Together in Growth. Swarnamahal Financial Services PLC Annual Report 2011/12

Transcription

1 Together in Growth Swarnamahal Annual Report 2011/12

2 Contents Financial Highlights 2 Chairman s Message 4 Director/Chief Executive Officer s Message 8 Board of Directors 11 Senior Management Team 16 Management Discussion and Analysis 18 Financial Review 22 Sustainability Report 27 Risk Management 32 Corporate Governance 37 Annual Report of the Board of Directors on the Affairs of the Company 63 Directors Statement on Internal Control 69 Auditor s Report on Internal Control 71 Statement of Directors Responsibilities in Relation to Financial Statements 72 Chief Executive Officer s and Senior Finance Manager s Statement of Responsibility 74 Board Audit Committee Report 75 Board Integrated Risk Management Committee Report (BIRMC) 77 Board Human Resources and Remuneration Committee Report 78 Independent Auditor s Report 81 Income Statement 82 Balance Sheet 83 Statement of Changes in Equity 84 Cash Flow Statement 85 Significant Accounting Policies 86 Notes to the Financial Statements 93 Six Years at a Glance 114 Share Information 116 Glossary of Financial Terms 118 Our Network 121 Notice of Meeting 122 Form of Proxy 123 ABOUT US is a Public Limited Liability Company Incorporated in Sri Lanka 14 th January 2004, under the Companies Act No.17 of 1982, and re-registered 16 th September 2008 under the Companies Act No.7 of The Company is licensed by the Monetary Board of the Central Bank of Sri Lanka under the Finance Business Act No.42 of VISION To be the Premier Financial Services Provider in LFC market. MISSION To create superior long - term value to our shareholders, customers and employees above the industry standard. VALUES Highest standards of ethics and integrity Always do the right thing and keep commitments. Engage others to build trust and encourage strong communication. Listen and share as a team Respect Respect all through trust, courtesy and open communication Innovation and continuous improvements Anticipate customer needs and work to exceed their expectations Service Excellence Commitment to achieve the highest standard of services quality with personalized services. Learning focused Search new knowledge for innovations

3 Together in Growth Growth is never achieved singularly and it is by working shoulder to shoulder that visions are created and targets achieved and at the end of another year we have seen results. Here at, we are proud to work together towards a common goal of development and progress. regardless of differences. The teamwork displayed by our company can be summed up in a few words, We believe in each other and likewise in the potential of a company whose trust is etched in gold.

4 2 Financial Highlights 2011/ /11 Change % Financial Performance for the year (Rs. Mn) Gross Income 1, Net Profit Before Tax (PBT) Tax Expense Net Profit After Tax (PAT) Net Profit per Employee Financial Position at the year end (Rs. Mn) Total Assets 5,315 4, Pawning Advances 3,155 2, Other Loans and Advances Deposits 4,399 3, Shareholders Funds Information per Ordinary Share (Rs.) Earnings Net Asset Value Key Indicators Return on Average Shareholders Funds (%) 38.7% 24.0% Return on Average Assets(%) 5.3% 3.5% Cost to Income Ratio (%) 54.3% 65.4% Capital Adequacy Ratios Core Capital Ratio-Tier I (%) 21.1% 15.7% Total Risk weighted Capital Ratio -Tier II (%) 25.1% 21.6% Statutory Ratios Shareholders Funds to Deposits (%) 9.89% 8.47% Liquid Assets Ratio (%) 11.4% 8.47% 34.42

5 3 Gross Income 1,069 Rs. mn Net Profit (PAT) 141 Rs. mn Rs.Mn Total Assets 5,315 4, , Rs. Total Assets 5,315mn Deposits 4,399 Rs. mn Year Rs.Mn Profit Before Taxation Rs.Mn Profit After Taxation % Cost to Income Year Year Year Rs.Mn Total Deposits Rs.Mn Pawning Advances Rs.Mn Shareholders Fund ,399 3,470 1, Year ,155 2, Year Year

6 4 Chairman s Message Given your company s highly respected reputation in the gold loan services market, we will continue to sustain our growth momentum through strategic market expansion of our core business of gold loans in the ensuing year.

7 5 It gives me a great pleasure to welcome you all to the 7 th Annual General Meeting and to present the performance of your company for the financial year 2011/12, that evidences a year of commendable growth, with high returns for all stakeholders. Economic Overview Globally, financial markets remained sluggish due to rising sovereign debt problems in the European Union and increased uncertainty about the prospects of the global economy. As a result, investors adopted a cautious approach and prices of safe haven assets, such as gold, rose significantly in Domestically, 2011 was a year of growth for Sri Lanka, with the economy recording the highest post independence growth of 8.3%. Inflation remained at single digit levels with annual average inflation at 6.7%, while year-on-year inflation was 4.9% in December In the favourable economic climate, imports and credit demand continued to grow and in February 2012, the Central Bank raised interest rates and capped bank lending to 18% with an additional 5% allowed for foreign funds, to rein in possible demand fuelled inflation and to contain import related credit to safeguard national foreign exchange reserves. To further strengthen external stability, in February 2012, the Central Bank allowed greater flexibility in the exchange rate by limiting its interventions in the domestic foreign exchange market. Taxes on imported motor vehicles were raised in March 2012 to control vehicle imports and save foreign exchange. During the first quarter of 2012, despite rising concerns of an Euro zone crisis and a global slowdown, Sri Lanka s economic growth continued to remain strong. The Sri Lankan economy recorded a 7.9% growth between January and March 2012, supported by an agriculture sector growth of 11.5%, an industrial sector growth of 10.8% and services growth of 5.8%. Licensed Finance Companies (LFC) In 2011, Sri Lanka s financial systems continued to remain stable and resilient, sustained by strong domestic economic growth, despite the uncertain global financial environment. During the year, the regulatory and prudential framework of the financial sector focused on capital enhancements and improvements to corporate governance and risk management infrastructure. The performance of the non-bank financial institution sector (LFCs and specialized leasing companies) improved due to expansion of business activities. There were notable improvements in asset quality, profitability and capital adequacy. The new Finance Business Act was effected in November 2011, introducing a stronger system to regulate finance companies. In addition, LFCs were required to list on the Colombo Stock Exchange by June In 2011, the Central Bank also implemented a mandatory deposit insurance scheme under the provisions of the Monetary Law Act, to safeguard interests of small depositors and maintain public confidence in the financial system. During 2011, the total asset base of the non bank financial sector grew by 26% to Rs. 490 billion, compared with a growth of 30% in The main contributory factor in the expansion of the asset base was the growth of the accommodations portfolio. Accommodations grew by 46% to Rs. 388 billion as at end 2011, compared to a growth rate of 35% during Finance leases, hire purchases and other secured advances were the major sources of the increase in accommodations, accounting for 43%, 30% and 15%, respectively of total accommodations. Among the products, finance leasing, other secured loans and pawning, indicated high growth rates of 90%, 58% and 35%, respectively. As at September 2011, LFCs accounted for 4.1% of financial sector assets at Rs. 301 billion and 5.8% of deposits, at Rs billion. SFS Performance Your company was able to sustain a strong growth throughout the financial year 2011/12. As a reputed finance company that has had the trust and confidence of consumers for many years,

8 6 Chairman s Message Contd. compliance with the stronger governance and security process introduced by the Central Bank, through the new Finance Business Act, was easily accommodated. Despite the current negative market sentiments, we are happy to announce that the Company s share price remained buoyant throughout the year, reflecting our strong fundamentals. The Company commenced trading 26 th May 2011, and during the period 26 th May 2011 to 31 st March 2012, trade volumes reached 53,502, while the traded share volumes rose to 42.1 million, recording a turnover above Rs. 4 billion. The Market Capitalization was over Rs. 3.9 billion as at 31 st March The price increase of gold during the year resulted a higher demand for our gold related services that contributed towards the overall profit growth. The increased gold prices also strengthened our asset base, making SFS one of the most stable and secured finance companies in the country. Despite competition from 38 LFCs operating in the country, the total income of your company grew by 49% during the year under review, to reach Rs billion, compared to the income of Rs. 713 million in the previous year. As a result of this strong performance, our profit after tax more than doubled to Rs million. This strong growth is a result of the quality of services and accessibility of services offered by SFS to consumers. Our highly trained and experienced staff, seven days a week service, access points at all major cities and modern security facilities have contributed towards establishing SFS as a premier service provider, particularly in the gold loans market. The rise of interest rates in 2012, caused interest rates of fixed deposits and savings deposits to increase. This upward trend in interest rates will exert pressure on the interest rate spread and cost of borrowing. These changes did not have a significant impact during the financial year under review. However, they may affect the company performance in the new financial year. Future Outlook The country s economic growth forecast has been revised downwards from 8.0%, to 7.2%, for the year Private sector credit is also expected to contract during the year, due to the cap on bank lending and the higher cost of credit. In this environment of slow overall national economic growth, our challenge will be to retain the growth momentum sustained over the past years. However, despite the new challenges, we hope to sustain our growth momentum through strategic market expansion of our core business of gold loans and also the provision of fixed deposit services. Given the high yield, high security and high liquidity of gold loans, compared to other lending products, expansion of gold loan services will contribute towards strengthening the Company s asset base, while ensuring high returns. Given your Company s highly respected reputation in the gold loan services market and our in-house expertise in gold transactions, I am confident we will be able to sustain a strong growth in this segment during the ensuring financial year. As a part of our expansion programme, we will add five new branches to our network during the financial year 2012/13, with greater penetration in the North and East of the country, with our expertise. We will also convert a number of our pawning centres into full service branches. This will enable us to offer a full range of services, including fixed deposits, to a larger market. We also wish to notify our valued shareholders that your Company will retain the earnings of the year under review, to strengthen the Company s Tier 1 capital base and will also wish to issue debentures during the new financial year, to strengthen Tier 11 capital, to meet the Central Bank s capital adequacy requirements in line with our expansion plans. In addition, we will continue our endeavours to keep improving the quality of our services and maintain our commitment towards the training and development of our staff.

9 7 Appreciations I would like to extend my wholehearted appreciation to our former Chairperson, Dr.(Mrs) Soma Edirisinghe, for her direction and total dedication in guiding this Company since its inception. I would also like to thank the Board of Directors for their guidance in steering the Company to achieve its current performance. For their continued support and trust in the company, all our shareholders and customers, deserve my unreserved appreciation. I have no doubt that our shareholders will join me in commending the CEO, his management team and staff of SFS, for their dedication and team spirit that has resulted in the Company for achieving its current success. J. H. Edirisinghe Chairman 05 th June 2012

10 8 Director/Chief Executive Officer s Message During the Financial Year 2011/12, we continued to surge ahead in a strong growth trajectory with revenues, profits and assets, all showing commendable growth and reflecting consumer trust placed in the Company.

11 9 I am happy to announce that your Company has recorded an exceptional performance during the financial year 2011/12. The year under review reported a number of significant regulatory and policy changes that directly impacted the LFC sector and your Company. However, I am confident our strong fundamentals will continue to sustain growth in the coming year. Performance Overview In the financial year 2011/12, your Company continued to surge ahead in a strong growth trajectory with revenues, profits and assets, all showing commendable growth and reflecting consumer trust in the Company. The year also saw our asset base strengthen, with gold backed assets rising to 65% of total assets. This has made SFS one of the most stable and secured LFCs operating in the country today. Our overall income grew by 50% to reach Rs billion, compared to the income of Rs million in the financial year 2010/11. Our profit before tax grew by 126%, to reach Rs million, from Rs million during the previous financial year. Profit after tax meanwhile, more than doubled to Rs million, from Rs million in the previous year. Our asset base also expanded by Rs. 1.3 billion, to Rs. 5.3 billion from Rs. 4.0 billion. We are happy to announce that our (NPL) ratio also, indicated a reduction during the year, to 0.3% from 0.4% previously, due to our ongoing efforts to streamline debt collections. Our gold loans portfolio continued to expand by 30%, from Rs. 2.4 billion in the previous year, to Rs. 3.2 billion during the 2011/12 financial year. The growth in this segment in particular, reflects consumer confidence in the Company s expertise in gold transactions, including valuations and security facilities. It gives us a great pride to record that SFS has some of the most experienced and highly trained gold assessors in the country, providing the best standard of service for consumers. We maintain utmost integrity in all transactions, ensuring the security of gold items left in our custody, and their safe return to the rightful owners. During the year, the rising gold prices contributed towards increased demand for our gold loan services and we saw higher demand from the North and East of the country. As a result the North and East now account for one third of our total assets. Our fixed deposit portfolio increased from Rs. 3.5 billion to Rs. 4.4 billion in the financial year 2011/12. Due to the higher cost of bank credit, fixed deposits continued to remain as the main source of funding for the Company. In addition to the gold loan services, we also continued to provide credit facilities, such as Leasing and Hire Purchase and Education Loans for our customers. Due to the negative trend in the real estate market and the downturn in investor sentiments at the Colombo Stock Market, it was necessary to re-evaluate our strategies in the real estate sector and equities investments. While adequate provisioning have been made against contingencies in the property development market and share market, we are hopeful that improved investor confidence in the share market would enable us to reverse provisioning on share market investment during the new financial year, as our investments are in Blue Chips/ high potential companies. However, as an improvement in the real estate sector cannot be envisaged in the short term, new strategies will be formulated to ensure the best returns for the Company and to ensure the best interests of our shareholders. During the current financial year we did not continue the purchasing of land. Instead, we adopted a strategy of disposal of low yielding properties and re-investing the funds in higher yielding products. During the year, the Company added two new pawning centres to its network in Batticaloa and Aluthgama, thereby expanding our market coverage. The year also brought in many significant regulatory changes including the introduction of the Finance Business Act, to regulate finance companies in the country. As a Company with a strong brand name built on trust, we welcome these initiatives

12 10 Director/Chief Executive Officer s Message Contd. to improve governance of the LFC sector, as they will boost consumer confidence in the sector. As a part of these regulatory changes LFCs were also required to list on the Colombo Stock Exchange (CSE) before end June Therefore, SFS listed its Ordinary Voting Shares on the DiriSavi Board of the CSE and commenced trading activities 26 th May Future Outlook In the face of slow economic growth and credit constraints, in the financial year 2012/13, we plan to operationalize our strategic expansion plan, focussing strongly on expanding our geographic coverage of the country, with further emphasis on the North and East. In this context we hope to establish five new branches in strategic locations in the North and East and in the South. In addition, we also plan to convert some of our pawning centres into fully fledged branch offices enabling us to offer our full range of services to a wider customer base. Due to higher credit cost and increased vehicle import taxes, we anticipate lower demand for vehicle hire purchase and leasing services. In addition, securitised credit from banks, for finance companies, has also slowed down due to the cap on bank lending. However we plan to meet our funding targets by floating Debentures and mobilising more Fixed Deposits. However, in an environment of rising inflationary pressures and higher requirements for credit, we anticipate higher demand for gold loans to be sustained. In the face of rising interest rates, the fixed deposit segment too, can be expected to remain strong. Therefore, in the new financial year, we will continue to focus strongly on growing our fixed deposit and gold loan portfolios. Our geographic expansion will be strategically linked with our gold loan and fixed deposit service expansion. We will also continue to focus on skills development of our team and upgrading of technology, to facilitate this process. We are confident our market expansion plan for the year 2012/13 will contribute significantly towards reaching our goal of being ranked among the top 10 companies in the LFC sector, in terms of profitability, over the next two years. Appreciations On behalf of the shareholders and employees, I extend my warm appreciation to our former Chairperson, Dr (Mrs) Soma Edirisinghe for her untiring efforts in guiding the Company to its present position. I also extend my gratitude to the Chairman and my colleagues on the Board, for their active interest in the Company and their strategic guidance. Our shareholders, providers of Credit Lines and depositors deserve my gratitude for the confidence they continue to place in us. I also thank our borrowing customers for their patronage and appreciation of our services. I firmly believe that our success is due to the hard work and dedication of our team of employees. Our service quality and the quality of our team of personnel, are what differentiates SFS from the competitors in the industry, consolidating the Company s reputation for trust, reliability and security. Therefore, I extend a warm thank to our team SFS for its contribution towards the success of our company. S. M. Ganegoda Director/Chief Executive Officer 05 th June 2012

13 11 Board of Directors Standing from Left to right : 1. Mr. J. H. Edirisinghe 2. Mr. N. P. Edirisinghe 3. Mrs. A. D. Edirisinghe

14 12 Board of Directors Contd. Standing from Left to right : 4. Mr. A. S.Edirisinghe 5. Mr. D. S. Abeyratna 6. Mr. S.M. Ganegoda

15 13 Standing from Left to right : 7. Mr. J.F.G. De Silva 8. Mr. S. A. Weerasinha 9. Mr. N.G. M. De Silva

16 14 Board of Directors Contd. 1. Mr. J. H. Edirisinghe Chairman Managing Director of EAP Edirisinghe group of companies, he counts over 25 years of extensive experience in the fields of Gold, Jewellery, Finance, Electronic Media and Management. 2. Mr. N. P. Edirisinghe Executive Director Director of EAP Edirisinghe group of companies, he has an expert knowledge in Gold and other precious metals and stones and counts over 20 years of extensive experience in the fields of Gold, Information Technology, Finance and Management. 3. Mrs. A. D. Edirisinghe Executive Director Director of EAP Edirisinghe group of companies, she counts over 20 years of experience in the fields of Management and Finance. 4. Mr. A. S.Edirisinghe Executive Director Director of EAP Edirisinghe group of companies, he is a Finalist of the Chartered Institute of Management Accountants (UK) and a Member of the Film Association. He counts for over 20 years of experience in the fields of Film Industry, Gold, Information Technology and Finance. 5. Mr. D. S. Abeyratna Independent Non-Executive Director PhD (UH-USA), FCA (SL), FCMA (SL), FCMA (UK), CMA (AUS.) He counts over 40 years of experience in the fields of Finance and Audit and a Fellow Member of the Institute of Chartered Accountants of Sri Lanka, Fellow Member of the Institute of Management Accountants of UK, Member of Certified Management Accountants of Australia. He also a Fellow Member of Certified Management Accountants of Sri Lanka and obtained a Doctorate in philosophy, from the University of Honolulu USA. Partner: AbeyRatna & Co., Chartered Accountant, an associate of AGN International Limited UK and is the 04 th largest Accounting association in the world. AGN is represented in102 countries. Chairman: West Asia and African region of AGN. Director: AGN International Board, UK, Navaloka Hospitals PLC, East West Properties PLC, Eastern Brokers Ltd. 6. Mr. S.M. Ganegoda Director/Chief Executive Officer ACA, B.B.Mgt. (Acc), ASCMA He counts over 15 years of experience in the fields of Finance and Audit and holds the Business Management Degree from the University of Kelaniya and is an Associate Member of the Institute of Chartered Accountants of Sri Lanka and Society of Certified Management Accountants of Sri Lanka. 7. Mr. J.F.G. De Silva Independent Non-Executive Director BSc., FCIB (UK) He counts over 40 years experience in the banking and financial sector and is a Fellow Member of the Chartered Institute of Bankers (UK) and holds a Bachelor of Science Degree, University of Ceylon, Peradeniya. He is a professional banker, primarily served at Bank of Ceylon and retired as the Senior Deputy General Manager having also been its Country Manager in UK (1996 to 2000). He also was the Managing Director/CEO of People s Merchant Bank PLC from May 2003 to September He has held Directorships at the subsidiaries of Bank of Ceylon namely Ceybank Securities Ltd, Ceylease Financial Services Ltd, BOC Travels Ltd and Nepal Bank of Ceylon Ltd.

17 15 8. Mr. S. A. Weerasinha Independent Non-Executive Director He is a professional banker having over 25 years of banking experience at People s Bank. He joined the People s Bank as a Senior Finance Officer in 1979 and retired from the Bank as the Deputy General Manager Human Resources in December He was the General Manger of State Mortgage and Investment Bank from November 2006 to November He has held Directorships at the Board of Uva Development Bank and Ruhunu Venture Capital Company. 9. Mr. N.G. M. De Silva Non-Executive Director FCA (SL), MBA (SRI.J PURA), FCMA (SL), CMA (Aus) He counts over 25 years of experience in the field of Finance & holds a Master s Degree in Business Administration (MBA) from the University of Sri Jayawardenapura. He is a Fellow Member of the Institute of Chartered Accountants of Sri Lanka and Society of Certified Management Accountants of Australia.

18 16 Senior Management Team Mr. S.M. Ganegoda Director/Chief Executive Officer ACA, B.B.Mgt. (Acc), ASCMA He counts over 15 years of experience in the fields of Finance and Audit and holds the Business Management Degree from the University of Kelaniya and is an Associate Member of the Institute of Chartered Accountants of Sri Lanka and Society of Certified Management Accountants of Sri Lanka. 2. Mr. Dhanuka Perera Senior Manager - Pawning & Gold Sales He counts over 10 years of experience in the fields of Pawning and Gold Sales and holds a Diploma in Business Management from JMC.

19 17 3. Mr. R.M.G. Ratnayake Senior Manager Finance He counts over 08 years of experience in Financial Sector and holds the Degree of B.Sc.Accountancy & Financial Management (Special), from the University of Sri Jayawardenapura. Diploma in Treasury Management, Institute of Bankers of Sri Lanka. 8. Mr. R Harendran Manager Internal Audit He counts over 05 years of experience in the fields of audit and assurance. He holds the Bachelor of Business Administration (Special Finance Management) Degree from the University of Colombo and is an Associate Member of the Institute of Chartered Accountants of Sri Lanka. He counts over 04 years of experience at Ernst and Young (E&Y) Chartered Accountants. 4. Mr. George Samantha Senior Manager Corporate Relations He counts over 08 years of experience in the fields of Banking and Finance and holds the B.Sc Marketing Management (Special) Hons. Degree, from the University of Sri Jayawardenapura and is an Associate Member of Sri Lanka Institute of Marketing (AMSLIM). 9. Mr. Samith Ganepola Manager - IT He counts over 05 years of experience in the field of Information Technology and holds the B.Sc Information Technology (Special) Hons. Degree from the Sri Lanka Institute of Information Technology. 5. Mr. Mahesha Withanawasam Manager Branch Operations He counts over 09 years of experience in the fields of Accounting and Finance. He holds the B.Sc. Accountancy & Financial Management (Special) Degree from the University of Sri Jayawardenapura. 6. Mrs. Subhani Edirisinghe Manager - Deposit Mobilizations She counts over 11 years of experience in the field of deposit mobilization. She holds the B.Sc Business Administration(Marketing Special) Degree from the University of Sri Jayawardenapura. 7. Mr. Newton Fernando Manager Credit He counts over 13 years of experience in the field of Credit and holds the B.Sc Business Administration (Special) Degree from the University of Sri Jayawardenapura.

20 18 Management Discussion and Analysis Overview We are happy to announce that our Company was able to sustain its growth momentum during the financial year 2011/12 to show commendable growth in revenues, profits and assets. (SFS), is a public limited liability Company, incorporated 14 th January 2004 in Colombo, under the Companies Act No 17 of 1982 and re-registered 16 th September 2008 under the Companies Act No.7 of The Company is licensed by the Monetary Board of the Central Bank of Sri Lanka under the Finance Business Act No.42 of 2011 and listed on the DiriSavi Board of the Colombo Stock Exchange. SFS is one of the fastest growing finance companies in the non bank financial services sector of Sri Lanka, with a highly trained, experienced staff. The Company provides a wide array of financial services for both corporate and individual customers. These include fixed deposits, pawning and gold loan services, leasing and hire purchase, term loans and savings and minors savings accounts. Operating Environment Plagued by the Euro area sovereign debt crisis, slow global economic recovery and geopolitical uncertainties in some oil producing Middle Eastern and North African countries, the global economy grew at the modest rate of 3.9% in 2011, according to the IMF, and is projected to slow down further to 3.5% in Despite the sluggish global economy, Sri Lanka recorded an impressive 8.3% GDP growth in 2011, with exports growing by 22% and imports growing by 51%. In the first quarter of 2012, the Sri Lankan economy recorded a 7.9% growth supported by an agriculture sector growth of 11.5%, an industrial sector growth of 10.8% and services growth of 5.8%. In the Licensed Finance Business sector in Sri Lanka, comprised of 39 LFCs competing directly in the financial services market of the country. To differentiate our services, and to gain an edge over the competition, we continued to invest in our core expertise of gold services and enhanced our customer care services to ensure best value for consumers at our 17 branch offices and gold loan service centres. In November 2011, the Finance Companies Act was replaced by the Finance Business Act, to regulate finance companies. The new law introduced stronger measures to prevent unauthorized deposit-taking, while improving the regulation of finance companies. Unauthorised finance businesses and deposit-taking are targeted through several measures. These include, widening the definition of deposits to cover a broader range of fund mobilisation activities and strengthening the powers of the Central Bank to investigate unauthorised entities. The regulatory framework for Licensed Finance Companies (LFC) was also upgraded with enhanced prudential, reporting and compliance requirements. In addition, it has been made mandatory for any licensed finance company to have the word finance, financing or financial, as part of its name, to easily identify a finance company by its name. Other institutions have been prohibited from using the word finance financing or financial or any of its derivatives, or its transliterations or their equivalent, in any other language, in their company name or description, without the prior written approval of the Monetary Board. To improve governance standards of finance companies and to broad-base ownership, LFCs were required to list on the Colombo Stock Exchange by June The public listing is also expected to facilitate capital augmentation of LFCs. The minimum capital requirement for non bank financial institutes is being enhanced gradually, to facilitate business expansion in a sustainable manner. As a result, the core capital requirement of LFCs, which is currently Rs. 200 million, has been increased to Rs. 300 million, by 2013, and Rs. 400 million by During the year, the Central Bank introduced a mandatory deposit insurance scheme to safeguard interests of small depositors and strengthen public confidence in the financial system. All licensed banks and LFCs are members of the scheme, and a premium on eligible deposits, ranging from 0.10 % to 0.15%, is levied on a monthly/quarterly basis. The premium is credited to a Deposit Insurance Fund, operated and managed by a separate unit of the Central Bank. Depositors will be compensated through this scheme if required.

21 19 A number of key national policy changes were introduced during the financial year 2011/12, that impacted on our overall operating environment. The cap on bank lending in February 2012 introduced constraints to private sector credit. Higher vehicle import taxes resulted in increased vehicle prices and rising cost of leasing and hire purchase. However, as these developments occurred during the latter part of the financial year 2011/12, their impact will be felt more significantly in the new financial year. The Central Bank s decision to limit its interventions in the foreign exchange market resulted in the rupee depreciating against the US dollar. This caused gold prices to increase in the Sri Lankan market, and in turn, generated higher demand for gold loans and also encouraged customers to redeem their gold articles without defaulting. This situation therefore, was favorable for SFS and the year saw strong growth in our gold services. The increased gold prices also strengthened our asset base. Nearly 65% of our asset base is currently backed by gold, making SFS one of the most stable and secured financial service providers in the country. In an operating environment of rising interest rates and inflationary pressures, the expansion of credit assets can be expected to slow down in the new financial year, while also increasing the risk of asset quality. The industry will also have to preserve its profit margins in the face of rising interest rates and higher cost of funding. Principal Activities The Company s principal lines of business are broadly classified under two categories: Lending products and borrowing products. Lending products include pawning and gold loans, leasing, hire purchase and term loans, while borrowing products include fixed deposits and savings accounts. Pawning and Gold Loans We focused strongly on expanding our market share of the pawning and gold loans sector during the year, due to the products high yield, high security and high liquidity, compared to other lending products. Currently pawning and gold loans are our main lending product, as pawning advances are a low risk lending instrument with short maturity periods and high collaterals. During the year we continued to expand our pawning portfolio by offering attractive loans at competitive interest rates to customers. The rising world market prices of gold strengthened our gold portfolio in Though the rate of appreciation of world gold prices declined in the first quarter of 2012, it had no adverse effect on the value of our gold portfolio due to depreciation of Sri Lankan rupee. However, to mitigate risks in the gold segment, we have maintained a loan to value ratio of 75% on our gold lending. Our gold assessors, who have years of experience in the gold market, are a strong asset to the Company in expanding our gold services, by ensuring quick and accurate assessments during gold transactions. This expertise has contributed towards building consumer confidence in the Company and helped to reduce assessment risks. We have ensured easy access to our gold services by locating our gold loan service centres in all major cities and by keeping our gold loan service centres open on all seven days of the week. During the year, we also opened two new pawning centres in Batticaloa and Aluthgama. We have invested in modern security measures for the safety of all gold stocks in our custody. During the year, our pawning portfolio, which amounted to Rs. 2,434 million as at 31 st March 2011, grew by 30% to reach Rs. 3,155 million by 31 st March The interest income from pawning recorded a significant growth of 69% from Rs. 542 million in 2010/11 to Rs. 917 million during the financial year 2011/12. The Company has already identified new strategic locations to open 5 new branches with particular emphasis on the North and East. The North and East are strong emerging markets in the gold services sector with growing demand for gold services from our existing branches in Vavunia, Jaffna, Batticaloa and Trincomalee. These areas already account for

22 20 Management Discussion and Analysis Contd. nearly one third of our total assets. Supported by our expansion in the North and East, we hope to augment our gold advances portfolio to Rs.5.0 billion by the end of the financial year 2012/13. Leasing, Hire Purchase and Term Loans Our leasing, hire purchase and term loans are designed to suit the requirements of our different customers with competitive interest rates and personalized, efficient support services. The Company s lease and hire purchase portfolio stood as Rs. 290 million as at 31 st March Higher vehicle prices due to increased vehicle import taxes and rupee depreciation, coupled with rising interest rates, have resulted in rising leasing and hire purchase costs. This situation is expected to dampen the demand for leasing and hire purchase of vehicles in the coming year. Fixed Deposits Fixed deposits were the main source of funding for the Company during the year. Reflecting consumer confidence in the Company and supported by our flexible customer care services, this segment showed a growth of 26% from Rs. 3.4 billion as at 31 st March 2011, to Rs. 4.3 billion by 31 st March Due to rising cost of bank credit, fixed deposits will continue to be the most cost effective source of funding for the Company in the new financial year. Therefore, we hope to expand our fixed deposits segment by leveraging the existing customer confidence in the Company and by extending our branch network to new geographic locations. In addition, we intend floating a substantial debenture to augment our Tier 2 capital fairly soon. Our expansion plans will be supported by staff training, to provide exceptional and personalised customer care services. Our customer care services are a significant factor differentiating SFS in the LFC sector in Sri Lanka. Unlike many LFCs, at SFS, we do not penalise customers for early withdrawal of fixed deposits and our customers are not required to give prior notice for pre-mature withdrawals of fixed deposits. As a Company with the customer s best interest at heart, we facilitate immediate withdrawal of fixed deposits by customers, even in the case of pre-mature withdrawals. This strong customer orientation has resulted in higher customer satisfaction and repeat customer visits to the Company. We intend to enhance our fixed deposits portfolio to Rs.5.5 billion by the end of the financial year 2012/13. Savings Accounts Our savings products are specially designed for corporate and individual customers, including children. SFS SAVER This product is exclusively designed for depositors who opt to deposit in large volumes. Clients earn higher interest rates on savings, depending on the deposit amount. NORMAL SAVINGS ACCOUNT This account provides competitive interest rates for savings regardless of the volume of savings. MINOR S SAVINGS ACCOUNT The Kumara Kumari savings accounts are designed for children, with an attractive interest rate to encourage the savings habit among children. Investments in Shares During the year, the Company continued to invest in equities with strong fundamentals, mainly focussing on Blue Chips / high yield potential companies, trading in the Colombo Share Market. Despite their strong potential, due to the downturn experienced by the Colombo Stock Market, our equities portfolio has generated negative returns during the year. While our investment portfolio totaled Rs. 5.7 million, the market value reflected, was Rs.3.9 million, as at 31 st March As such, adequate provisioning has been made as impairment in the financial accounts of the year 2011/12. However, we are

23 21 confident of renewed investor confidence in the Stock Market reversing the downtrend and our share investments generating improved returns during the new financial year. Investments in the Property Market The real estate sector in Sri Lanka experienced a downturn during the year under review, prompting us to reconsider our strategies in this sector. Therefore, during the year, we did not expand our investments in this sector and instead, adopted a strategy of disposing our property portfolio to mitigate losses in the sector. These incomes have been re-invested in more lucrative products. In addition, we have made provisioning for losses in this sector in the profit and loss accounts of the financial year under review. We will continue to monitor this segment closely in the new financial year, for any potential opportunities. Human Resources We believe that our team of employees are our most valuable asset and we are committed towards their development and growth, in parallel with the growth of the Company. As such, we provide regular training for our employees to upgrade their skills and to equip them with the skills required to perform their duties, while fulfilling their own goals and ambitions. We also focus on attracting and retaining the best talent. In the provision of gold services in particular, our experienced and well trained staff have directly contributed towards customer confidence and trust in the Company. This in-house pool of expertise has also helped to reduce risks associated with gold transactions, through accurate assessments of the value of gold items deposited with the company. As at March 31, 2012, our total staff strength was 207 persons. Information Technology The Company is equipped with a state-of the- art IT system. All branches and pawning centres island wide are electronically linked, enabling real time transactions through 365 days of the year. The system enables faster service delivery and accuracy, enhancing the overall quality of our customer care. The Company has also implemented stringent security procedures to mitigate operational risk. Future Outlook A number of challenges have emerged in the new financial year. The increased cost of vehicles and rising cost of credit, is expected to slow down the growth of the vehicle leasing and hire purchase market. We also anticipate restrictions in bank funding, due to higher cost of credit and the cap on bank lending. However, we hope to address these challenges and sustain growth momentum in the coming year, by re-aligning our operational and marketing strategies. Given the lower growth potential in the leasing and hire purchase sector, and rising cost of funding, during the new financial year, we hope to focus on expanding our fixed deposit and gold loan services portfolios. To achieve our objective, we are planning to expand our branch network to new geographic locations and also increase our service coverage. We plan on adding five new branches, mainly focussed in the emerging markets of the North and East, while also increasing our coverage in the South. This move will increase our total number of branches and pawning centres to 22, from the current 17. In addition, we propose to expand our service coverage to a wider geographic area, by converting some of our existing pawning centres into branches. Currently out of our 17 service points, 10 are dedicated pawning centres. We hope to convert some of these pawning centres, located in strategic growth areas, into full service branches, offering the full range of our services to a larger segment of customers. We are confident that our market expansion programme will contribute significantly towards sustaining our growth momentum in the coming financial year and that our medium term goal of being ranked among the top 10 companies in the LFC sector, in terms of profitability, will be achieved over the next two years.

24 22 Financial review Profitability Despite a number of key policy changes that affected the company, SFS recorded a strong performance during the financial year 2011/12. We are happy to announce that our overall income grew by 50% to reach Rs billion, compared to the income of Rs million in 2010/11. Our before tax profit surged by 126%, to Rs million, from Rs million during the previous financial year. Profit after tax meanwhile, more than doubled to Rs million in the financial year 2011/12, from Rs million in the previous year. Rs.Mn Profitability F.Y. Gross Income PBT PAT Total Assets The total asset base of the Company grew from Rs. 4 billion to Rs. 5.3 billion, an increase of Rs. 1.3 billion. This strong growth in assets was mainly driven by further enhancement of our gold loan advances and gold stocks. Gold loan advances grew by 29% to reach Rs. 3.2 billion, from Rs. 2.4 billion in the previous year. In addition, our investments in government securities increased from Rs million to Rs million during the year, also boosting our asset base. Rs.Mn Growth of Total Assets Fixed assets (PPE) Other Receivables Other Trading Stock Other Loans & Advances Pawning Gold Jewellery Other Investments Government Securities Cash and cash equivalents F.Y.

25 Interest Income Our interest income increased by Rs million, which is a growth of 50%, to Rs billion during the year, from Rs million in 2010 / 11. The main contributor to this growth was gold loans. Interest income from gold loans increased by 69%, from Rs million during the previous financial year, to Rs million during the year under review. Interest income from Treasury Bills too, increased by 54% to Rs million, from Rs million. Rs.Mn 1,200 1, Interest Income F.Y. Interest on other Investment Interest on Gvt.Securities Interest on other Loan Interest on Pawn Broking Interest Expenses Interest expenses showed an increase of 38% during the year, from Rs million in 2010/11, to Rs million. This rise in expenses was mainly driven by the growth in interest payments for deposits. Interest payments increased by 38% from Rs million in the financial year 2010/11 to Rs million in 2011/12. Rs.Mn Interest Expense F.Y. Interest on other Borrowings Interest on Customer Deposit

26 24 Financial review Contd Operating Expenses Operating expenses during the year increased by 34% to Rs million, from Rs million in the previous financial year. This was mainly due to our geographical expansion programme that added two additional pawning centres to our network, taking the total number of customer contact points to 17 from 15 in the previous financial year. Our administrative expenses rose from Rs million to Rs million. Personnel expenses too, increased from Rs. 63 million to Rs million. Personnel Expenses Operating Expense Gratuity Provision Premises, Equipment & Establishment Exp. Loan Loss provision Other Administrative Expenses Financial & Other Expenses (1) Rs.Mn Total Liabilities Total liabilities of the Company increased by 29%, from Rs. 3.7 billion, in the financial year 2010/11, to Rs. 4.8 billion, in 2011/12. This augmentation of liabilities was driven by the increase in customer deposits, interest payable and a sharp increase in income tax payable. Customer deposits increased from Rs. 3.5 billion, to Rs. 4.4 billion. The interest payable, increased to Rs million from Rs million. Meanwhile, income tax payable increased by 702%, from Rs. 5.5 million in the previous year to Rs million in the financial year 2011/12. In addition, our Loans and borrowings stood at Rs million by the end of the financial year. However, the company was able to contain bank overdrafts to Rs million from Rs million in the previous financial year, while other liabilities were reduced from Rs. 8.9 million in the previous financial year, to Rs. 6.9 million. Rs.Mn Growth in Liabilities F.Y. Other Liabilities Other Borrowings Debentures Retirement Benefit Tax Payable Interest Payable Customer Deposit Bank OverDraft

27 25 Deposit Base Our customer deposit base comprises of fixed deposits and different categories of savings deposits targeted at individuals, businesses and children. During the financial year, our deposits base grew by 26%, from Rs. 3.5 billion to Rs. 4.4 billion, mainly due to rising demand for fixed deposits. Total Capital and Reserves Our shareholders funds grew to Rs million during the financial year 2011/12, from Rs million in the previous year, with retained earnings rising from Rs million to Rs million. Our statutory reserves too, increased to Rs. 45 million, from Rs million in the previous year. As per the Special Resolution passed at the Extraordinary General Meeting (EGM) held 27 th March, 2012, it was resolved that each of the issued and subscribed 25,000,007 Ordinary Voting shares be sub - divided in to 20 (twenty) Ordinary Voting shares without any increase in resource. As a result, the number of Ordinary Voting shares, that stood at 25,000,007 as at 01 st April 2011, increased to 500,000,140, as at 31 st March 2012 and the issued share capital of the company remained unchanged at Rs. 250 million. Rs.Mn Retained Earnings Investment Fund Statutory Reserve Stated Capital Fixed & Saving Deposits 1, , , Year Fixed Deposit Saving Deposit 3, ,399 Shareholders Fund Rs.Mn Taxation During the financial year, the VAT payments on financial services increased to Rs million from Rs. 15 million in the previous year. Income tax expenses of the Company increased from Rs million in the financial year 2010/11 to Rs million. As a result, our financial VAT and Income Tax liabilities increased from Rs. 49 million in the financial year 2010/11 to Rs. 106 million during the financial year 2011/

28 26 Financial review Contd Profitability Ratios The Company s Return on Assets (ROA) increased from 3.5% to 5.3% from the previous financial year showing growth in profitability against the asset base. The Return on Equity, which shows profitability against each rupee of shareholder equity improved from 24% in 2010/11 to 38.7% during the financial year 2011/12. Capital Adequacy The capital adequacy ratio increased from 15.7% in 2010/11 to 21.1% during the financial year 2011/12. The total risk weighted capital ratio was also strengthened to 25.1% from 21.6% in the previous year. Net Interest Margin & Spread Ratio 20% 16% % % Net Interest Margin and Net Interest Spread The Net Interest Margin increased from 13.8% in the previous financial year to 14.9% in the financial year 2011/12, while the Company s Net Interest Spread increased from 15.6% to 16.7%. 4% 0% F.Y. Net Interest Margin Net Interest Spread NPL (%) Asset Quality and Provisioning for Loan Losses The Non Performing Loans (NPL) ratio declined from 0.4% in the previous year to 0.3% during the financial year 2011/12 due to the implementation of improved collection procedures. Ratio F.Y.

29 27 Sustainability Report We view sustainability as a long term, strategic process that encompasses social, economic and environmental considerations, while we pursue our business objectives. Therefore, while striving to achieve our corporate objectives, we fully appreciate the importance of being a good corporate citizen and are committed to deliver sustainable value to all our stakeholders. Our Approach to Sustainability Our approach to sustainability revolves on adding value to all our stakeholders by fostering an excellent team sprit among our staff by making them a part of our success and by ensuring equitable returns to our other stakeholders, while consciously reducing environmental impacts from our operations. Our efforts towards sustainability cover a range of stakeholders; Employees: We invest in fostering an excellent team spirit, providing a rewarding, diverse and inclusive workplace. Customers: We believe in providing a superior service that delights our customers. Shareholders : We conduct our business operations with a view to maximize shareholder wealth. Community: We support communities by providing assistance for the quality of life improvement of disadvantaged persons. Suppliers: We work with suppliers to improve their social and environmental performance. We comply with all labour laws of the country and offer a competitive remuneration package to all our employees in line with the industry standards, based on experience, performance and qualifications. In addition, we provide a number of other facilities and rewards aimed at motivating our employees. These include fuel allowances, incentives to employees who achieve their targets, loans for employees at concessionary rates and bonuses twice a year. Further, we maintain a retirement gratuity scheme and a health insurance scheme for our employees. Recruitments During the year under review, emphasis was placed on the recruitment of Tamil conversant personnel, to support our expansion in the North and East, and to facilitate better customer care for our customers from those parts of the country. Therefore, during the year, 25 personnel conversant in Tamil, were recruited from the areas of Hatton, Jaffna, Vavuniya and Batticaloa. These new recruits have been systematically inducted into the Company and have been exposed to the required training, to maintain the high standard of our service to our customers. In addition, we provided on-the-job training opportunities for university students who require corporate exposure, with an attractive allowance during the training period. We also provided the opportunity for those who successfully completed their training period, to join our company and advance in their careers. Employee Responsibility We are an equal opportunity employer and as such we provide opportunities for employment, development and growth with no discrimination.

30 28 Sustainability Report Contd. Analysis of Staff With the growth of the Company, our employee strength has also grown. As at 31 st March 2012, our employee strength stood at 207 persons. Staff Gender Ratio Age Analysis 13% Service at SFS 9% Provincial Distribution of Staff 2% 5% 13% 31% 69% 11% 33% 43% 25% 19% 47% 7% 1% 3% 9% 8% 15% 45% Male Female Over 35 Over 5 years Below 1 Western Central Eastern Northern North Central Sabaragamuwa Southern Uva Wayamba Training and Development We believe employees are an asset and as such, we invest in training and development of our employees on a regular basis. Training programs were conducted using internal and external resource personnel in order to develop technical skills of our employees covering both front and back office activities. On the job training is provided for each category of new employees. Employee Profitability As indicated below, the net profit per employee increased by 109% year on year, from Rs 0.57 million in 2010/11 to Rs 1.19 million in 2011/12. Net profit per employee before taxation Rs.Mn During the year under review, in addition to ongoing training programmes we conducted a special training for the employees to develop their leadership skills and communication skills , , Year

31 29 Performance Evaluation and Rewards We believe in fostering a performance oriented culture, to motivate our employees, by acknowledging and rewarding their efforts. The fifth annual staff get together held at the Jaic Hilton, Colombo 02, 03 rd December 2011 proved a grand success. All employees face annual appraisals, against set goals. Rewards and increments are based on the outcome of the appraisals. We also offer job rotation and career path planning for personal growth and development of our employees. Work Life Balance We believe in maintaining a work life balance for a positive attitude and optimum performance of our employees. As such, while ensuring employment related facilities and support systems, we also provide opportunities for our employees to build team spirit and friendships among colleagues. During the year, we conducted the fifth annual Avurudu Festival, 15 th May This was a wonderful opportunity for all staff grades to have fun and re-establish contacts Photo one above is a scene from the festival. Photos 2 and 3 above depict two pictures of the function.

32 30 Sustainability Report Contd. In appreciation of service, a special awards and recognition ceremony was held for employees who completed 05 years of service at SFS. Shareholder Responsibility We provide many opportunities for our valued key shareholders to contribute suggestions and recommendations to the management and to discuss company strategies and implementation. We ensure prompt communications with our shareholders by presenting the financial reports and disclosing other relevant information in a timely manner. Our shareholders wealth grew by Rs. 141 million (48%) to Rs. 435 million, as at 31 st March 2012, from Rs.294 million on 31 st March Compliance with Regulations The Company has complied with regulatory requirements of relevant authorities. Environmental Responsibility We believe awakening an environmental consciousness is vital for sustainability in the current age of climatic change and extreme weather patterns, experienced not only in Sri Lanka but across the globe. Therefore, we believe in conducting our business activities while making a conscious effort to minimize adverse impacts on the natural environment. In this context we have invested in a number of sustainable initiatives for environmental conservation. To reduce energy consumption, CFL bulbs have been introduced at all our branch offices and our head office We limit the use of air conditioners during office hours to reduce electricity consumption. We practice separating recycled paper, polyphone and organic waste in separate bins to ensure methodical garbage disposal. Customer Responsibility We have developed a Customer Service Action Plan to enhance our service delivery and to ensure customer satisfaction in our services. Customer feedback is ensured through year round engagements with management, marketing and front office staff in the form of promotional visits, direct mails, calls and personal visits. Community Responsibility We are committed to uplift our communities where ever we operate and conduct a number of programmes to assist different community groups. An ongoing programme at SFS is to contribute towards the the Punarjeewa Dr. Soma Edirisinghe Fund, which has been set up for the highly commendable purpose of raising funds to assist heart patients faced with financial difficulties in undergoing heart surgery. Our staff raised over Rs.500, 000/= for the Punarjeewa fund during the year through the sale of Punarjeeva bands. They also participated in the fund raiser Walk for Heart Work organised by Punarjeewa Fund, 26 th February 2012 to raise funds for heart patients. Reduce, Reuse, Recycle We have a policy of recycling and reusing waste paper and envelopes within the organization, wherever possible. Continuous awareness programs are conducted to reduce printing of s and unnecessary documents and to encourage the use of s and electronic documents instead of printed matter.

33 31 Over 30 SFS employees donated blood at the Janasarana Foundation s blood donation campaign, held 25 th June 2011, at the Thilakarathnaramaya Temple, Borella Photos 1 and 2 above depict staff participation in the fund raiser. 4 Photos 3 and 4 above show the blood donation in progress.