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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » LOLC weathers tough year with highest-ever profits

LOLC weathers tough year with highest-ever profits

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Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics
LOLC Group posted yet another year of healthy growth in profitability recording Rs. 10.3 b profit before tax, a 24% year on year growth. Profit after tax for the year was Rs. 8.9 b, a 27% increase over last year which was Rs. 7 b.
LOLC weathers tough year with highest-ever profits Hamper-LOLC-Group-Managing-Director-and-CEO-Kapila-Jayawardena

LOLC Group’s superior performance comes amidst a challenging environment where its core business of financial services faced interest rate volatility, increased taxes on motor vehicles, lower liquidity in the market and a general credit squeeze.
Despite these challenges, financial services remained dominant in profit contribution, with 72% of the profits amounting to Rs. 7.4 b, coming from this sector further reducing the dependency on other sectors in the Group. Net profit attributable to equity holders increased by 66% to Rs. 6.37 billion.
The total net receivables of the financial services sector increased to Rs. 80 b, a solid growth in the book of advances (portfolio growth) a 38% growth compared with the previous year’s book of Rs. 58 b.
This is a result of the Group’s lending strategy to reach the SME and micro sectors via a strong presence in all regions of the country.
Lanka ORIX Finance PLC (LOFC) closed the year with a deposit base of Rs. 25 b, consisting of both savings and fixed deposits. The net inflow for the year was Rs. 8 b, a 44% growth over last year’s deposit base.
LOFC is one of the largest registered finance companies in the country and the inflow recorded during the year is a clear demonstration of the continued public confidence in the company.
The Group’s remarkable performance is achieved despite the marked to market losses of Rs 1.5 b on the trading equity portfolio due to the downturn of the stock market.
The Group’s total assets as at the year-end was a strong Rs. 146 b compared with previous year’s Rs. 112 b, 30% growth, while total borrowings of the group including deposits and savings stood at Rs. 92 b. Equity of the group was Rs. 43 b at the end of the financial year, an increase of 24% from Rs. 35 b last year.
During the year under review, parent company LOLC obtained the consent of the Central Bank of Sri Lanka (CBSL) to relinquish its leasing license from April 2011. Consequently, the existing book of LOLC was transferred to its flagship finance company LOFC and LOLC consolidated its position as a Holding Company.
LOLC further extended its strong channel network of its financial services entities throughout the island. These companies benefit from the 185 financial services outlets with more than 39 in the north and the east.
The parent company posted strong PBT for the year of Rs. 4.4 b compared with Rs. 1.9 b last year through its operations and other income. Overall operating expenses of LOLC witnessed a dip due to the business being channelled through the subsidiaries.
Of the subsidiaries, all financial services companies are duly registered with and regulated either by Central Bank of Sri Lanka, Insurance Board of Sri Lanka or the Securities and Exchange Commission. Of these, the CBSL regulated finance companies, LOFC and Commercial Leasing and Finance PLC (CLC), posted remarkable results during the year, with LOFC posting a PBT of Rs 1.8 b and CLC a PBT of Rs. 3.2 b.
LOLC Micro Credit Ltd. (LOMC), the only regulated micro finance institution in the private sector, recorded an impressive PBT of Rs. 858 m.
LOLC Securities Pvt. Ltd. (LOSEC) reported a PBT of Rs. 21 m in less than a year of its operations. The insurance arm, LOLC Insurance Company Ltd. (LOIC) in its maiden year, recorded Rs. 65 m as losses due to start-up costs, however made excellent progress capturing the captive market of the Group’s motor business, one of the largest motor books in the insurance industry.
Despite the momentous growth, the quality of the lending portfolio was not compromised. The NPL ratios of the companies were LOFC 1.4%, LOMC negative 3.1% and CLC negative 0.4%. Both LOMC’s and CLC’s provision cover is more than 100% of their respective NPLs, which result in negative NPL ratios.
These ratios are clearly among the best in the industry. Nevertheless, these companies maintain a very conservative provisioning policy and made additional specific provisions on account of the bad and doubtful debts amounting to Rs. 487 m, which is well above the regulatory requirements stipulated by the CBSL.
LOLC’s associate, PRASAC Micro Finance Company, is the largest micro finance institution in Cambodia, and contributed Rs. 174 m as profits to LOLC. This investment has given LOLC not only financial returns but also offered synergies to LOMC in effective management of rural micro financing.
A key competitive advantage of LOLC is its strong pipeline of foreign funds. The group has one of, if not the largest, range of external funding partners in the country, who work closely with the Group in many endeavours.
They consider LOLC not only as their preferred conduit but also as a catalyst to achieve their development and commercial goals, may it be in SME development, micro enrichment, north and east resurgence or renewable energy.
Their valued contribution beyond funding has enabled LOLC to attain operational excellence, fine-tuned processes, environmental standards, early compliance good governance and state-of-the-art IT systems. The quantum of new borrowings LOLC has sourced from foreign funding agencies for lending to the SME and micro sectors during the year amounts to US$ 40 m.
LOLC Group’s policy of zero exposure to foreign exchange risks paid well where the Group was not exposed to the devaluation effects of the rupee and this policy was also mandated by the CBSL on all foreign borrowing of LOLC Group.
ORIX Corporation – Japan, the single largest shareholder of LOLC, has always been a pillar of strength with its continued support, especially in compliance and governance. As a result LOLC is the only financial services company in Sri Lanka to report on Sarbanes Oxley. The steadfast performance of LOLC was recognised by its award for Excellent Performance 2012 out of all of ORIX’s overseas subsidiaries, for the second consecutive year.
During the year LOLC consolidated its presence in the leisure sector with the acquisition of the unique Dickwella Resort & Spa, a stunning property at the tip of the southern coast, and also closed three of its hotels situated in the south coast for refurbishment.
Plans have been finalised for a new complex, the largest in the southern coastal belt with 500 keys, within the three properties of Riverina, Palm Garden and Tropical Villas.
The remaining two hotels, Eden Resort & Spa PLC and Dickwella Resort & Spa, performed well with Eden posting best-ever results of Rs. 196 m PBT and Dickwella following suit with Rs. 51 m PBT. Dickwella was under LOLC management for only three months of the year but has a promising year ahead.
LOLC’s exposure in plantation, renewable energy, construction, manufacturing and trading sectors have offered the group a conglomerate position in Sri Lanka’s corporate landscape. Contribution of these companies to the group profit is Rs. 2.9 b. The Green portfolio of the company showed tremendous progress in plantation and power generation.
LOLC Group Managing Director/CEO Kapila Jayawardena said: “LOLC will continue to align its focus on the growth sectors of the economy. I commend the efforts taken by our strong and dynamic management team to establish LOLC’s capacity to surpass expected goals and outperform set targets. LOLC is on track to sustain its steady growth in the years ahead. With the recent financial results reflecting a landmark achievement in the company’s history, LOLC is fully geared to strengthen its performance and explore more opportunities, in particular, in the financial services sector.”


Manager - Equity Analytics
Manager - Equity Analytics
From Accounts for the year ended 31 March 2012....

Other income includes foreign exchange gains, capital gains arising from marked to market valuation of quoted shares held for trading purpose and rent income. It also includes the disposal gain arising from sale of 10% of subsidiaries, Lanka Orix Finance and Commercial Leasing & Finance Co, amounting to Rs.3.8bn and 4.1bn in the Income Statements of the Group and the Company respectively for the twelve months ended 31 March 2012

In line with SLAS 25 – Business Combinations, the leasehold right held by MDL was valued based on current market conditions. The Company obtained valuations from two Chartered professional valuers to value the leasehold right for the remaining lease period and on a prudent basis the Company used the lower valuation, amounting to Rs.3,500Mn, to recognize the value of the leasehold right on the acquisition date and this resulted in the Group recognizing a negative goodwill amounting to Rs.2,600Mn.

In December 2011 the group acquired 99.9% of Dikwella Resorts (Pvt) Limited, a resort located in the southern coast of Sri Lanka. The total consideration of the acquisition was Rs.1.01Bn. The fair value of the identifiable assets acquired and liabilities assumed has been determined provisionally and negative goodwill Rs.268Mn was recognized on the acquisition.

8. In December 2011 the group increased its holding in Taprobane Capital Ltd, from 40% to 100% at a consideration of Rs.134Mn. The group recognized a negative goodwill of Rs. 41Mn on this acquisition and it is reflected in these financial statements. Taprobane Capital Limited is the holding company of Royal Fernwood Lanka group which is in the business of manufacturing and sale of porcelain products.

In February 2012 through Browns Investments PLC, the Group acquired 51% of Ajax Engineers Ltd for a consideration of Rs.100mn. The group recognized a goodwill of Rs. 10Mn on this acquisition and it is reflected in these financial statements. The acquired Company is in the business of aluminium fabrication.


Therefore total Non-recurring gains recognised in the accounts for the year ended 31 March 2012 is;


LKR6,719Mn, out of of the total profit for the period before Minority Interest of LKR8,937Mn, is from Non-recurring items.

Obviously profits from the recurring operations are LKR2,218Mn (LKR8,937Mn - LKR6,719Mn).

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