equity multiplier) is 11.89% in
order to compensate for the lower ROA and to generate a comparable ROE with Commercial
Bank.
We can identify a straight forward decomposition of ROA through the Dupont analysis. It is
composed of three parts. Those are Income ratio, Expense ratio and Tax ratio. The figures of
Commercial Bank are 9.295%, 7.267% and 0.626% respectively while HNB shows the
figures as 9.422%, 7.103% and 0.709%.
27
Return on Equity
16.59%
Equity Multiplier
10.31
Return on Assets
1.61%
Income Ratio
9.422%
Interst Income Ratio
8.107%
Non-Interest
Income Ratio
1.223%
Securities
Gain/Losses Ratio
0.093%
Expense Ratio
7.103%
Interest Expense
Ratio
4.049%
Non-Interest
Expense Ratio
2.911%
PLL Ratio
0.144%
Tax Ratio
0.709%

Interest income is the major source of the revenue of a bank. So, the interest income ratio
takes a prominent place in evaluation and it is 7.82% of Commercial Bank and 8.107% of
HNB. Fee, commotions and trading income falls to the non-interest income category which is
1.233% where the both bank show.
Interest expense ratio of Commercial bank which is 4.26% and non-interest expense ratio
shown as 2.382% while HNB shows 4.049% and 2.911% respectively.
Bank ROE Equity Multiplier ROA
Commercial Bank 16.68% 11.89% 1.40%
HNB 16.59% 10.31% 1.61%
CAMELS Framework
28

CAMELS rating is a rating system used by regulators to access the quality of bank's earnings
and overall management.
This is consisted of six general categories of performance under the label CAMELS.
C - Capital Adequacy
A - Asset Quality
M - Management Quality
E - Earnings
L - Liquidity
S - Sensitivity to market risk
Capital adequacy shows the ability to maintain the sufficient amount of capital within the
bank. It signals the ability to maintain capital extent of all types of risk, and the ability of
management to identify, measure, monitor and control them. There are two indicators of
capital adequacy.
1. Total capital/Risk weighted assets
2. Tier I Capital/Risk weighted assets
Asset quality shows the amount of existing credit risk associated with the loan and
investment portfolio as well as off-balance sheet activities. There are two indicators of assets
quality.
1. Non-performing loans/ Gross loans
2. Sectoral Distribution of loans/Gross loans
The management quality reflects the adequacy of the board of directors and senior
management systems and procedures to identify, measure, monitor and control risk.
Earnings is the quantity and trainings, but also the factors that may affect the sustainability
and quality of earnings.
Return on assets, return on equity, interest margin and non-interest expense/gross income are
some ratios that are taken to assess the earnings.
Liquidity reflects the adequacy of the bank's current and prospective sources of liquidity and
the management practices.
Two ratios are being used.
1. liquid assets / Total assets
2. Liquid assets/ Short term liabilities
Sensitivity to market risk reflects degree to changes in interest rates, foreign exchange rates,
commodity prices and equity prices etc.
29

Regulators numerically rate each bank in each of the six categories, ranging from the highest
or best rating (1) to the worst or lowest rating (5). Regulators also assign a composite rating
for the bank's overall operation.
Let's see how each bank is positioned in these categories.
Capital Adequacy
HNB Com. B
2014 2015 2014 2015
Total capital/Risk
weighted assets (%)
14.83 12.70 16.22 14.28
Tier I Capital/Risk
weighted assets (%)
12.15 10.53 13.07 11.55
Central Bank of Sri Lanka has imposed the mandatory requirement for all banks to maintain
minimum 10% for the total capital ratio and 5% for the tier I ratio. Both the banks are in the
safe zone since they are above the minimum requirement in two ratios. But they have to pay
attention on capital component and the risk weighted assets since for both bank the two ratios
have declined compared to the previous year.
Asset Quality
HNB
Non-performing loans/ Gross loans- 2015 - 2.43% 2014 - 3.16%
Sectoral Distribution of Loans/Gross Loans – Since the notes to the financial statements are
silent about the sectoral distribution of loans, we could not comment on that.
Commercial Bank
Non-performing loans/ Gross loans - Since the notes to the financial statements are silent
about the non-performing loans, we could not comment on that.
30

Sectoral Distribution of Loans/Gross Loans
Figure 5 Sectoral Distribution of Loans -Commercial Bank
Figure 6 - Sectoral Distribution of Loans as a percentage
In the above, sectoral loan distribution calculation relating to 2015, we can identify that a
large amount of loans has been granted to other customers, but that value compared to year
2014, has declined by 5%. The second rank is the trading industry which has remained the
same in both years. 14% for manufacturing, 12% for construction, 10% for other services are
the next major sectoral that are listed.
From this, we can identify that Commercial Bank has not concentrated more on one industry
rather they have diversified their loan portfolio well in order to mitigate the credit risk and
ensuring the asset quality.
31

Management Quality
Management quality or the Qualitative criteria in a bank can be discussed in various aspects.
Here we have considered following area in relation to HNB and Commercial Bank.
 Management competency and integrity
 Business Strategies
 Corporate Social Responsibility
Commercial Bank
Management competency and integrity
Mr. Dharma Dheerasinghe’s name was announced as Chairman in 2014 and the name of Mr.
Preethi Jayawardene as Deputy Chairman of the Bank. Chairman is a Fellow member of the
Institute of Chartered Accountants of Sri Lanka. He has more than 35 years’ experience
locally and overseas specializing in Finance and Treasury operations. Previously he has
served as a Deputy Governor of the Central Bank.
Deputy Chairman, Mr. Jayawardena was appointed to the Board of Commercial Bank in
December 2011 and was appointed as Deputy Chairman of the Bank on 29th July 2014. He is
a Fellow of the Institute of Chartered Accountants of Sri Lanka and accounts for nearly 35
years post qualifying experience both locally and overseas specializing in Finance &
Treasury Operations. He was with Zambia Consolidated Copper Mines for 13 years in many
senior positions including the Head of Treasury, managing an international loan portfolio of
over US$ 2 billion.
CEO, Mr. Jegan Durairatnam has been appointed as CEO in 2014. Mr Jegan Durairatnam
joined the Bank in 1982. His banking experience covers all aspects of International Trade,
Off-shore Banking, Credit, Operations and IT. Mr Durairatnam has been in the Bank’s
corporate management team for seven years. The holder of a Bachelors Degree from the
University of Peradeniya, Mr Durairatnam has served Commercial Bank in several senior
management positions, including Deputy General Manager, Assistant General Manager –
International Division and Head of Imports.
Business Strategies and Values
 Maximize profits while managing substantial growth in the lending portfolio and
maintaining a quality loan book.
 Encourage branches to carry out local campaigns with special focus on mega and
micro savings.
 Introduce micro-savings and micro-insurance products.
 Establish 24/7 automated banking centers at identified locations.
 Encourage account-opening via electronic platforms targeting specific customer
segments.
32

 Further improve the centralized approval process and implement centralized loan
disbursement.
 Centralize the post-sanction functions of credit/advances.
 Ensuring ongoing compliance with all mandatory requirements and encourage to
adopt best practices and voluntary requirements.
Corporate Social Responsibility
Smart Schools’ initiative
A ground-breaking new initiative to raise averages for pass levels in key subjects in the
secondary school’s curriculum has been launched by the Commercial Bank of Ceylon as part
of the Bank’s extensive commitments to promote education.
Leveraging the 170 computer labs already donated by the Bank to schools around the island,
the new initiative seeks to create ‘smart schools’ where students and teachers use these IT
facilities to improve knowledge and skills in subjects such as English, Mathematics and
Science for the GCE Ordinary Level and Bio science and Mathematics for the Advanced
Level.
Working with Headstart (Pvt) Ltd., the company that owns the Guru.lk educational website,
Commercial Bank has utilized the knowledge of a panel of academics to develop curriculum
based new content that will be part of Learning Management Systems that will be installed in
the computers of the school IT labs and will be accessible from external computers as well.
Enhanced scholarships & laptops to 50 more undergrads from Commercial Bank
The Commercial Bank of Ceylon has reaffirmed its commitment to support the education of
young Sri Lankans by conferring scholarships on 50 more undergraduates, and substantially
increasing the value of these scholarships.
Recipients of scholarships from 2016 onwards under the Bank’s ‘Sarasaviyata Nawa
Saviyak’ programme will receive Rs 50,000 a year -- an increase of Rs. 20,000 -- for the
duration of their degree, as well as a laptop each from Sri Lanka’s leading private bank.
HNB
Management competency and integrity
Mr Rienzie Arseculeratne, the chairman, appointed Director in April 2015 and Chairman in
May 2015. Mr Rienzie Arseculeratne is an Attorney-at-Law and a Member of Unofficial Bar
Practicing Criminal Law and Public Law. He was appointed as a President’s Counsel in 1998.
Mr Arseculeratne was the former Director General of the Commission to Investigate
Allegations of Bribery or Corruption. He was also a State Counsel, Senior State Counsel,
Deputy Solicitor General and Additional Solicitor from 1975 – 2003 and he was the Head of
the Criminal section of the Attorney General’s Department until his retirement in 2003.
33

Mr Jonathan Alles, Managing Director/Chief Executive Officer, Appointed an Executive
Director on 1st May 2013 and Managing Director/Chief Executive Officer on 1st July 2013.
Mr Jonathan Alles holds a MBA from the University of Stirling, U.K. and is an Associate
Member of the Institute of Bankers, Sri Lanka. He counts 25 years of banking experience
having served International Banks and HSBC, Sri Lanka and also at Hatton National Bank
during the period September 2002 to June 2005. Having returned to Sri Lanka from the UAE
in September 2010, Mr Alles re-joined Hatton National Bank in the capacity of Chief
Operating Officer.
Business Strategies and Values
 Treasure professional & personal integrity at all times
 Demonstrate mutual respect in all our interactions
 Passionate in everything we do
 Committed to being customer centric
 Courage to change, challenge and be different
 Demonstrate unity in diversity
 Established clear communication channels at all levels of the organisation,
 IT-based business processes.
Corporate Social Responsibility
‘Green Pledge’
HNB has initiated a two-pronged environmental responsibility ethics programme in 2009
known as the HNB ‘Green Pledge’. Designed to educate employees of the Bank as well as
garner commitment towards the bank all employees have made a pledge to combat climate
change.
Million Tree Stories Project
The Bank partnered with the Rotary Club of District 3220 and the Rotary Club of
Ibbagamuwa to plant 1 million trees on the banks of the Deduru Oya.
The Rotary District 3230 through the Rotary Club of Ibbagamuwa will be responsible to plant
the trees under the guidance and support of the Department of Sri Lanka Irrigation,
Department of Agrarian Services and other several government institutions.
Earnings
HNB Com. B
2014 2015 2014 2015
Return on Assets 1.7% 1.61% N/A 1.42%
Return on Equity 16% 16.59% N/A 16.90%
34

Interest Margin N/A 4.5% N/A 4.03%
Non-Interest
Expense/Gross Income
N/A 30.89% N/A 25.63%
Based on the available information, we can conclude that out of the two banks, HNB has
generated more returns on assets, but whereas, return on equity value Commercial Bank is at
the top. The asset base is high at the Commercial Bank, so that the ROA is low compared to
HNB. Since the Equity value and the profit for the year is low at HNB, the ROE value is low.
If we analyze the interest margin ratio, out of the gross income, the highest interest income is
generated from HNB. It implies that interest income is high in HNB, but if we analyze
further, it is because of the interest income: Rs. 52,615,463,000 is divided by a small gross
income value compared to Commercial Bank which is Rs. 61,153,466,000. For the
Commercial Bank the decomposition of the ratio is interest income is Rs. 66,030,456,000 and
the gross income is Rs 77,867,952,000.
From the Non-Interest Expense ratio, we can identify that Commercial Bank is more efficient
in controlling the non-interest expense relative to the gross income, compared to HNB.
Liquidity
for 2015
HNB Com B.
Liquid Assets/ Total Assets 25.09
Liquid Assets/ST Liabilities 52.71% >30%
As per the available information, we can conclude that liquid assets to total assets ratio shows
a considerable value for HNB but a good comparison cannot be made.
The ratio of liquid assets to ST liabilities for the both banks are above the minimum
requirement of 20% so that it shows the ability of both banks to meet the short-term
withdrawals of funds without facing liquidity problems.
Sensitivity Analysis
35

Risk Management Framework
One of the major issues encountered by the financial sector in present is to devise a proper
balance between risk and return. Most recent misfortunes occurred in the financial sector
have been heavily emphasized to maintain a strategic risk management practices in banking
sector.
Banking system exposes many dynamic and unpredictable circumstances while continuing its
operations due to the rapid economic development and business environmental change in
both local and global economies that provide attractive opportunities and at the same time
stressful threats and challenges.
In order to overcome those threats a bank must has a strategic mechanism and frame work
which lead to ensure the survival of the bank and the safety of the stakeholders in present
competitive and complex market. Thereby risk management is an integral part of the bank
and it associates with the decision-making process.
Banks are bound to implement optimal risk management process which is perfect of accuracy
and soundness to generate superior shareholder value by achieving appropriate tradeoff
between risk and return.
The objectives of the risk management frame work are -
1. To establish common principles, standards for the management and control of all risks and
to inform behavior across the Bank.
2. Provide a shared framework and language to improve awareness of risk management
processes.
3. To provide clear accountability and responsibility for risk management.
HNB
The Bank is also exposed to market risk through its treasury operations and to operational
risk as a result of its business activities including outsourced operations. Managing liquidity
risk is also an integral part of the Bank’s risk management framework. The Bank assesses the
level of liquidity required for its operations by looking at factors such as cash-flow
requirements for the different maturity periods, expected increases and decreases in loan
demand, volume of deposit withdrawals and type of deposits, whether institutional or retail.
36

The Bank’s Asset and Liability Management (ALM) system helps to measure the direction
and extent of the asset liability mismatch. Action is then taken to balance cash-flows
or interest rates for a particular time horizon. A Board approved funding strategy is also in
place to deal with liquidity planning under different scenarios, including crisis situations.
Risk Governance
Effective risk management begins with good governance and leadership. HNB has a well-
established risk governance framework in place with an informed and engaged Board
of Directors, supported by an experienced Corporate Management Team and Risk
Management professionals.
The Board of Directors
Sets the tone at the top by ensuring that risk management is aligned with the Bank’s strategy
and risk appetite.
The Board Integrated Risk Management Committee (BIRMC)
Responsible for the oversight of HNB’s risk management framework and assists the Board in
fulfilling its responsibilities relating to compliance and regulatory risk matters.
The Board Audit Committee (BAC)
Provides an assessment on the effectiveness of internal audit and external disclosures in line
with accounting policies and financial reporting to the Board.
Executive Management Committees
A number of Executive Management Committees each with specialized focus are in place to
support the BIRMC. The different Committees are responsible for the coordination of risk
matters for the different business areas (see Risk Governance Structure) and review the day-
to-day management of the Bank’s risk-taking activities. The Executive Management
Committees set forth specific risk instructions, supervise the Bank’s risk management
practices, approve credit applications over and up to a defined limit, and ensure adherence to
regulatory and internal risk management policies, processes and procedures. In order to
strengthen surveillance on its Group entities, the Bank has also established Subsidiary Level
Risk Management Committees and instituted a reporting framework for the individual
companies. The Risk Management Department monitors the Bank’s risk appetite and partners
with the business lines to ensure that risk management is truly ingrained in HNB’s corporate
culture.
37

Risk Governance Structure
Figure 7 Risk Government Strucute for HNB
Managing the Bank’s Risks
HNB’s risk management framework incorporates active management and monitoring of
credit, market, operational and liquidity risks. The Bank also monitors interest rate risk (in
the banking book) as well as compliance risk. Other risk areas identified and monitored are
group risk, reputation risk, IT security and business/strategy risk.
The following heat map provides an overview of the Bank’s risk profile.
38

Figure 8 HNB's Risk Profile
Commercial Bank
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
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. 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 Sub-Committee 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 ALCO meetings that convene at least once a fortnight. In addition, the
Risk Management Department carries out semi-annual Bank-wide risk assessment function
39

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
Management 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.
Bank’s Financial Risk Management Framework
Figure 9 Commercial Bank Financial Risk Management Framework
Following risk categories will be addressed in the following section for both the banks in
detail along with a small introduction to that particular risk.
 Credit Risk
 Market risk
 Liquidity risk
 Operational Risk
 Reputational risk
 Legal and Documentation Risk
Credit Risk
Risk associated with the quality of individual asset and the likelihood of default.
Credit risk is the potential variation in net income and market value of equity resulting from
this nonpayment or delayed payment.
In a bank’s losses arise from outright default due to inability or unwillingness of
customer or counterparty to meet commitments in relation to lending, trading, settlement or
other financial transactions.
40

Indicators of credit risk
Commonly every bank use following indicators to evaluate their credit risk.
 Historical loss rates on loans and investments
Gross loan losses
Net loan losses
 Expected losses in the future
Non-performing loan losses
Restructured loans
Hatton National Bank PLC
Granting loans and advance is the core business of the HNB and as such credit risk is
the bank’s most important risk. The bank face credit risk primarily from Corporate Banking,
SMEs and Retail exposure.
Credit risk indicators
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00% 7.05%
5.78%
6.73%
6.15%
4.51%
3.92% 3.66% 3.64% 3.16%
2.43%
1.85% 1.41%
2.28%
2.90%
1.95% 2.31% 1.82% 1.37% 1.43%
0.84%
Non Performing Advances 2006-2015
NPA Gross as a % of Loans and Advances
NPA Net as a% of Loans and Advances
Figure 10 Non-performing Advances
The Bank’s NPA has been on a declining trend over the past 10 years. Due to continuous
monitoring, strong recovery efforts across the network and a healthy growth in the loan
portfolio, the bank’s Gross NPA ratio declined to a low f 2.435 in 2015.
41

Managing Credit Risk
Managing the credit quality of the lending portfolio is a key area of focus at HNB. The
approach is to avoid large credit risk on a counterparty or portfolio level by applying
stringent underwriting standards combined with various tools such as credit limits, internal
rating mechanism, taking collateral, portfolio diversification, and credit insurance. In order to
manage the credit risk HNB has followed some steps.
Figure 11 Credit Risk Management Cycle
 Loan Origination and Risk Appraisal
The loan origination process includes of initial screening and credit process. The
evaluation basically focuses on the ability of borrower to meet his obligation with in
the given period.
 Loan Approval and Sanction
The bank has established guidelines for loan approvals by adopting a committee. All
members in the have equal responsibility for credit risk. Individual credit facilities
beyond the minimum level require an independent risk signatory who are not in the
respective committee.
 Credit Administration and Disbursement
Credit Administration Division in HNB administrate the HNB’s Corporate Banking
and Project Finance loan portfolios. This division independently reports to the risk
management function.
42
Credit risk
managemen
t cycle
Loan origination and risk appraisal
Loan approval and sanction
Credit administration and disbursement
Credit measurement and monitoring
Recoveries

 Credit Measurement and Monitoring
To safeguard the bank against possible credit losses, problem loans need to be identify
early. The division studies the impact and detects early warning signals pointing to
deterioration in the financial health of a borrower.
 Recoveries
The Credit Supervision and Recoveries Department manage the problem credits and
non-performing advances. This unit is responsible for all aspects of an overdue
facility, follow up of rescheduled facilities, monitoring the value of the applicable
collateral and liquidation, security of legal documents and liaising with the customer
until all recovery matters are finalized.
Internal Risk Rating Models
The bank use four credit rating models to rate its corporate clients and SMEs,
focusing an aspect of operating risk, financial risk. Nine ratings from AAA to C have been
defined for corporates and SMEs. A rating of ‘AA’ implies for example a very high credit
worthiness and very low expectation of credit risk.
Credit Risk Mitigation
The bank use a range of strategies to mitigate credit risk such as netting and set off.
Collateral and guaranties from an important part of the credit risk mitigation process.
Credit Policies
The credit policy defines the principles encompassing client selection, due diligence,
early alert reporting, tolerable levels of connection risk and portfolio monitoring. The bank’s
credit policy approved by the board plays a central and strategic real in managing daily
business activities. A monthly credit policy committee meeting chaired by the Chief
Executive Officer drives policy decisions and implementation plans.
Commercial Bank PLC
The bank considers and consolidates all elements of credit risk exposure (such as individual
obligor default risk, country and sector concentration risks) to ensure stringent credit risk
management.
How to manage risk
 Continuous monitoring process
 The determine limit for credits are continuously monitored and periodically
reviewed by the Credit Policy Committee, the Executive Integrated Risk
Management Committee and the Board Integrated Risk Management Committee.
43

 Hierarchy of approval of loans
 Individual credit proposals evaluated by the Authorizing Officers within the
hierarchy in delegated authority levels whilst ensuring a minimum of four eyes
principal when approving any lending proposal. The executive Credit Committee
(ECC) and the Board Credit Committee (BCC) are entrusted with high value
approval of facilities while the Board will be the ultimate authority for approving
facilities beyond predetermined threshold levels. The Risk Management
Department provides risk approval for individual proposals above predetermined
threshold levels
 Credit policy
 Lending Guidelines of the Bank formulated in consultation with lending units
provide expected granularity of credit assessment of collateral etc. as well as
exposures and concentration levels to various sectors. According to the Basel
requirement of facility rating and counterparty rating is adopted by the bank for
evaluation of credit proposals. This risk grading framework consists of 10 grades
of varying degrees of risk reviewed by the integrated Risk Management
Department.
 Single Borrower Limit
 By setting various concentrations limits under different criteria within the
established risk appetite framework (i.e., single borrower/group, industry sectors,
product etc.) the bank ensure that an acceptable level of risk diversification is
maintained on an ongoing basis. These limits are continuously monitored and
periodically reviewed.
 Portfolio Management
 Loan portfolio of a bank should be diversified according to the sector wise and
also regional wise. Commercial bank diversified their loan portfolio into 11
sectors to mitigate credit risk of the bank as follows,
Sector
201
5
201
4
A Agriculture and fishing 9%
11
%
B Manufacturing
14
%
13
%
C Tourism 6% 4%
D Transport 3% 3%
E Construction
12
%
10
%
F Trading 15 15
44

% %
G New economy 3% 2%
H
Financial and Business
services 8% 7%
I Infrastructure 4% 4%
J Other services
10
%
10
%
K Other customers
16
%
21
%
Figure 12 Loan Portfolio
Market risk
Market risk is the risk that changes in equity, bond and commodity prices, as well as
movements in foreign exchange rates and interest rates may adversely affect the
bank’s trading and banking books. It can be categorized mainly into three types.
 Equity and securities price risk
o HNB shows its equity portfolio outperformed in the equity market over
the last two years (2014-2015). Equity risk of trading portfolio as in
the statement is 4.29%.
o Further hikes in US interest rates may affect to decline in local equity
and bond markets since high interest seeking foreign investors are
returning to the more liquid and developed markets. Then the security
prices may go down. As an effect of this, interest rate risk is minimal
as over 70% of advances and 90% of deposits can be re priced within
one year.
o HNB shows they have affected from decline in bond prices due to
increase of interest rates.
45
A
B
C
D
E
F
G
H
I
J
K
2015
A
B
C
D
E
F
G
H
I
J
K
2014

o Commercial bank says they got an impact on profit or loss and equity
as a result of a change in market price by 10% throughout the year.
 Interest rate risk
o This is the sensitive of interest income to changes in asset yields with
sensitivity of interest expense to changes in the interest cost of
liabilities.
o According to the gap analysis of HNB shows 0.99 one month period
gap between the banks interest rate sensitive assets and interest rate
sensitive liabilities.
o Commercial bank interest rate sensitivity gap for 2014 is 64690380000
when it is for 2015 is 55380409000. It may have reduced due to the
stability of interest rates for assets and liabilities throughout the year of
2015.
 Foreign Exchange rate risk
o This arises as a result of fluctuations in the value of a financial
instrument due to changes in foreign exchange rates.
o HNB uses one day, 99% Value at Risk approach for overnight foreign
exchange positions to reflect the 99% probability that the daily loss will
not exceed the reported value at risk. According to that foreign
exchange risk shows 0.54%.
o Commercial bank regularly conducts analysis on Net Open Position
(NOP) due to possible changes in the USD/LKR exchange rate to assess
the exposure to foreign exchange risk. In 2014 NOP takes negative
US$1117 that is much good than previous year. It says they have
handled that risk.
Apart from above circumstances, followings are also affected to the market risk of HNB as
well as for Commercial bank up to certain level.
 Economy slowdown in China results lower investments from China to finance local
infrastructure developments and therefore the bank has to grant loans for that projects,
it takes about 6.4% of the lending portfolio.
 Sustained drop in commodity priced for local exports declines in export revenue for
companies involved in these sectors and that affect the loan recovering process badly.
 Further decline in gold prices may give losses on gold backed endings. The bank’s
pawning portfolio is only 3% of total advances and the impact is minimal due to
possible auctioning of gold articles when not redeemed.
46

Liquidity risk
This refers to the liquidity level of the bank. When the bank cannot generate or maintain
sufficient funds to meet its obligations on time it is identified as liquidity risk. The principal
objective in liquidity risk management is to assess the need for funds to meet such obligations
and to ensure the availability of adequate funding to fulfill those needs at the appropriate
time, under both normal and stressed conditions.
The main sources of bank’s funding are capital, core deposit from retail and commercial from
interbank money market. Usually banks maintain marketable securities to make strength their
liquidity position.
HNB
HNB uses following strategies to manage their liquidity risk
 Liquidity stress tests are carried out to assess the impact of extreme events
 A contingency funding plan to deal with a crisis situation is a part of liquidity
management process
 Approving a liquidity policy to manage liquidity on day to day basis
HNB competes its monthly liquidity gap based on realization of assets and liabilities.
Liquidity gap analysis of HNB
Figure 13 HNB Liquidity Gap Analysis
The following table shows the main liquidity ratios monitored by the Bank. Limits are
applied in order to monitor liquidity movements in assets and liabilities.
47

Figure 14 Liquidity Ratios
Commercial bank
In order to meet the principle objective in liquidity risk management, the Commercial bank
uses following strategies
 continuously analyses and monitors its liquidity profile
 Maintains adequate levels of high quality liquid assets
 Ensures access to diverse funding sources and has contingency funding agreements
with peer banks to meet any unforeseen the liquidity requirements.
There is a committee called Assets and Liability Management Committee (ALCO) to monitor
and manage the assets and liabilities of the Bank and also the overall liquidity position to
keep the Bank’s liquidity at healthy level.
The Exposure to Liquidity Risk in Commercial bank
The key measure used by the Bank for managing liquidity risk is the ratio of liquid assets to
total liabilities excluding shareholders’ funds. For this purpose, ‘liquid assets’ include cash
and cash equivalents, placements with banks and Government Securities (net). Details of the
reported ratio of liquid assets to external liabilities of the Domestic Banking Unit (DBU) and
the Off-shore Banking Centre (OBC) as at the Reporting date are as follows.
Figure 15 Exposure to Liquidity Risk
48

The Bank’s recent liquidity ratios can be shown as follows,
Figure 16 Liquidity Ratios
Figure 17 Liquidity Reserves
Operational Risk
Operational risk is the risk of losses incurring due to inadequate or failed internal processes,
systems, people or external events. Or else it is the risk of loss arising from systems failure,
human error, fraud etc.
When controls fail to operate effectively, operational risks can cause damage to reputation,
have legal or regulatory implications or lead to financial losses.
Let’s see how each bank has taken measures in mitigating the operational risk.
Commercial Bank
The Operational Risk Management Framework of the Bank has been defined under the Board
approved Operational Risk Management Policy.
49

Operational Risk is managed by establishing an appropriate internal control system that
requires a mechanism for segregation of related responsibilities within the Bank and a
detailed testing and verification of the Bank’s overall operational systems and achieving a
full harmony between internal and external systems and establishing a fully independent back
up facility for Business Continuity Planning.
Further, controls include effective segregation of duties, access, authorization and
reconciliation assessment processes such as the use of internal audit.
Hatton National Bank
The objective of the Operational Risk Management (ORM) division is to establish sound
control practices to increase the effectiveness of the Bank’s resources and minimize financial
losses. Operational risk is monitored on a regular basis and the operational risk management
policy framework is embedded in the daily activities of all employees.
Working in conjunction with business unit managers, the ORM division has developed tools
to assist in identifying, measuring, monitoring and reporting operational risk.
Risk identification techniques include highlights of the audit reports, discussion with network
management, branch visits and operational risk review meeting conducted across branches.
Key Risk Indicators
HNB has identified a number of Key Risk Indicators (KRIs) for the different business units in
order to increase transparency of operations and identify possible sources of risk to the Bank.
The information derived from these KRIs act as an early warning signal to identify a potential
event that may have harm our daily business activities and consequently have an impact on
the Bank.
A high level operational risk dashboard is prepared monthly for monitoring purposes and for
circulation to Senior Management and the Board. All branch and head office losses over a
predefined Rupee threshold are reported. Furthermore, tolerance limits for operational losses
and KRIs covering lapses in credit and general operations, cash and pawning, legal, card
centre and information systems are monitored.
The following chart shows some of the KRIs used at the Bank for the assessment of
operational risk.
50

Figure 18 Key Risk Indicators
Reputational risk
This is the risk which refers to the bank’s reputation or goodwill. The negative publicity of
the reputation of bank among the stakeholders can be identified as reputation risk. Reputation
risk makes loos of revenue of the bank.
When it comes to HNB, the bank considers the reputational risk as the consequence of a
failure to manage its key risk areas and emerging new risk areas.
HNB has taken care in addressing the cyber threats which have an impact on its business and
reputation. The bank has adopted to cyber security strategies as the industry standards.
Other than that, monitoring of system downtimes by it division and remedial actions have
been taken on real time basis. Operational risk division independently received the
complaints through several risk indicators then analyses the causes and impacts. After that
they will make recommendations for preventive actions.
Legal and Documentation Risk
Legal risk arises when the bank’s businesses are not conducted in accordance with
applicable laws, when the bank may be liable for damages to 3 rd parties when
contractual obligations may be enforced against the bank resulting from legal
proceedings.
51

 Both banks have made provisions for legal claims that are in uncertain
situations.
Documentation risk means the risk that have to bear, when there is no proper control
with essential documents of the bank regarding to transactions.
 Both banks have said that they have introduced automation system for
documentation to minimize the need of physical storage space to keep
documents and increase the accuracy.
 And also, HNB have implemented Security Repository System to centralize
the security documents of the bank.
 Through that we can say their documentation risk may be at very low levels.
52

Capital Adequacy Ratio
Capital Adequacy Ratio (CAR) is a specialized ratio that is used by banks to determine the
adequacy of their capital maintenance in relation to their risk exposures. It is the ratio of a
bank’s capital to its risk. Therefore, it is also known as Capital to Risk (weighted) Assets
Ratio. Regulation party with related to banking field requires a minimum capital adequacy
ratio in order to provide the banks the ability to absorb losses and to comply with statutory
capital requirements. This improves stability and efficiency in financial markets and protects
deposit-holders. The Basel Committee on Banking Supervision of the Bank of International
Settlements develops the rules related to capital adequacy.
Under this, two types of capital are measured. They are Tier one capital and Tier two capital.
Tier one capital is the capital that can absorb losses without a bank being required to stop its
trading, and tier two capital is the capital that can absorb losses in case of winding-up.
The CAR is calculated as follows.
In order to comply with the international standards and by considering the local funding and
liquidity requirements the Central Bank of Sri Lanka (CBSL) has required to maintain a CAR
not less than 5% with Tier one capital in relation to total risk weighted assets and a minimum
overall CAR of 10% inclusive Tier one and Tier two capital in relation to total risk weighted
assets.
When considering the CAR of HNB in 2014 its Tier one capital in relation to total risk
weighted assets was 12.15%. It indicates that the bank is in a position to absorb it losses
without the bank being required to cease its operations because it is above the requirement as
per the CBSL. However, when it comes to 2015, the ratio has been reduced up to 10.53%.
Though it still exists as per the requirement, the performance of the bank has been slightly
reduced.
The bank’s total capital in relation to risk weighted assets is 14.83% in 2014 which is above
the requirement of CBSL. During the process of winding-up, funds of depositors are given
53
CAR = Tier 1 capital +Tier 2 capital
Risk weighted assets

a higher priority than the bank’s capital, so depositors can only lose their savings if a bank
registers a loss exceeding the amount of capital it possesses. Therefore, higher the CAR of a
bank, the higher the protection to its depositors. But when moving to 2015 the ratio has
been decreased up to 12.70% which indicates that the deposits are slightly exposed to risk
because the ratio is getting closer to 10%.
When observing the CAR of Commercial Bank Tier one capital in relation to total risk
weighted assets was 13.07% in 2014. It indicates that the bank is in a good position because it
is above the requirement as per the CBSL. However, when it comes to 2015, the ratio has
been reduced up to 11.55%. It indicates that the bank’s position has slightly gone down.
The bank’s total capital in relation to risk weighted assets is 16.22% in 2014 which is above
the requirement of CBSL. Higher the CAR of a bank, the higher the protection to its
depositors. Therefore, Commercial bank gives a higher protection to its customers. But
when moving to 2015 the ratio has been reduced up to 14.28% which indicates that the
depositors are slightly exposed to risk when comparing to last year.
According to the annual reports of the two banks, when we consider about the Tier one
capital in relation to total risk weighted assets Commercial Bank is maintaining a higher
ratio when comparing to HNB. It implies that Commercial Bank is in a greater position
than HNB in both years, in absorbing its losses without the bank being required to cease its
operations.
And when we consider about the bank’s total capital in relation to risk weighted assets,
Commercial bank is maintaining a higher ratio when comparing to HNB in both years. It
indicates that Commercial Bank gives a higher the protection to its depositors than HNB.
54

Liquidity Management
Liquidity is a financial institution's capacity to meet its cash and collateral obligations without
incurring unacceptable losses. Liquidity Risk is the current and potential risk to earnings and
market value of stockholders’ equity that results from a bank’s inability to meet payment or
clearing obligations in a timely and cost-effective manner. Liquidity risk is higher when a
bank cannot anticipate new loan demand or deposit withdrawals, and does not have access to
sources of cash. It is also considered as the risk that a bank will be unable to fulfill its
contractual obligations when they are due.
This liquidity risk should be properly managed; it is known as liquidity risk management. It
involves having funds to meet financial commitments when they fall due and ensuring that
funds are available to take advantage of the opportunities when they arise.
Following are some measures that should be taken in liquidity risk management.
 Advances to Deposits ratio should be less than 80%
 Maintaining a pool of liquid assets that is greater than 20%
 Diversification of funding sources
 Availability of Credit Lines with other lenders
 Actively matching funding horizon of liabilities to liquidity of positions
 Maintenance of a stable retail deposit base
Advance to deposit ratio is calculated by dividing the advances by deposits. This ratio should
be less than 80%. When considering the Commercial Bank, this ratio is 76.69% in 2014
which indicates that its liquidity risk is properly managed because it is lesser than the limit.
This implies that the bank had necessary fund to meet its payment or clearing obligations in a
timely and cost-effective manner. But when it comes to 2015 the ratio is 81.51% which is
above 80%. It indicates that the bank is facing liquidity risk up to certain extent.
Liquidity assets as a percentage of total assets, is calculated by dividing the liquid assets by
its total assets. As per the requirement of Central Bank, this ratio should be greater than 20%.
When observing the financial reports of Commercial bank, in 2014 this ratio was 33.15%,
which was a good value and in the 2015 it has decreased up to 26.24%. Even though the
value is decreased, they are still at the safe side since the minimum requirement is covered.
When considering both these ratios, it shows contradicting results. Since these ratios are
calculated based on the given data in the notes to financial statements and some ratios are
extracted from the notes, we are not in a position to provide a good comment.
Commercial Bank
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2015 (%) 2014(%)
advances as a percentage of deposits 81.51 76.69
Liquidity assets as a percentage of total assets 26.24 33.15
HNB
Advances to deposits ratio for HNB does not indicate a good position for HNB since it is
very much higher than the minimum requirement. And the liquidity asset ratio is also not that
much powerful since in 2014 it is less than minimum requirement and in 2015 also it has
slightly increased.
Hence, HNB has to pay a considerable attention on managing liquidity risk.
2015 (%) 2014 (%)
advances as a percentage of deposits 94.54 94.50
Liquidity assets as a percentage of total assets 21.12 18.69
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Non-Performing Loans Management
Non-performing loans are the loans that are not generating any income to the bank. It can be
identified as bad and doubtful debt as referred to in section 46A of the Banking Act. For
calculating non-performing loans, all credit facilities excluding exempted credit facilities will
consider and they are classified as non-performing loan on the period basis and potential risk
basis.
Non-performing loans are loans that have defaulted where not only the capital repayment but
also interest is defaulted. The credit risk can be considered as the core risk of a bank. The
funds of depositors will be used to fund the credit portfolios of a bank. If borrowers are
defaulting banks would not be in a position to meet their obligations of depositors. Because
of that non-performing loans management is an important task to a bank. Banks have to make
provisions for non-performing loans.
We can compare by using ratios which can give an idea about non-performing loans of banks.
Mainly we can calculate 2 ratios in order to make a comparison between banks. Those two
ratios are as follows,
Non-performing loans to Total loans
This ratio explains about the credit risk of the bank. If this ratio gets high, it will indicate that
there is a credit risk.
Non-performing loans to Total loans = Non-performing loans
Total loans
Non-performing loans to Total Assets
This ratio explains about the recoverability of loans that made for borrowers. If this ratio gets
high, it will indicate that most of the loans are not recoverable.
Non-performing loans to Total Assets = Non-performing loans
Total Assets
.
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HNB
For the year of 2015, they have managed to taka the ratio down at 2.43%, which is lower than
the previous year 2014 and even lower than the industry average which is 3.2%.
They say that it is the lowest value for the NPL ratio that is been recorded over the past few
decades. And they have achieved this level because of the commitment of recovery teams at
the head office and the branches countrywide with a background of growth of loans at 25%.
These are the reasons that they have identified
for the lowest NPL ratio.
 refining the loan origination processes
 risk management along with aggressive
recovery efforts
 stringent monitoring for early warning
signals
 recovery camps
Figure 19 NPA Ratio
Commercial Bank
Since the notes to the financial statements of Commercial Bank is silent regarding the non-
performing loan management, we are not in position to discuss.
References
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Financial Statements of Hatton National Bank for the year 2015
Financial Statements of Commercial Bank for the year 2015
https://www.hnb.lk/
https://www.combank.net/
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