As we stand poised for 2024, amidst the symphony of progress and the cacophony of challenges, I take this opportunity to reflect on the dynamic journey we have embarked upon and the vision that propels us forward. Our narrative is one of resilience in the face of adversity, of innovation amidst uncertainty and of unwavering commitment in a world ever-changing. I take pride in our ability to not only weather the storm but to emerge stronger, outperforming market expectations and steadfastly securing and expanding our market share with our strategic roadmap guiding us all the way. This agility and foresight have been pivotal in sustaining our competitive edge amidst turbulent times.

Embracing a technology-centric approach with a human touch, the Bank remains steadfast in its commitment to digitising every facet of the customer journey, thereby guaranteeing flawless interactions, seamless experiences and operational prowess. Our ongoing investment efforts are directed towards enhancing our IT infrastructure and retaining premier IT talent, reflecting our unwavering commitment to staying at the forefront of technological innovation.

Navigating challenges with resilience

In 2023, despite the challenges stemming from Sri Lanka's economic revival and reform, Commercial Bank showcased unwavering resilience and adaptability. Through focused strategies and a commitment to stakeholder equity, we navigated these transformative times, embracing reforms and innovative approaches to ensure stability and sustainable value creation. This resilience, emblematic of our dedicated team, underscores our gratitude to customers and stakeholders for their enduring support.

As the leading private sector commercial bank, we prioritised customer, employee and community support during these trying times, strengthening our foundation through strategic investments in people, processes, technology and products. Noteworthy efforts in digital transformation enhanced the customer journey, optimised operations and modernised risk capabilities.

Aligned with our sustainability commitment, substantial strides were made towards climate goals, community initiatives and inclusivity, extending beyond financial support to encompass knowledge-sharing and empowerment programs for our customers.

Despite socio-economic hurdles, our teams demonstrated empathy and resilience, delivering tailored support to customers and advancing financial inclusion efforts. Our dedication to seamless service, fueled by talent development and succession planning initiatives, remained unwavering.

Looking forward, our focus on SME support with special focus on women entrepreneurs, renewable energy investments, trade finance and international expansion positions us for sustainable growth. Transitioning to NetZero by 2050 underscores our commitment to sustainability and responsible banking. With customer confidence as our cornerstone, our achievements were recognised with prestigious titles such as “Best Bank in Sri Lanka 2023” by Global Finance Magazine, UK among over 100 other domestic and foreign awards, reaffirming our market leadership and balance sheet strength.

Our 2023 performance

Despite the persistent challenges posed by macroeconomic factors, the Bank exhibited robust operational performance, showcasing resilience and the enduring strength of our long-term strategy. We witnessed substantial growth in key metrics, with gross income surging by 21.90%, primarily driven by a notable 34.03% increase in interest income. Despite the challenges posed by the Rupee appreciation on FCY loans & advances during the year, our loan book expanded by 3.76%, particularly buoyed by increased credit to the private sector in the latter half of the year. Deposits also saw a healthy growth of 8.92%, even after negating the impact of Rupee appreciation on FCY deposits. Consequently, total assets expanded by 6.37% as of December 31, 2023, compared to the end of 2022. After factoring in an impairment provision of Rs. 38.624 Bn. for the year (covering both loans and advances and investments in USD-denominated Government securities) and operating expenses amounting to Rs. 42.644 Bn., our operating profit before taxes on financial services surged to Rs. 36.842 Bn., marking a significant increase of 39.07% compared to 2022. Following a provision for income tax totaling Rs. 11.419 Bn., our profit after tax for the year stood at Rs. 20.461 Bn., compared to Rs. 22.970 Bn. in 2022. Notably, our Bangladesh operation made a significant contribution to the overall performance of the Bank which negated the temporary setback experienced in the challenging economic context in Sri Lanka during the first half of 2023.

For a detailed review of our financial performance, please refer page Financial review 2023.

Portfolio quality

Amidst the pending sovereign debt restructuring and the domestic debt optimisation concluded during the year under review, we have adapted with foresight, proactively provisioning for potential reductions in the value of sovereign bonds. Agile and vigilant, we navigated the year to uphold the Bank’s robust financial position. In the realm of customer loans, a notable decline in asset quality pervaded the banking industry amidst challenging operating conditions. Forecasts suggest that the industry's ratio of Impaired Loans (Stage 3) likely hit double digits by the close of 2023. Our provision for loan impairments took note of this trend as well as the improvements witnessed in the macroeconomic variables and the economic scenarios.

Our Early Warning Signal (EWS) System has been quite effective in its predictive capabilities in enabling us to foresee potential exposures showing signs of delinquency 9 – 12 months in advance. This proactive approach empowered Lending Officers with ample lead time to address warnings promptly and strategically, thereby preserving the Bank’s portfolio quality. Consequently, we were able to close the year with a marginal increase in Impaired Loans (Stage 3) ratio to 5.85%, from 5.25% in 2022, marking one of the lowest rates in the banking industry. We improved the Impairment (Stage 3) to Stage 3 Loans Ratio to 43.22% from 39.60% a year ago.

Ensuring robust capitalisation for sustainable growth

Amidst macro-economic pressures, significant challenges surrounding impairment provisioning and diminishing profitability, maintaining a robust capital base is imperative for sustained growth and resilience. Throughout the year, we remained steadfast in upholding prudent capital management practices, ensuring that our capital adequacy ratios consistently exceeded regulatory thresholds. By continuing to strategically prioritise capital-light activities and executing targeted capital-raising endeavours, alongside prudent dividend policy, we fortified our capitalisation levels. To safeguard our operations, we adopted a proactive approach, emphasising capital management through frequent Assets and Liabilities Committee (ALCO) meetings. Successfully raising Rs. 12 Bn. in Tier II capital in December, we improved the total capital adequacy ratio to 15.151%. Our commitment to rebalancing the balance sheet, fostering a capital-centric decision-making ethos and optimising divisional capital allocation is ongoing, supported by a Board-approved Capital Augmentation Plan. These initiatives further fortified our capital base, ensuring sustained resilience amid evolving market dynamics, with our capital adequacy ratios exceeding regulatory minimum requirements as of December 31, 2023.

Innovative digital solutions

With ongoing investments in digital innovation, we have revolutionised how customers engage with us, elevating their experience to new heights. Our award-winning Flash Digital Account, Sri Lanka’s first “wearable banking” product, has opened doors to endless possibilities for our customers, setting a new standard of convenience. Further, we introduced digital customer verification, streamlined teller services and enabled seamless foreign remittances, all aimed at enhancing accessibility and security.

Partnering with Quantum, an international software service provider, we are about to unveil a cutting-edge treasury software system, showcasing our commitment to staying ahead of the curve. These technological strides have not only positioned us for the future but have also fortified our foundation, making us a safer and more resilient institution. As a result, our digitally enabled retail customer base has grown by over 45%, with digital transactions soaring by over 19% year on year.

Automation has been a focal point, optimising processes across the board, from centralised procurement to real-time monitoring of branch operations. Looking ahead, we are poised to introduce AI-based interfaces, including a trilingual AI-Smart chatbot on our website, enhancing customer support while maintaining the human touch through our call center operations. Digital Assistants deployed across our branches have further facilitated customer onboarding and engagement with our digital platforms.

By harnessing the power of analytics to gauge stakeholder engagement, we are well-positioned to strategically leverage future-ready products and services, ensuring we continue to meet and exceed customer expectations in the ever-evolving digital landscape.

Promoting women’s empowerment and SME growth

Our dedication to empowering women and SMEs extends far beyond a range of financial products and services specifically tailored to their needs; it encompasses training and capacity building programmes, the digital business ecosystem – “Commercial Bank LEAP GlobalLinker” – to enhance global market access, SME fairs and clinics and advisory services. Through targeted resource allocation and succession planning, we foster an internal environment conducive to the advancement of women into middle and senior management positions.

Through collaboration with the IFC and DFAT Women in Work program, the Bank has undertaken various initiatives aimed at improving women's access to finance and enhancing financial literacy. Our inaugural women-focused product, the Anagi Women’s Savings Account, introduced in 2012, has seen significant growth, with over 600,000 accounts opened and the balance exceeding Rs. 36 Bn. Additionally, the “Anagi Business Loan for Women Small and Medium Entrepreneurs”, launched in 2022, has amassed a portfolio worth over Rs. 3.0 Bn. as of the end of 2023. This initiative not only provides financial support but also offers capacity-building services and educational partnerships, empowering women entrepreneurs to date throughout Sri Lanka.

Despite facing challenges, we maintain a strong focus on the quality of our SME portfolio while actively engaging in government-sponsored credit lines to bolster support for SMEs. Our emphasis on sectors like agriculture and microfinance extends to rural areas, contributing to the development of the rural economy and mitigating potential food shortages. Notably, the Ministry of Finance, Sri Lanka, acknowledged Commercial Bank as the foremost SME lender for the years 2020, 2021 and 2022, highlighting the Bank's strong dedication to the SME sector. In collaboration with GlobalLinker, an international business enabling platform committed to making SME businesses simpler, we launched Commercial Bank LEAP GlobalLinker, an online business ecosystem providing SMEs and corporate clients with free access to a wide array of tools and resources. From digital catalogues to e-commerce platforms, this initiative fosters growth, facilitates networking and enhances industry awareness, enabling SMEs to explore new avenues and expand their local and global market presence.

Pioneering ESG and wider sustainability stewardship

This Annual Report details the Bank's proactive efforts in ESG and wider sustainability stewardship. Despite not being bound by mandatory environmental regulations, the Bank acknowledges climate change as a shared responsibility and is committed to set an example for environmentally conscious corporate practices. This commitment is exemplified by the Bank’s comprehensive “Climate Position Statement”, which outlines its strategies for sustainable operations and environmental stewardship. Notably, the Bank achieved carbon neutrality status, surpassing regulatory requirements and demonstrating its dedication to reducing its carbon footprint voluntarily.

Aligned with its Sustainability Framework, these initiatives showcase the Bank’s leadership in environmental sustainability and innovative approaches. By embracing responsible finance and sustainable banking practices, the Bank empowers communities and businesses towards environmentally conscious, socially inclusive and economically enriching progress, aligning with the CBSL’s Road Map for Sustainable Finance in Sri Lanka.

The Bank‘s commitment extends beyond words to impactful action through its CSR Trust, which invests in education, healthcare, environment, community and cultural heritage initiatives. With initiatives such as providing green financing facilities and transitioning towards a paperless culture, the Bank is actively working towards reducing its environmental impact. These efforts have been recognised internationally, with accolades such as being named the “Best CSR Bank” by Global Banking and Finance Review Magazine, UK and the “Best Sustainable Practices in Banking – Sri Lanka 2023” at the Global Business and Finance Magazine Awards 2023.

Moreover, the Bank's participation in global forums, such as the UN Climate Change Conference and integration of eco-friendly features into its digital banking platforms further highlight its commitment to sustainability. As Commercial Bank stands at the forefront of leading the charge towards a sustainable future, it inspires other businesses to adopt proactive roles in safeguarding the planet and driving positive change.

2024: A forward-thinking outlook

Looking forward to 2024, we acknowledge the persistent economic hurdles and reaffirm our dedication to resilience and preparedness for the future. Our strategic agenda prioritises refining digital customer experiences to ensure seamless interactions, that obviate the need for physical visits to the Bank. Capital management efforts will continue to focus on engaging in capital-light activities and capital-raising exercises and fundraising endeavours, ensuring robust capitalisation for stakeholder value maximisation.

Moreover, our unwavering commitment to supporting exporters, local manufacturers, renewable energy projects, corporates and SMEs will remain steadfast, ensuring their sustained financial strength and operational viability in the long run. We will further enrich our groundbreaking digital ecosystem for business clients, emphasising our commitment to pioneering solutions tailored to customer needs. The long-term bancassurance partnership we entered into with AIA will enable us to leverage AIA's exceptional capabilities and broaden our revenue sources. Additionally, we will sustain our focus on operations in Bangladesh and other international markets, leveraging this competitive advantage to propel growth and profitability.

Following the receipt of the National Quality Award in 2022, we dedicated ourselves to uphold and enhance the quality standards ingrained in our services and values, honed over our 104-year journey. With the Customer Experience Unit set up in 2023, we aim to set new benchmarks in customer satisfaction starting from 2024 and establish itself as a service leader in the banking industry.

Fuelled by the courage, conviction and empathy of our skilled team and the unwavering trust of our clientele, we approach the future with confidence. Through continued emphasis on supporting SMEs, advancing renewable energy endeavours and embracing technological evolution, we remain steadfast in our mission to construct a digitally empowered, sustainable and forward-looking institution, anchored in our enduring pursuit of excellence.

Acknowledgements

Concluding my review, I wish to extend my heartfelt gratitude to our esteemed customers and shareholders for their unwavering support throughout the years. I am deeply appreciative of the dedication and hard work demonstrated by our Corporate Management, Senior Management, and staff members across all regions, including Sri Lanka, Bangladesh, the Maldives and other overseas locations, as well as our Sri Lankan subsidiaries. Additionally, I am thankful for the invaluable guidance provided by the Chairman and the Board of Directors in navigating unprecedented challenges. I also wish to express my sincere appreciation to the Governor, members of the Governing Board and the Monetary Policy Board and officials of the Central Bank of Sri Lanka for their guidance and support in maintaining a stable regulatory environment. Special thanks are extended to our External Auditors, Ernst & Young, for their professionalism and timely completion of the audit.

As we embark on the journey ahead, let us pledge to remain agile, innovative and customer-centric in all our endeavours, embracing change, fostering collaboration and upholding our core values. With renewed vigour, determination and a shared resolve, let us make 2024 a year of innovation, sustainability and unparalleled achievement, inscribing new tales of triumph and prosperity in the annals of our Bank's legacy. Together, we possess the formidable power to shape a brighter, more inclusive future for all stakeholders.

I would like to end my review by referencing to a fitting quote from Helen Keller that reads as “Alone we can do so little; together we can do so much” which emphasises the power of collaboration and unity in accomplishing great things.

S C U Manatunge
Managing Director/Chief Executive Officer

February 21, 2024
Colombo