Preamble Highlights Messages€¦ · over Financial Reporting 238 Independent Assurance Report ......

1

Preamble Highlights Messages Our Value Creation Model Management Discussion and Analysis Governance Financial Reports

Our Ethos... our StrengthAt our core we are an institution committed to fostering a healthy, sustainable, and secure savings protocol for all people of the Nation. The Bank is today one of the strongest and safest financial institutions in the country.

Our ethos is truly our strength

Contents

Integrated Annual Report

A comprehensive overview of NSB’s operations, performance, challenges, and future outlook according to each capital. Further, it outlines NSB’s position with regard sustainability as a binding part of business operations and performance.

Management Discussion and Analysis

66 83 88 93Financial Capital

Manufactured Capital

Intellectual Capital

Human Capital

106 120 125Social and Relationship Capital

Natural Capital

GRI Content Index in accordance with Core Criteria

65

4 Preamble

4 5Milestones About this Report

8Highlights

10 Messages

10 12Chairman’s Message General Manager/

CEO’s Review

Governance

Discusses the integrated systemic processes of corporate governance and compliance and the framework of regulations and practices by which NSB is governed. Corporate governance at NSB provides a sound basis for the Bank’s operations and maintaining a healthy relationship with all stakeholders.

130 134Board of Directors

Corporate Management

136 138Executive Management

Chief Managers

139 140Statement on Corporate Governance

Statement on Risk Management

12916 18 33Our Sustainable Business Model

Operating Environment

Our Strategy

54 60Stakeholders Materiality Matters

A comprehensive discussion of the Bank’s value creation process guided by NSB’s Vision, Mission, Values, and the Strategy. This section includes NSB’s Business Model that presents an overview of the value creation process. Further, it presents the operating environment and outlines the Bank’s stakeholder engagement process, materiality identification process, and sustainability policy which contributes to the formulation of the Bank’s strategy.

Our Value Creation Model

15

Financial Reports

Income Statement, Statement of Comprehensive Income and Statement of Financial Position that depicts the financial performance and position for the year 2018.

142Income Statement

143Statement of Comprehensive Income

144Statement of Financial Position

141

Corporate Information

146


Compendium

Governance 148Corporate Governance 148Report of the Board Audit Committee 179Report of the Board Human Resource and Remuneration Committee 183Report of the Board Nomination Committee 185Report of the Board Integrated Risk Management Committee 187Report of the Board Credit Committee 190Report of the Board Information Technology Strategy Committee 192Risk Management 194

Financial Reports 227Financial Calendar 228Annual Report of Board of Directors 229Statement of Directors’ Responsibility for Financial Reporting 236Directors’ Statement on Internal Control over Financial Reporting 238Independent Assurance Report on Internal Control 240Independent Assurance Report 241General Manager/CEO’s and Deputy General Manager’s (Finance and Planning) Statement of Responsibility 243Auditor General’s Report 245Content of Financial Statements 247Income Statement 248Statement of Comprehensive Income 249Statement of Financial Position 250Statement of Changes in Equity 252Statement of Cash Flows 256Notes to the Financial Statements 258

Supplementary Information 381Products and Services 382Income Statement in US Dollars 386Statement of Comprehensive Income in US Dollars 387Statement of Financial Position in US Dollars 388Basel III Disclosures as per Schedule III of Banking Act Direction No. 1 of 2016 389Other Disclosure Requirements as required by CBSL 402Statistical Indicators 2009-2018 409Analysis of Deposits 411Correspondent Banks 412Exchange Companies 413Eurogiro Members 415Glossary of Financial and Banking Terms 416

Governance

Discusses the integrated systemic processes of corporate governance and compliance and the framework of regulations and practices by which NSB is governed. Corporate governance at NSB provides a sound basis for the Bank’s operations and maintaining a healthy relationship with all stakeholders.

130 134Board of Directors


136 138Executive Management

Chief Managers

139 140Statement on Corporate Governance


129



15

National Savings Bank Annual Report 20184


Milestones

1972A Parliamentary Act facilitated the amalgamation of the four traditional savings organisations in the country into one establishment called the National Savings Bank

Introduction of Savings Certificate with a draw

NSB implements Mobile Banking Unit to reach the rural population

The first ATM machine was

established

The NSB ACT was amended to

facilitate business diversification

Launch of Hapan Punchi Hapan product

NSB opened doors to its 100th Branch at Nittambuwa

Launch of Ithuru Mithuru product

1979 1981 1994

1995199819992000NSB’s subsidiary NSB FMC was established

Launch of Sthree product

NSB becomes the first Sri Lankan bank to obtain AAA(lka) rating from Fitch Ratings Lanka Ltd.

International banking operations inaugurated

2002 2003 2004 200824x7 NSB

Call Centre was established

NSB opened its doors to its

200th Branch at Medawachchiya

20112012NSB celebrates its 40th Anniversary

Issuance of the single largest bond of USD 750 Mn. by a Sri Lankan bank

Became the first specialised bank to reach Rupees One Trillion asset base

20132014Launch of Buddhi personal loan for higher education studies

2016Opened its 250th branch at Kopay

Global Finance rated NSB as “The Safest Bank in Sri Lanka”

Ventured into Trade Financing

Issuance of NSB’s first unquoted subordinated debenture valued at Rs. 6 Bn.

2017 2018Successfully

redeemed the USD 750 Mn.

international bond

Secured the first foreign currency

term loan

Annual Report 2018 National Savings Bank 5


National Savings Bank is pleased to present its fifth consecutive Integrated Annual Report for the calendar year of 2018. The Report presents detailed information about the Bank’s position with regard to its financial performance in the context of the surrounding economic, social, and environmental conditions.

Our approach to integrated thinking for value creation

As an exemplary organisation operating in a complex world, we are navigating through the challenges of internal and external drivers, interdependencies and trade-offs that influence our ability to create value. In our process to sustainable value creation, our customers, stakeholders, and our strategy are consistent with our integrated thinking.

How to read this Report

This Report is presented in two parts:

Book 1 Integrated Annual Report 2018

The Integrated Annual Report 2018 offers a comprehensive insight into the strategy, capital management, risk management and governance of National Savings Bank. It addresses the Bank’s value creation process over the short, medium, and long term towards its stakeholders. This section addresses the Bank’s operations, its achievements, the execution of strategic objectives, expansion of its product portfolio, its contribution to the community, and its relationship with the environment. Where applicable, information in this report have been extracted from Book Two of the reporting suite.

Book 2 Compendium

Compendium contains a detailed review of the Bank’s corporate governance and risk management practices applied at NSB. It includes Audited Financial Statements with notes portraying the financial performance of the Bank and the Group for the year ended 2018 and its financial position as at 31 December 2018 along with supplementary information.

Navigation icons This Report uses icons for ease of navigation and as a communication tool to support or replace textual content where possible. Icons are developed primarily for capitals, stakeholders, strategic objectives, and materiality issues. An index of the primary icons utilised in the Report will appear on page 7.

About this Report

Report boundary, scope, and materiality

GRI 102-10, 45, 46, 48, 49, 50, 51, 52

The overall boundary of this Annual Report comprises the National Savings Bank and its fully-owned Subsidiary, NSB Fund Management Company Ltd., duly identified as the “Bank” individually and “Group” collectively. Consistent with the framework adopted in the 2014 report, key financial aspects are discussed in the context of the Bank as well as the Group, while non-financial aspects are discussed in the context of the Bank unless stated otherwise.

The scope of the NSB Annual Report 2018 covers the 12-month period from 1 January to 31 December 2018, and is consistent with the annual reporting cycle for financial and sustainability reporting. There are no significant changes from previous reporting periods in the scope and aspect boundaries. The most recent Annual Report, dated 12 March 2018, covered the 12-month period ended 31 December 2017. Comparative financial information, if reclassified or restated, has been disclosed and explained in the relevant sections.

This Report focuses on aspects that are material or important. It is an assessment based on the extent to which these factors may substantively affect the Bank’s ability to create value over the short, medium, and long term. The materiality assessment process is discussed under the section titled Materiality Matters on page 60.

GRI 102-1


About this Report

6

Reporting framework and compliance

GRI 102-12, 54

NSB has followed the GRI guidelines in formulating its past Annual Reports. For sustainability reporting, we have transitioned to the recently published Global Reporting Initiative (GRI) Standards since 2017 and this report has been prepared in accordance with the GRI Standards; core option. Sustainability is an integral part of the Bank’s overall business, it is subject to the Bank’s existing internal and external control and assurance systems.

The primary statutes that govern the activities of the Bank are the National Savings Bank Act No. 30 of 1971 and its amendments, Banking Act No. 30 of 1988 and its amendments, Directives and Guidelines of the Central Bank of Sri Lanka (CBSL), and Regulations and Directions of the Department of Inland Revenue (IRD). The financial information contained in this report, as in the past, is in compliance with all applicable laws, regulations and standards and is declared in several reports and statements that appear under the section on Financial Reports commencing on page 142. This integrated Annual Report draws on concepts, principles, and guidance given in the following, where applicable:

Sri Lanka Accounting Standards issued by The Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka)

The International Integrated Reporting Council (IIRC) Framework (www.theiirc.org)

Global Reporting Initiative (GRI) Sustainability Reporting Guidelines GRI Standards (www.globalreporting.org)

Code of Best Practice on Corporate Governance issued by the CA Sri Lanka

Sustainable Development Goals (SDGs) – The UN initiative with 17 aspirational “Global Goals”

Smart Integrated Reporting MethodologyTM (www.smart.lk)

External assurance

The Bank has complied with all the regulatory and statutory requirements in producing the Annual Report. The Financial Statements were audited by the Auditor General while the assurance on sustainability reporting was issued by Messrs KPMG Sri Lanka.

Forward looking statements

Certain statements in this report regarding our business operations may constitute forward-looking statements. These include all statements other than statements of historical fact, including those regarding the financial position, business strategy, management plans, and objectives for future operations. Forward-looking statements are necessarily dependent on assumptions, data, or methods that may be incorrect or imprecise and that may be incapable of being realised, and as such, are not intended to be a guarantee of future results, but constitute our current expectations based on reasonable assumptions. The readers are advised to consider this information with due caution and not to place undue reliance on the projected data in making their decisions. We neither intend to nor assume any obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.


Annual Report 2018 National Savings Bank

About this Report

7


QueriesGRI 102-53

We welcome your comments or inquiries on this Report, which can be addressed to:The Finance and Planning Division National Savings Bank, No. 255, Galle Road, Colombo 3. [email protected]

Index of navigation icons

Capitals

Financial capital

Manufactured capital

Intellectual capital

Human capital

Social and relationship

capital

Natural capital

Stakeholders

Shareholder Customers Employees Regulators and Government institutions

Business partners

Society and environment

Long-term strategic objectives

Customer driven Excellence in governance

Strength and

sustainability

Transformation leader

Short to medium-term strategic objectives

Heightening customer

experience

Enhancing employee

engagement

Reinforcing risk culture

Promoting organic growth

Leading by example

Material matters

Customer service and experience

Risk-focused organisational

culture

Digital transformation

Cyber security, fraud

prevention, and anti-money laundering

Economic value for contributors

Regulatory compliance

Responsible lending

Financial inclusion

Economic and social impact

Attracting, developing, and retaining talent

Diversity and inclusion

Environmental footprint

Workplace safety, health, and well-being

Supply chain responsibility

Operational efficiency

8

Bank Group

2018 2017 Change % 2018 2017 Change %

Results for the year (Rs. Mn.)Gross income 111,902 107,996 3.62 112,760 108,235 4.18 Profit before financial VAT and taxation 11,171 17,629 (36.63) 11,181 17,342 (35.52)Profit before taxation (PBT) 7,941 14,135 (43.82) 7,944 13,751 (42.23)Income tax expenses 3,441 4,419 (22.13) 3,444 4,595 (25.05)Profit after taxation (PAT) 4,500 9,716 (53.68) 4,500 9,156 (50.85)

Position at the year end (Rs. Mn.)Shareholders’ funds (total equity) 43,733 39,096 11.86 44,755 40,140 11.50 Due to other customers/deposits from customers 839,574 737,213 13.88 839,574 737,213 13.88 Financial assets at amortised cost – debt and other instruments (gross) 518,957 555,740 (6.62) 522,982 559,591 (6.54)Gross loans and receivable 427,378 378,439 12.93 427,403 377,151 13.32 Total assets 1,037,483 1,010,977 2.62 1,051,954 1,017,669 3.37

Information per ordinary share (Rs.)Earnings (basic) 6.72 15.67 (57.12) 6.72 14.77 (54.50)Earnings (diluted) 6.72 15.67 (57.12) 6.72 14.77 (54.50)Net assets value 46.52 58.35 (20.27) 47.61 59.91 (20.53)

RatiosNet interest margin (NIM) (%) 2.43 2.61 (7.07) 2.44 2.62 (6.95)Return on average shareholders’ funds (ROE) (%) 10.87 27.24 (60.11) 10.60 24.77 (57.20)Return on average assets (ROA) (%) 0.78 1.47 (47.27) 0.77 1.42 (45.87)Year on year growth in earnings (%) (53.68) 2.30 (2,436.21) (50.85) (4.25) 1,097.91

Statutory ratios:Liquid assets (%) – minimum requirement 20% 54.88 73.44 (25.27) N/A N/A –

Liquidity coverage ratio (%)Rupee – minimum requirement (2018 – 90%, 2017 – 80%) 245.06 377.57 (35.10) N/A N/A – All currency – minimum requirement (2018 – 90%, 2017 – 80%) 321.29 376.18 (14.59) N/A N/A –

Capital requirements: Basel IIITier 1 – minimum requirement (2018 – 8.875%, 2017 – 7.75%) 13.325 11.931 11.87 14.140 12.651 11.95 Total capital – minimum requirement (2018 – 12.875%, 2017 – 11.75%) 16.138 15.311 5.57 16.882 15.996 5.68


Highlights GRI 102-7


Financial goals and achievements – BankGoals Achievement

Financial indicator 2018 2018 2017 2016 2015 2014

Net interest margin (NIM) (%) 2.87 2.43 2.61 2.89 3.32 2.98Return on average assets (ROA) (%) 1.38 0.78 1.47 1.60 1.51 1.46Return on average shareholders’ funds (ROE) (%) 21.74 10.87 27.24 31.15 29.37 30.20Growth in income (%) 10.25 3.62 23.57 1.79 10.24 18.78Growth in profit for the year (PAT) -6.64 -53.68 2.30 26.29 9.52 479.98Growth in total assets (%) 2.02 2.62 10.89 8.80 7.50 19.12

Highlights

9

2018 2017 Impact

Shareholder

Profit per employee (Rs. Mn.) 1.76 3.16

Non-performing loan (%) – Gross 1.4 1.3

Dividend paid (Rs. Mn.) 500 5,111

Cost to income without VAT (%) 54.2 37.8

Brand value (USD Mn.) 168 168

Customers

Value distributed to depositors (Rs. Bn.) 85.6 78.45

Number of customer complaints 2,644 3,678

Breaches of customer privacy Nil Nil

Number of branches 255 253

Number of ATMs including CRMs 310 286

Employees

Salaries and benefits (Rs. Mn.) 9,263 6,887

Number of new employee hires 145 216

Average hours of training per employee 13 12

Employee retention ratio 98 96.7

Gender ratio at all level (Male:Female) 6:5 6:5

Investment in training and development (Rs. Mn.) 38.7 34.4

Regulators and Government Institutions

Investment in Government securities (Rs. Bn.) 523 548

Investment in Government securities as (%) of total deposits 60.9 62.0

Direct and indirect taxes paid (Rs. Mn.) 6,671 7,913

Fines or penalties for regulatory breaches Nil Nil

Business partners

Number of suppliers supported locally 153 147

Spent on Procurement (Rs. Bn.) 2.1 1.1

Number of exchange houses 35 33


Investments in CSR projects (Rs. Mn.) 17.0 20.0

Percentage of Senior Management hired locally 100% 100%

Percentage of women above executive level 24 26

Number of eco loans disbursed 781 902

Energy consumption (Gigajoules) 33,417 27,614

Plants distributed through NSB Agroforestry 76,000 25,000

Increased from 2017, and positive impact Increased from 2017, but negative impact Unchanged from 2017

Decreased from 2017, and negative impact Decreased from 2017, but positive impact

Highlights





Chairman’s Message

Despite economic headwinds and other challenges during the year, we remained resilient and made progress in key areas and achieved controlled, organic growth through the execution of our strategic priorities formulated on our solid foundations.

We are at a seminal juncture in the banking industry where digitalisation and all its implications have dissolved the traditional boundaries between sectors. Consumer expectations and business needs have changed drastically in the past decade where new entrants pose a challenge to established business entities. With our incorporation 46 years ago in 1972, we inherited a financial heritage of over a century old, thus, we are attuned and acclimatised to change.

In 2018, we made steady progress in all our core business areas. Our deposit base recorded its highest mobilisation in history of Rs. 101.6 Bn. during the year and reached Rs. 839.6 Bn. Our assets too grew by 2.6% to reach Rs. 1.04 Tn. I am also proud to declare that we were the first local bank to adopt SLFRS 9 and accordingly prepare the Financial Statements from the first quarter of 2018.

A blueprint for success

As a trusted financial entity in a continuously evolving, disruptive, highly-competitive landscape, we rely on our strong foundations for resilience in the long term and our strategic plan to steer the Bank through the short to medium term. Our strategy forms the blueprint for our success and gives impetus for us to move forward while strengthening our internal processes, diversifying our business operations, expanding our portfolio, managing and mitigating risk, and seeking opportunities for organic, sustainable growth. NSB’s strategy consists of

GRI 102-14

11


four long-term and five short to medium-term strategic objectives that reflect a keen understanding of the operating context.

Context matters

The year 2018 was a challenging year for Sri Lanka where the growth momentum within the first two quarters of the year slowed down in the last two due to a variety of factors. The Sri Lankan economy grew by 3.2% in 2018, below the growth forecasts by the Central Bank of Sri Lanka (CBSL), Asian Development Bank (ADB), and the International Monetary Fund (IMF) due to unfavourable domestic and external developments. However, Sri Lanka experienced a recovery in agriculture and the services sectors and, the advances in the export and tourism sectors contributed to the overall performance in 2018 and will drive growth in 2019.

Sustainability initiatives

With our status as a State-owned bank, we have a responsibility of being an exemplary corporate citizen to deliver balanced and sustainable outcomes for our customers, community, people, and all stakeholders. The principles of sustainability are seamlessly integrated in our business model and under our long-term strategic objectives of “strength and sustainability” and “transformation leader”. Further, we formulated a Sustainability Policy covering environmental, social, and governance aspects in accordance with the guidelines of “The Sri Lanka Banks Association Sustainable Banking Initiative” and other policies such as Environmental, Human Rights, Corporate Social Responsibility (CSR), and Social and Risk Management. Further, we have pledged our support to achieve the United Nations Sustainable Development Goals (UN SDGs) and have taken tangible steps towards the fulfilment of a number of key SDGs. We continue to promote green banking in our efforts to reduce the negative impact of our operations on the environment.

To support small and medium scale entrepreneurs and to revive the entrepreneurial spirit of young entrepreneurs of the country, we partnered with the Government to realise the objectives of Enterprise Sri Lanka programme. We provide loans at a concessionary rate to small scale farmers, small and medium entrepreneurs, Home-stay owners registered under Sri Lanka Tourism Development Authority (SLTDA), with a special focus to encourage sustainable economic ventures like manufacture of bags and packing utilising biodegradable materials.

Future initiatives

We have laid the preliminary groundwork for the acquisition of Sri Lanka Savings Bank (SLSB) by completing due diligence studies. The move to complete the acquisition nears finalisation after its approval by the Monetary Board. SLSB, as a subsidiary of NSB, will allow us to diversify and expand our operations in the Sri Lankan banking sector by reaching untapped market segments with new portfolio of products and financial services.

Acknowledgements

I would like to extend my gratitude to my esteemed colleagues in the Board for their wise counsel. My appreciation is also extended to the General Manager and our team of committed employees for serving the Bank with utmost professionalism.

To the Postmaster General, and all officials of the Postal Department, I would like to offer my appreciation for the vital assistance you provide to extend our touchpoints across the island.

I would like to thank the Hon Minister of Finance, Hon State Minister of Finance, the Secretary to the Treasury and the officials, Hon Minister of Public Enterprise, Kandyan Heritage and Kandy Development, Secretary of Public Enterprise, Kandyan Heritage and Kandy Development and Officials, the Governor and officials of the Central Bank of Sri Lanka, the Attorney General, the Auditor General and his team and heads of other regulatory bodies and their teams for their continued support and guidance.

Jayaraja Chandrasekera

Chairman

14 March 2019


Chairman’s Message


General Manager/CEO’s Review

12



We took substantial steps towards the digitalisation of our operations, services, and product delivery and have witnessed their contribution towards enhancing customer experience.

We live in a rapidly evolving world where innovation and novel ways of conducting business are challenging the conventional business models. Keenly aware of the changes taking place in the corporate landscape as well as in the local and international banking industry, we have sharpened our focus on ensuring that the Bank remains future fit.

In 2018, amidst a volatile socio-economic backdrop, we continued to work towards fulfilling our mandate to foster a savings culture within Sri Lanka, displaying values of stability and resilience. This was possible due to our far-sighted strategic framework, best practices in corporate governance, and prudent risk management.

Expertly steering the regulatory landscape

The enhanced capital adequacy requirements under Basel III became fully effective from 1 January 2019. Over the past several years the Board and Corporate Management has acted swiftly and with foresight to ensure compliance with the new requirements. Consequently, as a “Domestically Systemically Important Bank (D-SIBs)”, NSB achieved Tier I capital adequacy ratio by increasing the capital base. The strong capital adequacy position enabled the Bank to comfortably absorb the Day 1 impact upon adoption of SLFRS 9 which requires impairment losses on loans and receivables to be based on the expected credit loss model. Accordingly, the Tier 1 capital adequacy ratio of the Bank, as at


GRI 102-14




31 December 2018, decreased only by 0.13% after adjusting the Day 1 impact to the retained earnings. NSB also has a conservative RWA density of 21.7%, which compares favourably with local and international peers.

A steady financial outcome

The Bank recorded a total income of Rs. 111.9 Bn. during the year 2018, a marginal growth of 3.6% from 2017 underpinned by strong growth of interest income which represented 98.7% of the total income.

The Bank reported profit before tax (PBT) and profit after tax (PAT) of Rs. 7.9 Bn. and Rs. 4.5 Bn. respectively for the year 2018. Non-recoverability of the upfront payment of WHT on Government Securities invested prior to 1 April 2018 and the Debt Repayment Levy (DRL) which was introduced with effect from 1 October 2018 made a significant negative impact on profits. Further, the increase in operating expenses coupled with a drop in non-interest income and a hike in impairment provisions were also major contributory factors for the decline in profit. Accordingly, Return on Assets (ROA) and Return on Equity (ROE) too have decreased to 0.8% and 10.9% respectively.

The total assets of the Bank grew by 2.6% during the year and reached Rs. 1.04 Tn. at the end of 2018 compared to Rs. 1.01 Tn. in 2017.

During the year, net fee and commission-based income, mostly relating to debit cards, trade finance, remittances, and credit operations, surged by 28.3% to reach Rs. 0.9 Bn., having registered a steady growth over the past five years despite accounting for 0.8% of total income.

As a result of the growth in lending portfolio of the Bank, gross non-performing loans (NPL) and net NPL ratios have increased to 1.44% and 1.22% respectively. Though these ratios are still lower than the industry average of 3.4% and 2.0%, the increases demonstrate a deterioration of asset quality, a trend observed across the industry during the year.

Accelerating innovation

We have taken substantial steps towards the digitalisation of our operations, services, and product delivery and have witnessed their contribution towards enhancing customer experience. In 2018, we invested heavily in IT security and IT infrastructure.

Non-personalised MasterCard EMV debit cards were issued from May 2018 to combat fraud and protect sensitive payment data. We completed the Visa Direct Connectivity Project in early 2018 and a project for issuing Visa PayWave debit cards was commenced during the latter part of the year. A new Card Management System (CMS) was also implemented with access to all branches.

With the increase in cybersecurity threats, we recognise IT security as a vital component of our operations. We implemented an Information Security Management System (ISMS) and our employees receive ongoing training in this field. Further, our IT Division was restructured to facilitate the implementation of digital solutions and to standardise all IT operations.

Expanding our global footprint

We extended our reach beyond our Nation’s shores to build new relationships and strengthened existing ones with global money transferring companies further ensuring secure remittances from anywhere in the world.

We are now connected to 35 exchange houses and 13 correspondent banks facilitating global money transfer services. We expanded the international remittances business by joining remittance service providers such as Small World and G Money (South Korea) during the year.

The Bank was able to obtain foreign currency term loan from Commerzbank for the repayment of the international bond of USD 750 Mn. matured in September. The ability to secure such loans reflects the trust placed in NSB by our international partners.

Simplifying banking with NSB Model branch

The NSB Model branch concept, with its bespoke “Smart Zone,” was initiated in 2017 to provide a superior banking experience to our customers through the delivery of digital, state-of-the-art services. The Model branches are designed following the 5S standards and all Model branches share a uniformity in appearance. As part of phase 1, a total of 16 branches were completed during 2018. We will expand NSB Model branches to 24 branches in 2019.




14

Moving forward with UN SDGs

As a leading financial institution in the country, we have been integrating sustainability across the full breadth of our business activities and addressing UN SDGs that are directly related to our operations. Community development initiatives that support quality education (SDG4) are an important component of our corporate social responsibility initiatives. They include the Hapan Scholarship seminar series, held for the 14th consecutive year and reaching over 25,000 schoolchildren, and our English language training programme for children in remote areas. Initiatives like our collaboration with HelpAge Sri Lanka to conduct mobile medical and eye camps for senior citizens which benefited over 2,000 elders, and our Hapan Scholarship Awards, that recognises children with learning differences, contribute towards their Good Health and Well-Being (SDG 3).

We continued our green banking schemes to promote the proliferation of renewable energy under NSB Eco Loan to support Affordable and Clean Energy (SDG 7). Consequently, 781 green loans were disbursed valued at Rs. 657 Mn. Further, under NSB Agroforestry, our flagship project to improve biodiversity and environmental preservation, over 75,000 plants and 26,000 seed packs were distributed among NSB customers.

Looking ahead

We are in the process of implementing our triennial strategic framework which charts our course for 2019-2021. In 2019, we will continue our investments to improve the digital offering and migrate our internal systems and processes to the virtual domain.

We laid the groundwork for our new core banking solution in 2018 and have finalised the due process in selection of vendor. This modern solution will have the breadth of functionality to handle the latest and the most sophisticated banking requirements with a high level of automation, risk-free deployment, and ease of use.

Acknowledgements

I extend my appreciation to the Chairman and the other members of the Board of Directors for their wise counsel and guidance.

My gratitude is extended to our loyal customer base from all segments of Sri Lankan society for their trust and confidence, and other stakeholders whose contribution we appreciate.

I also extend my gratitude to Hon. Minister of Finance, the Hon. State Minister of Finance, Secretary to the Treasury and the Officials.

I further extend my gratitude to Hon. Minister of Public Enterprise, Kandyan Heritage and Kandy Development, Secretary to the Ministry of Public Enterprise Kandyan Heritage and Kandy Development and the Officials.

I also extend my gratitude to the Governor and Officials of the Central Bank of Sri Lanka, the Postmaster General and his Staff, the Attorney General, the Auditor General and his team, Heads of other regulatory bodies, and their teams.

I also take this opportunity to thank the Management Team for playing an instrumental role in our operations during the year and for their continued support extended to me.

In closing, I would like to express my gratitude to the dedication, loyalty, and commitment of the NSB team.

S D N Perera

General Manager/CEO

14 March 2019




15



16 18 33Our Sustainable Business Model

Operating Environment Our Strategy

54 60Stakeholders Materiality Matters



16

Our Sustainable Business Model


Human capital

(Employee competencies, capabilities, experience and motivation to innovate)

145 New recruitments Rs. 39 Mn. Investment in training and development 133 Promotions Equal opportunity employer Positive working environment pages 93 to 105

Stakeholders

Demands on governance regularly and risk management

Inputs

Volatile and uncertain political and economic environment

Financial capital

(Pool of funds available and obtained for use)

Shareholders’ fundsCustomer depositsBorrowings from institutions and debt securitiesOther liabilities pages 66 to 82

(Facilities, equipment, and other infrastructure components)

Physical touchpoints (Branches, ATMs, CRMs and isaver) Virtual touchpoints/Digital channels Digital infrastructure pages 83 to 87


(Knowledge-based intangibles including intellectual property, brands, systems, protocols, processes, and procedures)

Corporate culture Institutionalised knowledge Culture of innovation Robust systems and processes pages 88 to 92


Social and relationship capital

(Relationships established within and between stakeholders and networks to enhance well-being)

Extensive product portfolio 100% Government guarantee 24/7 Customer service through varied channels 100% Procurement from local suppliers Enhanced relationships with business partners Rs. 17 Mn. investments in CSR projects pages 106 to 119

(Renewable and non-renewable stocks that support current and future prosperity)

NSB Sustainability Policy Rs. 1.6 Mn. Investment in NSB AgroforestryGreen banking initiatives Digitalisation of operations pages 120 to 124

Natural capital

Shareholder

Customer

Employees

Business Partners

Regulators and Government institutions

(refer pages 54 to 59)


17

(refer pages 34 to 37)

Value created (Outputs) Value shared (Outcomes)*

Products

(page 382)

Deposits

(13.9% of growth)

Savings depositsTime deposits

Lending products

(12.7% of growth)

Retail lendingPersonal loansHousing loansPawning advancesAuto loansLoans against deposit

Corporate lendingDirect lending to FIsLoan syndication Project lending

ServicesInward and outward remittancesTrade financeSafety deposit lockers

Value added servicesCard servicesUtility bill payment

Carbon FootprintGRI Content Index in accordance with Core Criteria (refer pages 125 to 128)

Financial capital

Rs. 4.5 Bn. Profit after tax Rs. 500 Mn. Dividend paidRs. 4.6 Bn. of retained earningsRs. 523 Bn. investment in Government Securities (CAR ratio 16.14%)12.7% Growth in lending


255 Branches 310 Secure ATMs 16,000 iSaver points56,932 Interactions through digital mediums


USD 168 Mn. Brand value 5th most valuable bank in Sri Lanka Introduced new products for different market segments: (NEO, I’M) Awards and accolades1,089 Employees with over 10 years of experience

Human capital

98% Retention ratio 2% Turnover ratio 13 Average number of training hours 99.7% Returned after maternity leave998 Female employees in executive levels

Social and relationship capital

20 million account holders100% Local employment 82% Customer satisfaction index 25,000 Students reached Hapan Seminar Series 2,000 Elders benefited through mobile medical campsRs. 7.5 Bn. contributed to the Government

Natural capital

781 Number of Eco loans disbursedRs. 657 Mn. Eco loans disbursed75,000 plants and 26,000 seed packs distributed 13 branches with solar panels installed 33,416 Gigajoules Energy consumption 76,161 (M3) Water consumption

Economic

Increase in customer wealth through the interest on their investments and increased trust of the public in the banking sector (customer, investor)*

Increase in stability and confidence of the Sri Lankan economy (customer, society and environment)*

Increasing accessibility to the financial services leading to economic growth (customer, society and environment)*

Enhanced employee wealth and increased standard of Living (employee, society and environment)*

Economic value generated (investors, Government and regulatory bodies)*

Social

Convenient banking increasing customer satisfaction (customers)*

Increased choices of products in selection (customer)*

Zero non-compliance with regulatory and Government requirements (Government and regulatory, employees, suppliers and service providers)*

Contribution to the balanced and highly competent workforce (employees, society and environment, customers)*

Improved economic and social well-being via Vision 2025 (Government and regulatory, society and environment)*

Increasing the knowledge of future generation through access to seminars and educational loans (society and environment)*

Contribution to sustainable national development (Government and regulatory, society and environment)*

Inculcating savings habit reaching remote parts of the country via postal network and contributes to financial inclusiveness (Customer and society and environment)*

Environment

Supporting low carbon and environmentally friendly economic growth (Society and environment)*

Supporting the Government/Sri Lanka to achieve SDGs (Society and environment)*

Promoting the green economy (Society and environment)*

* Related stakeholders

Banking in the digital age with disruptive technologies

Operating environment (refer pages 18 to 32)

Transformative environment

Transition in demographics and evolving skill requirements

Trading income

Ope

rati

ons/

Act

ivit

ies

(pag

es 7

9 to

82)

Fee and commission

income and expenses

Investment in Government

Securities and equity(Second largest investor

in Government Securities)

Interst incomeless impairment

Shot-term strategies

Risk culture Organic

grow

th

Leading byexample

pages 38 to 53

Cust

omer

experience Employee engagement

Cus

tom

er driv

en Excellence in governance

Transformation leader

page 38

Lo

ng-t

erm

stra

tegies

Strength and sustainability

Other operating expenses

Interest expenses

Oth

er o

pera

ting

inco

me

Sta

ff e

xpen

ses

Investing in our people

Deposit taking(100% Government

guarantee)

Lending(Specialised in

infrastructure lending and supporting

Enterprise Sri Lanka programme)

Transactional banking

(NSB Reach)

Revenue from other sources

(Linked to core business)

Investing in our operations

(Technology marketing, etc.)

Managing our material risks

Gui

ded

by V

isio

n, M

issi

on, and V

alues

Supported by strong governance and ethics

page 140

page 139

Inner cover

Investment and financial management

pages 79 to 82



NSB’s approach to sustainability and financial stability focuses on identifying key internal and external elements of the operating context that influence all our operations. Macro-external factors such as economic, technological, socio-political, and regulatory play a vital role in the formulation of NSB’s short-term and long-term strategic direction and value creation.

This section is an overview of the latest global and local economic development as well as the current trends in the Sri Lankan banking sector that had an impact on NSB’s operations in 2018. It also outlines potential trends and future outlook of the industry and identifies future economic challenges.

Further, we identify the risks and opportunities which determines our short to medium term and long-term strategies emerging from our operating environment.

Global economy

Global growth has moderated in 2018 and grew at an estimated 3.7% according to IMF’s World Economic Update January 2019. Global economic activity was impacted by trade tensions between China and the US, Brexit and its implications on Europe, and a strong US dollar leading to a tightening of financial policy in the emerging markets. Global economic activity within the year was supported by advanced economies such as the US, UK, and Japan.

In the G7 economies, US leads the pack due to healthy employment growth, increased consumer confidence, corporate profits, increase in oil productions, and solid wage growth. The US dollar had a strong year as a result of the rise in oil prices. The ongoing trade war between China and the US impacted both economies as well as the world as a whole. Japan’s momentum was hindered by natural disasters and Canada grew at a robust pace largely due to its strong labour market.

GDP growth in the UK expanded at a meagre pace. Eurozone markets decelerated due to social unrest in France and weak momentum in Germany. Further, Brexit uncertainty continues to influence all European markets.

The Chinese economy is expected to slowdown due to the need of financial regulatory tightening and the ongoing trade war with the US. In the Emerging Market and Developing Economies (EMDEs), borrowing costs have increased. Central banks in the EMDEs raised policy rates as a result of concerns about inflation effects from oil price increase and currency depreciation.

Oil prices remain volatile since August 2018 due to supply influences, the US policy on Iranian oil exports, and fears of softening global demand. Crude oil prices stood at USD 55 a barrel and is expected to remain at USD 55-65 over the next 4-5 years. Oil production in the US from shale regions reached 11.4 million barrels per day in 2018. International gold price fell nearly by 5% in 2018 as investors kept away from the gold market due to rising equity markets. However, the gold market is expected to pick up in 2019.

Outlook Despite weaker performance in Eurozone and Asia, the global economy is projected to grow at 3.5% in 2019 and 3.6% in 2020. Brexit remains the principal question mark over the Eurozone, though the markets are able to premeditate its impact. The German elections will also have an impact on the European political and economic landscape.

The impact of the US-China trade was mostly contained within 2018, yet it will affect trade in 2019. The outlook for Emerging Market economies is weak especially in Argentina, Turkey, and South Africa arising from country-specific factors, tighter financial conditions, geopolitical tensions, and higher oil import bills. India is expected to grow in 2019, benefiting from lower oil prices and a slower pace of monetary tightening than previously expected, as inflation pressures ease.

Sri Lankan context

Volatile and uncertain political and economic environment The year 2018 was a challenging year for Sri Lanka where economic volatility and political tensions impacted the overall economic performance. The growth momentum within the first two quarters of the year slowed down in the last two due to a variety of factors. However, the recovery in agriculture and the services sectors and advances in the export and tourism sectors contributed to the overall performance in 2018 and will drive growth in 2019.

Economic policy In 2018, the Government implemented the multipronged structural reforms supported by the IMF to address key structural issues in the economy which included revenue-based fiscal consolidation, improving business climate, and regional integration. The new Inland Revenue Act as well as an automatic fuel pricing formula was implemented.

Our Sustainable Business Model

GRI 102-11




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In a bid to unlock the growth potential of the country, the Government launched Vision 2025, an ambitious macroeconomic, structural, and social reform plan. This will support IMF recommendations and will lead to medium-term growth.

CBSL maintained a prudent monetary policy stance throughout the year. Due to favourable developments in inflation, inflation outlook, and the trends in the monetary sector, CBSL signalled the end of the tightening cycle in early April 2018 by reducing the Standing Lending Facility Rate (SLFR) by 25 basis points. However, a neutral monetary policy stance was maintained in the ensuring period due to global developments that affected the external sector.

Challenging political environment In the last quarter of 2018, Sri Lanka experienced a constitutional crisis that affected macroeconomic stability and impacted international business confidence. Although the issues were resolved in mid-December, it resulted in a worsened perception of the country’s risk profile. Three leading agencies Standard & Poor’s, Moody’s, and Fitch Ratings downgraded Sri Lanka’s sovereign ratings during the year with a stable outlook. However, Sri Lanka was ranked at 100 among 190 countries, moving up 11 places, in the Ease of Doing Business Index compiled by the World Bank.

GDP growth Sri Lankan economy grew by 3.2% in 2018, well below the growth forecasts by the CBSL, ADB, and the IMF who revised their original stances throughout the year taking into consideration unfavourable domestic and external developments.

Sri Lanka’s performance is one of the lowest in the region that experienced a GDP growth of up to 7% previously. Factors such as weak domestic demand, tightening of monetary policy, stagnant fixed investment, and lower net exports contributed to Sri Lanka’s below average performance for the year.

GDP Growth

2014 2018201720162015

3.2

4.5

3.4

5.0

5.0

%

5.0

4.0

3.0

2.0

1.0

0

Inflation CBSL maintained its deposit facility rate and standing lending facility rate at 8% and 9%, respectively which led to the containment of inflation at mid-single digit levels. Headline inflation based on National Consumer Price Index (NCPI) closed at 2.1% in 2018 down from 7.7% in 2017. Year on year inflation measured by the Colombo Consumer Price Index (CCPI) was 3.1% in December 2018, which was low compared to 4.3% recorded at the end of 2017 mainly driven by lower food prices compared to those in the drought affected 2017 despite currency depreciation and high oil prices.

Decelerated monetary aggregates Monetary and credit expansion decelerated gradually in response to the tight monetary policy stance maintained in the past. The Central Bank maintained a prudent approach in relation to monetary policy and operations, whereby the upper bound of the policy interest rates corridor was revised downwards in April 2018 and the interbank call money market rate was allowed to adjust within the corridor in line with evolving market conditions through appropriate Open Market Operations (OMOs). Despite the rate reduction, interest rates edged up and remained high in the second half of 2018 due to liquidity deficit prevailed in the market.

To release liquidity on a permanent basis, the Central Bank reduced the Statutory Reserve Ratio (SRR) to 6% from 7.5% during the latter part of the year. At the same time, in order to maintain its neutral monetary policy stance, the Central Bank raised policy interest rates: Standing Deposit Facility Rate (SDFR) by 75 basis points to 8% and the Standing Lending Facility Rate (SLFR) by 25 basis points to 9%, thereby narrowing the policy rate corridor to 100 basis points. As a result of the relatively tight policy regime, the growth in monetary aggregates showed a gradual deceleration.



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External sector performance Despite political instability, there was spurred activity in key elements of the economy. Exports rose 4.7% last year, eclipsing the previous record set in 2017 of USD 11.4 Bn. Food, tobacco, and beverages sector closed strongly with an increase of 17.7% in 2018. The apparel industry surpassed USD 5 Bn., in export earnings with total earnings amounting to USD 5,318 Mn. in 2018, an increase of 4.7% compared to USD 4,819 Mn. in 2017. The tourism industry grew by 11.6% in 2018 amounting to USD 4,381 Mn. Tourist arrivals in 2018 reached 2.3 million a growth of 10.3%. The construction sector declined by 5.8% displaying the predicted slowdown of industrial activities in 2018.

However, subdued performance of agriculture both on volume and price together with flat position in workers remittances dragged the growth in exports. The deficit in the trade account widened to USD 10.3 Bn. as the growth in imports outpaced the growth in exports mainly derived by higher oil prices and increased imports of vehicles.

Currency Due to tightening global financial conditions, the strengthening of the US dollar, and the widened trade deficit caused the net capital outflow from the Government Securities market and the Colombo Stock Exchange which resulted in a sharp depreciation of the Sri Lankan rupee throughout the year, especially in the final quarter. The Rupee depreciated 19% against the Dollar in 2018 pushing up import costs.

Debt management The Central Government debt to GDP ratio has increased to 82.9% at the end of 2018 due to the impact of currency depreciation and relatively low nominal GDP and higher net borrowings during the period. The Central Government external debt as a percentage of GDP was 58.7% and the ratio of debt service to Government Revenue was 108.8% in 2018. Keeping with the foreign exchange movements in capital outflows, debt repayment and market intervention, gross official reserves decreased to USD 6.9 Bn. in December from an all-time-high of USD 9.9 Bn. achieved in April 2018.

Outlook According to IMF predictions, Sri Lanka is expected to grow by 4% in the medium term. Activity will be supported by robust domestic demand as consumption rebounds following natural disasters, and investment is boosted by infrastructure projects.

Inflation may also be exposed to potential risks arising from global commodity prices, inclement weather, and the after effects of Rupee depreciation to domestic prices. The rupee is expected to largely stabilise during the up coming period.

The country will continue to benefit from tourism growth and the EU’s GSP+ in the medium term. On a positive note, Sri Lanka was named the No. 1 destination to visit in 2019 by Lonely Planet and Colombo was voted Must-photograph travel destination in 2019. This will boost Sri Lanka’s chances of achieving tourist arrival targets and increasing annual revenue from the industry.

At the macro level, the maintenance of low and stable inflation under the envisaged Flexible Inflation Targeting (FIT) framework, the competitive exchange rate, and the continuation of the Government’s fiscal consolidation efforts are expected to ensure macroeconomic stability in the medium term.

According to Sri Lanka Development update, February 2019 by World Bank, the country is expected to make its first-ever bullet repayment of USD 1.0 Bn. in January 2019 followed by another bullet repayment in April (USD 500 Mn.) on Eurobonds. In total, maturities of bullet repayments on Eurobonds from 2019 to 2023 and from 2025 to 2028 alone amount to USD 12.15 Bn. Given that large bullet repayments of more than USD 500 Mn. are new to Sri Lanka, these repayments could expose the country to refinancing risk and could lead to higher spreads on Sri Lankan debt compared to benchmarks.



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Risks Impact Opportunities Impact Our response Material matters Strategic priorities

Short to medium term

Long term


Long term

Challenging macroeconomic environment increase financial burden on customers and impact the savings and investments. Also, Quality of loan portfolio will hinder due to increase in non-performing advances as well as impairments.

Lower inflation outlook will ease the cost pressures

The Bank can reap the benefits of being the only bank to have the 100% Government guarantee for its depositors in turbulent economy

Proactive risk management approach by monitoring leading indicators and taking appropriate mitigating actions promptly

Hedging of foreign exchange and interest rate risks

Continue to respond to changes with proper strategies to unlock opportunities

Increasing urbanisation, consumption and huge infrastructure investments provide opportunities for financial lending.

Exposure to the foreign currency borrowings will be hiked following the downgrade of the sovereign credit rating of the country. This could results in accelerated cost of funding.

Downgrading in the country’s sovereign credit rating negatively affected the Bank’s credit rating issued by Fitch Rating Lanka Ltd.

Volatile and uncertainty of the economy will affect the earning growth potential and capital generation.

Opportunity increased since 2017 Risk increased since 2017 Risk/opportunity broadly stayed same since 2017

Opportunity decreased since 2017 Risk decreased since 2017



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Transition in the labour force and evolving skills requirements Changes in the demographic structure of the Sri Lankan population is expected to have significant effects on the labour market. Factors directly linked to demographics such as population aging, the number of children, age of childbearing and fertility rates, together with other factors indirectly linked to demographics and associated with cultural norms and social behaviour such as women’s labour participation and education attainment – delaying entry in labour markets — are expected to impact people’s choices in the labour market.

Shrinking labour supply and growth in dependents Sri Lanka which is undergoing a gradual aging process of its population has reached its advance stage of this demographic transition due to prolonged periods of lower fertility and rising life of expectancy of the population over time. Meanwhile, Sri Lanka’s share of working-age population peaked in 2005 and it is expected to gradually decline over time.

According to the Sri Lanka Development Update, February 2019: Demographic change in Sri Lanka by World Bank. The Word Bank, the dependency ratio (the ratio of youth and elderly to the working-age population) was 51% in 2015. About one-fourth of the population were under 15 years old, whereas one-tenth were 65 years or older. However, by 2050, it is projected that the proportion elderly (23%) to surpass that of the youth percentage. The dependency ratio – the ratio of potentially dependent population, i.e., youth and elderly, to potentially working-age population, i.e., 15-64 — is projected to grow significantly from 51.2% in 2015 to 67.4% in 2050, driven by the increase in the number of the elderly. Further, according to the United Nations Population Division forecasts, Sri Lanka’s population is projected to peak around 2035, and to decline thereafter.

Gap in labour force participation During the last 20 years, the labour force participation rate (the number of persons that work or are looking to work relative to the working-age population ages 15-64) has remained relatively unchanged, at about 59.4% in 1996 and 58.4% in 2015. There is a large gap in labour force participation rates between men and women across the age spectrum. Only 40% of working-age women

were either working (employed) or looking for a job (unemployed). In contrast, 80% of working-age men were in the labour force (ages 15-64). Female labour force participation in Sri Lanka remained relatively constant over the last two decades despite the lower fertility rates.

Human capital flight Migration plays a vital role in deciding Sri Lankan demographic structure. Trends in the migration for employment also changed in the last decade evidenced by 20% decline in total migration in 2017 against that of 2010. However, migrants from professional, middle, clerical, and skilled categories represented 45% of total migrants which increased from 35% registered in 2010. Although migrants for Middle East was on the top with a share of 88%, over the last seven-years period, share of migrants to South East Asia and other miscellaneous countries were increased while to Middle East has demonstrated a declining share. Following this trend, slice of remittances from Middle East shrunk to 52% (vs. 77% in 2010) while proportion of remittances from other countries have improved to 48% in 2017 (vs. 23% in 2010).

Evolving skills requirements Banks are larger employers in the economy as well as in the financial services sector and require highly skilled employees in multiple fronts for service delivery at the expected level to fulfil the continuing evolving customers’ expectations. Furthermore, it is envisaged that new skills will emerge, the skills currently required will evolve, and some skills will disappear completely, because of digitally enabled products and services, process automation and emergence of disruptive technologies.

Consumerism Following the increase of per capita income together with increasing financial literacy and elevation to the upper middle-income category, people are engaged in education, home improvement, automobiles, and other durables. Consumer financing may take a longer horizon as consumers will continue to keep on paying instalments on time. Furthermore, E-commerce is a future prospect of consumerism of the country and the profitability through the E-commerce payments will also be increasing.



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Outlook Sri Lanka’s share of working-age population was 68% in 2015 and it is expected to gradually decline, as the country’s old dependency ratio increases over time. Total population is forecasted to peak in 2035 at about 21.5 million persons, and to decline afterwards. The potential working-age population is projected to peak earlier in 2025 at 14 million persons and to decline thereafter.

Increases in female labour force participation are expected to counter the impact of ongoing demographic changes to some extent. This includes improving the supply of childcare and eldercare services and safe transport, and flexible work arrangements for women and will be expected to possess technical skills along with dramatic culture change for the digital transformation.



Long term


Long term

Demographic changes (size, age, and household composition) are expected to have an impact on outcomes of savings and investment and long-lasting implications for service delivery (health and education), pensions, employment, and public finances.

Current tech savvy generations and increasing aging population demands the banking industry to provide an advice or consultancy services (e.g.: retirements plans) rather than traditional banking services.

Focusing on building up agile teams

Investment in training and developing the skills that are needed to grow in agile working environment and recruiting from broader talent pool and retaining them in new ways.

Come up with innovative customised products and efficient payment solutions with the aid of technology.

Strategies for financial inclusiveness

Increase in significant proportion of working age in millennial generation and Generation Z along with emerging new social trends in increasing mobility, diverse families and propensity towards individuality influence the customer behaviour and compel the banks to offer tailor-made products and services as well as customer experience.

Highly skilled employees with new and emerging skills are becoming more expensive to recruit and retain amidst the acceleration of skills and academics migration.

Enabling to be agile in responding to changes in operating environment





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Banking in the digital age with disruptive technologies Digitalisation of banks and banking operations have dominated the sector in the last decade. The future of banking lies in the digital domain where virtual banking platforms, digital payment mechanisms, and the integration of Information Communication Technology (ICT) will be adopted in all banking operations. Due to increased competition and new entrants to the market, banks that fail to address challenges of digitalisation may face the risk of decrease in customer satisfaction, underachieving revenue targets, and eventually running out of business.

Disruptive technologies disturbing the business model Exponential advancement of technology will be the foundation of the next phase of growth in the banking and financial service industry. Disruptive technologies including mobile technology, fintech partnerships, cloud computing, Internet of Things (IoT), big data, advanced analytics or machine learning, blockchain technology, Artificial Intelligence (AI), robotics and biometrics plays an acute role in banking. It is changing all aspects of banking and financial industry, from customer expectations and new products and channels, to regulatory requirements, organisational structure, and processes and attracting and retaining required skills. They are reshaping the business model by changing value proposition of existing products and services and how these are delivered to customers.

Evolving customer expectations The increasing role of digitalisation has changed the consumer behaviour. It has heightened customer expectations for personalisation while transforming the manner in which customers interact with banks. Customers are increasingly multi-banked with technologically advanced banks due to increased awareness of the various bank offerings, quality of service and pricing. Furthermore, people turn to banks for advice and assistance for their complex issues including choice of investments, loans related to business, home, and their educations rather than transactional or payment purposes.

Disruptive entrants Technological advances facilitates the non-traditional market players such as telecommunication, fintech companies, payment facilitators, medical and insurance

providers to enter into the banking and financial industry with the innovative technology and data. They offer wide range of financial products and services to their existing as well as new customers through cross selling.

Cyberrisks In an age of cyberattacks, privacy and safety is of paramount concern to the banking sector. Despite the myriad of opportunities provided by the technology, the financial crime has increased dramatically, and cybercriminals and hackers have become more sophisticated. The sector has to provide the flexibility and the convenience of virtual banking to move towards a cashless society while alleviating customer concerns of privacy and safety. Banks must take advantage of new technologies like AI-based machine learning and pattern recognition that may prevent fraud. CBSL has outlined guidelines to improve the preparedness of the sector for such threats. A banking direction in this regard will be issued in 2019.

Digital payments Businesses and customers are interested in faster, safer, and more convenient payment methods as cash is obsoleting and they are shifting towards more-technologically driven payment methods. Digital alternatives such as mobile wallets, e-wallets, prepaid cards, contactless cards, and digital currencies are becoming popular among the millennials.

CBSL has taken progressive approach to strengthen the payment and settlement infrastructure of the country to cater to the growing payment needs of the economy. In the bid to develop a national payment and settlement system, CBSL in partnership with LankaClear will implement a National Card Scheme (NCS) under the brand name “LankaPay”. This system was launched in 2018. The National Payment Council appointed two committees to study the FinTech sector and blockchain technology. Following the directions of the FinTech committee a National Quick Response Code Standard for local currency payments “LANKAQR” was issued to all financial institutions and operators of mobile based electronic money systems to facilitate QR code-based payments. An inter-industry working committee is developing a framework for a blockchain-based KYC solution. A task force was appointed to study virtual currency schemes and the regulatory measures needed to ensure their safety and stability.



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mechanisms, CBSL will introduce a National Transit Card for transportation. CBSL intend to promote the usage of digital payment mechanisms by way of encouraging financial institutions to enable digital payment methods and creating awareness among general public on payment options and their benefits. It is also planned to introduce innovative fintech products.

Outlook CBSL has taken measures to create the necessary environment for Sri Lanka to move into virtual banking and benefit from advanced technologies and promoting digital payment mechanisms to establish cash less society. Further, to promote digital payment



Long term


Long term

Digital banking is increasingly becoming an essential and not a differentiator. Therefore, if digital offerings provided by the Bank will not remain competitive, we will tend to lose the revenue as well as market share.

Providing innovative and real time financial solutions and exceeding customer expectations continuously.

Continue to invest in technology platforms, processes and controls

Maintain IT systems stability through monitoring, enhancement and prioritising key issues

Embedding digital capabilities, introducing innovative digital products and offerings, increase digital experience for customers and employees while ensuring compliance with regulatory requirements will assure the sustainability of the Bank.

Come up with innovative and personalised offerings with frequent update of value added features which demands a significant investment in technology.

Provides the opportunity to respond to customers’ growing expectations for personalisation and relevance in an agile operating environment as well as enabling risk taking decisions and mitigating frauds.

Traditional banks challenged by new niche digital banks or payment providers.

Digitisation requires higher investment in innovation, IT and staff capabilities while the risk of cyberattacks continuing to increase.

Improve our operational efficiency through the automation of simple transactions while increasing our capacity to focus on complex and value adding transactions and reduce the costs in the long term.

Competition for specialised and scarce skills such as information technology, data analytics and risk management.





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Demands on governance, regulation, and risk management In the present global financial climate, financial institutions are more prone to risk arising from a multitude of factors. With the global financial crisis, coupled with increasing customer concern, corporate conduct, social responsibility and increasing financial crime and terrorism globally, financial institutions have seen an increase in new regulations aiming to ensure the soundness of banks and to protect customers. CBSL works towards strengthening the regulatory and supervisory framework of the banking sectors and recognises the importance of adhering to international standards and best practices. In 2018, CBSL implemented a number of policy measures on prudent financial and risk management and how to better absorb shocks arising from financial and economic risks. Evolving capital requirements, Net Stable Finding Ratio (NSFR), introduction of Leverage Ratio, implementation of SLFRS 9 and limitation on foreign currency borrowings are examples of regulatory changes that banks have to comply with.

Basel III Sri Lanka implemented capital adequacy requirements conforming to Basel III in June 2017. In 2018 CBSL issued Directions on Basel III liquidity standards and Leverage Ratio. To comply with Basel III, most banks have raised capital through right issues and subordinate debentures over the period and maintained capital ratios at a comfortable level up to December 2018. However, some large banks will require substantial fresh capital to meet full Basel III compliance by 2019.

In addition, CBSL issued Directions on foreign currency borrowings by licensed banks with a view to promote transparency and further strengthen risk management aspects of foreign borrowings by banks.

SLFRS 9 The Basel III implementation was complemented with the adoption of SLFRS 9, the international best practices in financial accounting standards. Sri Lanka adopted New SLFRS 9 standard set out by the International Accounting Standards Board (IASB), which requires banks to set aside provisions for future losses and introduced a new basis for financial asset classification and a model for hedge accounting. CBSL issued guidelines to banks on the adoption of SLFRS 9 in consultation with The Institute of Chartered Accountants of Sri Lanka for consistent and prudent application of standards.

Income tax The effects of the Inland Revenue Act No. 24 of 2017 (IRA) which became effective from 1 April 2018 aims to broaden tax base by removing some tax exemptions such as interest income from USD denominated bonds, professional loans and SMEs and the removal of notional tax credit on Treasury Bills and Bonds. It intends to simplify the tax system, rationalise corporate tax incentives through an investment oriented regime and strengthen powers of the tax administrator. Furthermore, the Government of Sri Lanka (GOSL) recently proposed a 7% Debt Repayment Levy (DRL) on financial institutions which would effectively increases the tax on financial services from 17% to 24%. The GOSL also proposed a transaction tax of 20 cents for every Rs. 1,000.00, in the national budget 2018, where banks were not allowed to recover this from their customers. However, the two proposals hang in the balance with Sri Lanka locked in a constitutional crisis.

Restrictions on foreign currency exposure The Government imposed various measures to control foreign exchange outflows through 200% cash margin on letters of credit on imports of vehicles other than buses, lorries, and ambulances and 100% margin on consumer durables, reduction of the LTV, suspension of vehicle imports for government entities and cutting the net open positions of commercial banks to increase dollar liquidity. Meanwhile, the Monetary Board introduces a policy framework for foreign currency borrowings which is an important source of funding for banks to reduce the exposure of banks to foreign exchange risk and minimising the pressure on the reserves and exchange rate of the country arising from large foreign currency borrowings. The maximum outstanding amount of foreign currency borrowing obtained by a licensed bank shall be determined as a percentage of total assets as per the latest annual audited accounts or interim accounts certified by the External Auditor of the Bank combined with capital adequacy level of the Bank.

Other

The national audit bill, which strengthens the power of the Auditor General building on the reforms of the 19th Amendment, was passed in July 2018.

The secured transaction bill, which would help SME finance by allowing movable collateral to be used in banks when borrowing, was approved by the cabinet.



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Outlook In a bid to improve the competitiveness of the sector, CBSL signed an MoU with the Securities and Exchange Commission (SEC) and the Insurance Regulatory Commission of Sri Lanka (IRCSL) to conduct effective consolidated risk-based supervision, enabling assessment of contagion and reputation risks that arise from business relationships.

CBSL is in the process of drafting a new Banking Act to further strengthen the regulatory framework. The Act will include an overall mandate for supervision and regulations and address key challenges of the industry such as digital banking, corporate governance, mergers and acquisitions, structures of foreign banks, and other regulatory challenges. In addition, the Banking Sustainability Rating Index (BSRI) will be implemented from 2019 for risk based supervision and planning the supervisory calendar.



Long term


Long term

Increasing regulatory demands are impacting on revenues, costs and capital, as well as the shape of bank balance sheet and additional compliance requirements.

Increased focus on risk management, governance and regulation enables the banks to having stronger bank balance sheet for absorbing unexpected losses in an economic downturn and being well positioned for growth as the economy improves.

Maintain the coordinated, comprehensive and timely approach to identify, assess, and respond to regulatory changes

Strengthening operational resilience, improving stress testing standards, reviewing impact tolerances and refining performance metrics

Increased complexity and cost of banking and affecting the fixed capital investments such as spending on human capital and IT capabilities, time to deliver innovative and competitive products.

Implementing regulatory requirements in a customer centric, integrated and synergistic manner makes the risk and governance provides the competitive edge to the Bank and acts as a key differentiator.

Revisiting lending policies and strict credit scoring, resulted in excluding certain customers from qualifying for obtaining loans will lead to slower loan growth.



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Long term


Long term

The implementation of new or amended governance, regulation and risk management add costs and employees’ existing workload.

Understand evolving frameworks and plan, manage and report promptly and appropriate.

Introducing new talent, process and technologies to strengthen risk management and compliance.

Non-compliance with regulations results in penalties and damage the Bank’s reputation.

Vulnerability to dividend demands from state banks could widen the capital shortfall and pose a significant challenge to meet the capital adequacy and leverage ratios.



Meeting the expectations of all stakeholders being a responsible business There is growing demand for sustainable business and related corporate disclosure from all stakeholders, including customers, suppliers, employees, communities, investors, regulators, and activists. Customers are increasingly seeking responsible brands that promise health, safety, and sustainability for the planet. Investors are changing the way they assess companies’ performance, and are making decisions based on criteria that include ethical concerns. Employees are increasingly looking beyond monetary benefits, and seeking out employers whose philosophies and operating practices match their own principles. Businesses need to achieve long-term financial value enabling both society and the planet to thrive.

Transition to sustainable economic model Sustainability has become important for the banking sector also as with other businesses. At present context, businesses held accountable more than ever before and they are expected to play a vital role in finding solutions to current social and environmental

Transformative environment Globally we are facing enormous economic, social, and environmental challenges. Protecting the environment and contributing to the sustainable development are imperative. Without them, we would compromise the ability of future generations to meet their needs. Increasing concerns about the impact of human activity on the environment, businesses today are under pressure to prove their profits do not come at the expense of people and planet.

Global Risks Report, prepared by World Economic Forum examines the evolving macro level risks and major threats that may disrupt the world in 2019 and over next decade. Extreme weather events, failure of climate change mitigation and adoption, major natural disasters, massive incidents of data fraud, large scale cyberattacks, man-made environmental damage and disasters, large scale involuntary migration, major biodiversity loss and ecosystems, water crisis, asset bubbles in major economy are highly ranked based on the possibility of occurrence.



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issues including climate change, resource scarcity, ecosystem contamination, wealth inequality, ethical and reputational crisis, corruption, human rights violation and social conflict, and migration. These lead the businesses to choose a sustainable economic model such as green economy, circular economy and collaborative economy to be aligned with their holistic goals.

Climate change In the context of Sri Lanka, weather temperature is continuing to increase, and it is causing devastating floods in some places and record-breaking droughts in others. As a result, the food and agriculture sector were negatively affected and pushing up food inflation. The deep interconnectedness of these risks with human well-being is posing systemic challenges to citizens across the nation. Energy management and other environmental concerns are being addressed by banks globally as well as locally. Banks are investing in energy management and many have already taken important steps towards reducing their environmental footprint.

UN Sustainable Development Goals The United Nations Sustainability Development Goals (UN SDGs) integrate economic, social, and environmental dimensions of development. In a global and a local environment where all business entities are encouraged to follow common policies and targets laid down by the SDGs, there is a greater need for the banking sector to align with the SDGs and adopt sustainable practices in all operations.

Outlook Road Map for Sustainable Finance 2019: CBSL is in the process of developing a directive titled Road Map for Sustainable Finance 2019 which provides guidance to the financial sector on sustainable practices and the alignment of SDGs in business strategies, plans, initiatives, and throughout all operations. The directive will be drafted by obtaining assistance from International Finance Corporation of the World Bank (IFC-WB) and financial assistance from the United Nations Development Programme (UNDP).

Promoting transparency, better management of natural resources, regeneration of ecosystems, human rights, ethics and improved quality life changed our understanding of our business impacts and responsibilities.



Long term


Long term

The impacts of climate change, which include more natural disasters and related costs to rebuild (or retrofit) infrastructures where required, increased energy costs, water shortage and quality issues, and increased food prices and shortages.

Integrating environmental and social considerations into core banking operations will enable the Bank to minimise our environmental footprint, resource efficiency improvements, corporate social responsibility and sustainable reporting.

The Bank can contribute to achieving the SDGs by supporting microfinance institutions, conducting CSR programmes that are specifically aimed at addressing the SDGs, services and products to drive progress, innovative solutions that directly address the goals, and other initiatives.



30




Long term


Long term

Extreme weather events affect cash flows of borrowers mainly small and medium enterprises, who would be struggling to meet their financial commitments to the Banks.

Creates a positive image and also reduces costs in several operational areas. Embedding SDGs and Sustainable Banking Principles (SBPs) at the heart of the business strategies ensure competitive advantage.

Digitalisation of key banking operations is one step towards contributing to the SGDs as it creates a ripple effect that may directly lead to the minimising paper wastage, lowering transport costs, reduction of water, electricity use, and other favourable impacts.

The businesses which have supplied their stocks to these borrowers are also facing challenges even though they have not borrowed funds directly from banks.

Opportunity to make a positive impact on the society through our business operations and community development programmes.

Vulnerabilities in environment will lead to certain industries becoming less viable, potentially resulting in job losses, amid growing economic and political instability.



The Sri Lankan banking sector overview

Sri Lanka’s banking sector currently consists of 13 local and 13 International Licensed Commercial Banks (LCB) and seven Licensed Specialised Banks (LSB). Of these, six are Domestically Systematically Important Banks (D-SIBs) maintaining assets over Rs. 500 Bn. each, accounting for 72% of the banking sector in the country. Out of the six D-SIBs, four banks worth over Rs. 1 Tn.

each. Sri Lanka’s financial services sector accounts for 5.7% of the GDP and plays a critical role through financial intermediation in facilitating economic growth. With the Government’s regional development agenda, the banking sector is expected to play an important role in enhancing financial inclusion and providing access to affordable financial solutions across the country.



31


Assets The banking sector recorded a strong performance in 2018 in asset growth and improvements in liquidity and capital levels. Total assets of the banking sector grew by 14.6% to Rs. 11.8 Tn. at the end of 2018 underpinned by expansion of credit and investment portfolios, compared to 13.8% growth recorded in 2017. Total loan and advances, which is the largest asset base of the banking sector bolstered by 19.6% on the grounds of growth in term loans and overdrafts amidst the challenging business environment.

Asset quality of the banking sector deteriorated during the year hindered due to subdued economic growth together with increasing pressure on disposable income. The gross and net non-performing ratios rose to 3.4% and 2.0% at the end of 2018, compared to 2.5% and 1.3% respectively reported a year ago.

Profitability The banking sector witnessed a decline of 9.1% in profitability, recording Rs. 126 Bn. compared to 18.9% growth registered in the 2017 with Rs. 138 Bn. of profit after tax. The main reasons could be attributable to increase in non-interest expenses and impairment provisioning. Accordingly, the sector’s Return on Assets (ROA) and Return on Equity (ROE) closed at 1.8 and 13.2% respectively compared to 2.0% and 17.6% recorded at the end of previous year. The substantial increase in impairment provision resulted from the introduction of SLFRS 9 effective from 1 January 2018 coupled with increase in taxation due to the implementation of new Inland Revenue Act with effect from 1 April 2018 and the introduction of Debt Repayment Levy effective from 1 October 2018 exerted further pressure on the bottom lines.

Funding position Deposits, which were the main source of funding, represented 72% of the total assets of the banking sector. Total deposit base of the sector recorded an impressive growth of 4.8% to achieve Rs. 8.5 Tn. at the end of the 2018 against the Rs. 7.4 Tn. driven by the term deposits. Sector borrowings also picked up by 9.7% to Rs. 1.8 Tn. during the year.

Capitalisation The banking sector was able to maintain sufficient capital levels in order to absorb any adverse shocks throughout the year by maintaining capital adequacy ratios remained at 15.1%, comfortable above the Basel III requirements. The Tier 1 Risk Weighted Capital Adequacy Ratio (RWCAR) and overall RWCAR clocked in 12% and 15.1% respectively in comparison to 12.4% and 15.2% recorded in 2017.

Liquidity Liquidity position of the sector continued to maintain at healthy level and Statutory Liquid Assets Ratio (SLAR) was maintained at 27.6% well above the minimum requirement of 20%, whilst the ratio of liquid assets to total assets registered at 25.7% which dropped from the previous year of 28.8%.

Outlook The future of banking lies in the digital domain where virtual banking platforms, digital payment mechanisms, and the integration of ICT in all banking operations. The sector has to provide the flexibility and the convenience of virtual banking to move towards a cash-less society while alleviating customer concerns of privacy and safety.

The Government introduced a 200% LC margin while lowering the loan to value ratio on motor car imports and imposed a 100% cash margin requirement on selected consumer goods imports. These measures will have an impact on the industry in 2018.

In a bid to improve the competitiveness of the sector, CBSL signed an MoU with the SEC and the IRCSL to conduct effective consolidated risk-based supervision, enabling assessment of contagion and reputation risks that arise from business relationships.

In an age of cyberattacks, privacy and safety is of paramount concern to the banking sector. CBSL has outlined guidelines to improve the preparedness of the sector for such threats.



32


Suppliers Service providers Employees

Industry attractiveness and competitiveness

We conducted the Porter’s Five Forces analysis that assisted the identification of Bank’s material issues and the formulation of the Bank’s strategic priorities. The identification and analysis of these five important factors helps the Bank realise its strengths and its position to stay competitive in the industry.

Threat from new entrants

Difficulty of obtaining licence for incorporating a bank due to high capital requirements

High capital investments in people, IT, delivery channels, and to comply with Basel III

Increasing demands in regulatory and compliance requirements

Government of Sri Lanka’s plan to establish banks for Import/export and SME

Bargaining power of suppliers

Depositors’ demand for higher returns and lower risks

Higher dependency on vendors and service providers of digital services

Employees have a higher bargaining power through trade unions

Lower dependency from other suppliers such as stationery suppliers, outsourcing and contractual employees, and etc.

Competitive rivalry

Higher number of players in the industry (six large, five medium, and 22 small banks)

Intense competition among the peers due to lower switching cost and ability to offer similar products and services

Threat of substitutes

Higher threat from telecommunication companies and other payment providers offering efficient payment solutions

Availability of similar low-cost products with no differentiation in pricing, quality, or features

High sensitivity of depositors and lenders to change of prices

Bargaining power of customers

Pressure to provide personalised, high standard of service to match evolving customer needs

Availability of similar products and services in the market

Customers can switch to competitors and substitutes without incurring high costs

Lack of customer loyalty in the new generation

Large lending customers have the ability to negotiate lower rates

High-LCBs-LSBs

New players New regulations and compliance requirements

Moderate

High High

High

Non-Banking Financial Institutions

Payment facility providers

Existing and potential customers



SWOT analysis One of the initial steps in the formulation and the execution of our strategy and strategic priorities was to conduct a SWOT analysis that gives an insight into our internal strengths and weaknesses as well as opportunities and threats in the external environment.

Strengths 100% Government guarantee for

deposits and interest thereon

100% State-owned bank with a savings legacy

Safest bank in Sri Lanka for the third consecutive year

Strong brand reputation

Extensive network of touch-points along with the national postal network

Strong employee base with higher retention rate

AA+ credit rating

Specialised in financing infrastructure projects and clean energy financing

One of the lower NPL ratio compared to the industry average

Domestically Systematically Important Bank (D-SIB)

Opportunities Government’s commitment towards

improving Sri Lanka’s infrastructure and NSB’s role in its execution

Increased focus on climate change and green economy

Growing credit culture and consumerism

Government’s commitment towards UN SDGs

Increase in small and medium entrepreneurs

Technological advancements

Larger market for foreign currency remittances

Threats Lower economic growth and

political instability

Intense competition from commercial banks as well as non-banking competitors

Tighter regulations imposed by Government and regulatory bodies.

Increase of disruptive technologies

Frequent change of customer needs and expectations

Downgrade of credit rating

Weaknesses Limitation imposed by the NSB

Act to expand business lines (Micro finance, lending for SME sector)

Mandatory requirement of investment of 60% of deposits in Government securities

Bureaucratic processes and procedures

Flexibility is limited due to non-availability of fully integrated system.

Slower adoption to the technologies due to stringent procedures.

Term deposits remain as the primary source of funding

Limited avenues for fee and commission base income

Conservative business policy and risk approach

Leveraging strengths to maximise opportunities

Use the infrastructure needs of the country using specialised knowledge

Improve service excellence through motivation and nurturing talent

Increase revenue and profitability derived from lending opportunities by increasing contribution from a wide range of access points

Providing the lending products in relation to green economy and utilising specialised skills in clean energy financing

Leveraging strengths to minimise threats

Stand out from the competition through strong advertising campaigns emphasising 100% Government guarantee, brand, and unique status of the Bank

Taking advantage of digital initiatives to extend access points and customer and employee base of the Bank

Capitalising vast arrays of access channels to provide personalised customer experience and to fulfil customer requirements

Counter weaknesses through exploiting opportunities

Acquire new customers and increase revenue generation capacity through lending to small and medium entrepreneurs (Promotion of Enterprise Sri Lanka programme)

Increase efficiency and reduction of errors and time through technological advancements

Conservative and risk aversion mindset to maintain lower NPL ratio while increasing the lending portfolio

Process improvements, introduction of convenient methods and greater automation plans to boost savings deposits

Penetrating remittance market and enhance fee-based income

Counter weaknesses and threats Using technological advancements to

make the systems and processes more agile enhancing customer experience

Acquire new talent with skills required for the future banking (IT, data analytics)

Pursuing lower-cost deposits, more long-term deposits, and longer tenure borrowings

In a constantly evolving context, strong foundations are required for any institution to thrive. Our strategy is built on its strong foundations that reflect the developments in the operating environment and the drive to deliver sustainable value to

our stakeholders in the short, medium, and the long term. A bank-wide, inclusive approach is taken to analyse factors that are material to the Bank, this process takes into account input from employees belonging to every level.

Our Strategy


Our Strategy

34


Building a more sustainable bank

We believe, being sustainable implies doing business and, at the same time, contributing to the economic and social progress of the communities where we operate taking into account its environmental impact while fostering stable relationships with our stakeholders. In this way, we believe that Economic, Social, and Environment (ESE) perspectives and sustainable products are key to creating long-term value for customers, shareholders, and society.

As a State-owned financial institution deeply rooted in society, we have a responsibility to play a central role in Sri Lankan economy to create a positive social and environmental impact. Therefore, we are committed to making banking more sustainable as a better bank contributing to a better world.

Our sustainable business model We have a sustainable, customer-focused business model oriented towards the generation of stable monetised growth. However, this model integrates not only economic criteria but also ethical, social, environmental, and governance criteria. Our business model, based on a long-term vision, has allowed us to retain its position as the savings giant of the country, anticipating challenges and capitalising the opportunities found in the rapidly changing environment. Refer pages 16 and 17 to our Business Model.

To ensure that we deliver lasting stakeholder value, we are paying careful attention to the positive and negative impact of our activities on different stakeholder groups. We engage in dialogue with our stakeholders to help us better understand their needs and are committed to forging long-term relationships with them. We conduct a materiality assessment to prioritise issues that could be leveraged to play a greater role in internal engagement and sustainability strategy development.

Economic performance

(Profit)

Environmental performance

(Planet)

Social performance(People)

Sustainability

Eco efficiencySocio-economic

Socio-environmental


Our Strategy

35


Sustainable strategy as a part of business strategy At present, we do not have a distinct sustainable strategy. We consider sustainable perspectives in the delivery of our products and services, operations, and in our business relationships. Thus, sustainability is integrated into our strategy through main perspectives as illustrated below:

Financial sustainability Promoting a sound and sustainable economy by strengthening the Bank’s long-term competitiveness.

Risk management Managing environmental and social risks associated with our financing activities.

Policy engagement and market development

Partnering with stakeholders to advance best practices and new opportunities.

Social sustainability Contributing to society’s development through all our businesses by actively promoting human rights, fair working conditions, diversity and gender equality.

Environmental sustainability Contributing to a sustainable use of earth’s finite resources and lower greenhouse gas emissions through all our businesses.

Employee engagement Leveraging the skills and passion of our employees to advance sustainability in our business and communities.

Sustainability Strategy

As the largest savings bank of the nation, we will continue to be a profitable, well-capitalised bank with a moderate risk profile while pursuing a prudent risk policy in the diversification of our activities. As part of the moderate risk profile, we also want to maintain a solid capital and liquidity position and a clean and strong financial position. Over the past years, we have built a capital buffer to accommodate for the significant impact of the Basel III reforms. To make sustainability seamlessly integrated into our business model, we have formulated sustainability policies which propels overarching sustainability framework. The policy was augmented by environmental policy, human rights policy, corporate social responsibility policy, and environment, social and risk management policy. We have conducted awareness programmes and capacity development programmes from the operational level to corporate Management level. The discussions on aligning our activities with Sustainable Development Goals (SDGs) have led to various initiatives in our business lines towards the social and environmental perspective.

Sustainability governance Strategic positioning with regard to sustainability is a binding part of our business strategy. The Board has overall responsibility for sustainability and considers ESE matters in the formulation of our strategy. ESE matters that are material to value creation are integrated into our balanced scorecard which is used to set objectives, drive behaviours, and measure performance of our people. The Board delegates the execution of the Bank’s strategy to the General Manager/CEO, who heads Corporate Management Team and is responsible for managing day-to-day operations of our Bank. During the year, the Corporate Social Responsibility and Sustainability Committee (CSRS) was formulated to monitor the execution of strategies and maintain the dialogue with the Board and other stakeholders.


Our Strategy

36


InfrastructureAs a part of sustainable business approach, we support infrastructure projects which facilitates economic development, empowers local communities and improve lives

in the country. We directly work with Government institutions to invest in transportation, water, telecommunication, and education.

See more on page 116

Financing for inclusive, sustainable growthNSB promotes financial inclusion in order to support social and economic progress where it operates. The Bank advocates “Enterprise Sri Lanka” and “Lakdiriya” programmes initiated towards the sustainable and inclusive growth economy, via financing small and medium enterprises.

The Bank makes indirect impact financing to the private institutions which are providing loans to the Small and Medium Entrepreneur.


Supporting a low carbon economyIn aligning with Government’s strategy of enhancing the share of renewable energy which supports diversification of Sri Lanka’s electricity supply, NSB is committed to lending and financing related to renewable energy generation and small and medium enterprises involved in green products/services

generation. We mainly focuses on solar energy and works in close connection with the electricity providers of the country namely CBE and LECO. NSB uses renewable energy in its own buildings and infrastructure.

See more on pages 121 to 124

TransparencyFor NSB, transparency goes beyond meeting legal or regulatory disclosure requirements. It means maintaining an open and fluid dialogue with all its stakeholders. This dialogue and the stable, lasting relationships allows us

to be more responsive to relevant issues that can arise and to our stakeholders’ expectations.

See more on pages 56 to 59 and 115

At NSB, we invest in developing our people. Our employee development programmes drive continuous learning and development and ensure we are equipped to meet the demands of rapidly changing digital world of work. We create opportunities for school levers and graduates

to build career with us. Our CSR programme prioritises supporting education and recognition for achievers in competitive exams along with children in special needs and nurturing aesthetics skills.

See more on pages 98 and 117 to 119 of this report

Committed to education, learning, and development

Our commitment to sustainability


Our Strategy

37


Outlook

monitoring sustainability performance of the Bank and advise the Board on material ESE matters

which will contribute to the materiality assessment of the Bank.

The SDGs provide for a universal agreement on economic, social, and environmental priorities to

be met by 2030. They represent a powerful lens to identify opportunities for business innovation and growth, and they define the “good” in our purpose. In 2019, we will focus on the what is most material

to us to guide our sustainability initiatives and delivery on the UN SGDs.

We aim to grow our business in a sustainable manner and we believe that a sustainable business model is by definition a work in

progress, so we constantly explore ways to improve while keeping a firm eye on our

strategic priorities.

We will continue to develop our approach to sustainability and refine our reporting.

We have set key performance indicators (KPIs) and targets to drive sustainability

initiatives across the Bank. Further, the CSRS Committee will actively be involved in

Combating financial crime

to detect and report suspicious financial transactions which is vital

in preventing fraud, corruption, and money flaws to criminal syndicates

and terrorist organisations. NSB has robust controls to protect system

integrity and the safety of our customers’ funds.


The banking system plays a central role in collecting and moving funds

and effective controlling systems that protects the integrity of the

financial system which is crucial to economic and social development.

The Bank implemented anti-money laundering system and we continue

Healthfor medically vulnerable elderly

persons in Sri Lanka. We promote home gardening and organic crop

production through distribution of seeds and crops with the view to

generate a healthy nation.

See more on pages 118 to 119 and 124

We care about the health and well-being of our society. While we

are committed to safeguard a healthy and safe working environment for

employees, the Bank finances to conduct mobile medical camps

Contribution to the UN SDGs

economic, social, and environmental dimensions of development while

prioritising the management of natural resources for sustainable

production and consumption. Our contribution to the UN SDGs is

outlined in our capital management report from pages 66 to 124.

UN SDGs are a set of 17 Sustainable Development Goals adopted by

world leaders at the United Nations Sustainable Development Summit

on 25 September 2015 to eradicate poverty by 2030, fight inequality

and injustice, and combat climate change. These goals integrate the


Our Strategy

38


Our strategic objectives

Assessment of our Business Model, operating environment, along with proactive stakeholder engagement shaped our material issues and aspects that add or distract value. These along with resultant risk and opportunities lead to the formation of the Bank’s strategy.

Our strategy, built on strong values, reflects our keen understanding of the operating context and is geared towards improving governance and risk management capabilities, while delivering sustainable outcomes for all our stakeholders.

It is firmly anchored to our vision of being “the most reliable and sought after choice for your savings”. Equipped with a triennial

business plan (2018-2020) the Bank has identified key strategies to focus on. In developing the strategic plan, a company-wide, inclusive approach was taken with the participation of staff and management at different levels. It involved in-depth discussions with all members of the corporate management, highly interactive residential workshops with employees across all the staff categories, and an intensive research where staff had the opportunity to provide their proposals, views and suggestions.

NSB’s strategy consists of four long-term strategic objectives and five short to medium-term strategic objectives.

Long-term strategic objectives

Customer driven At NSB, the customer is at the heart of everything we do in our goal to become the Bank of choice. We are committed to provide a superior customer experience in all our interactions with the customers. Our offering of products and services, our numerous touchpoints across Sri Lanka, our customer care centres, our online presence and support, and our social media channels are customer driven and are committed to deliver better outcomes for our customers.

Excellence in governance NSB follows international best practices in maintaining the highest standards in corporate governance and has fostered a culture of risk management and compliance. NSB aims to leverage risk management as a strategic and competitive differentiator.

Strength and sustainability NSB is committed to achieve strong, sustainable, and balanced growth through improving on the fundamentals. Financial solvency, strength, and sustainability will create long-term value for all our stakeholders.

Transformation leader NSB as a state-owned specialised bank, has an added responsibility to lead through example. Since our inception, we have contributed to improving the lives of all Sri Lankans through conducting our operations in a conscientious manner. Further, we are committed to support and enable innovation in all business processes, delivery channels, and strategic planning to capitalise on emerging opportunities.

Short to medium-term strategic objectives

Heightening customer experience

Enhancing employee engagement



Leading by example


Our Strategy

39



Cybersecurity, fraud prevention, and anti-money laundering


Risk-focused organisational culture



Responsible lending

Financial inclusion








1

2

3

4

5

6

7

8

9

10

11

12

13

14

15





Leading by example

Material issues of NSB Short to medium strategic objectives

Mat

eria

lity

asse

ssm

ent

proc

ess

(see

pag

e 60

)





Leading by example


Our Strategy

40



NSB takes a multi-channel approach to meet multiple customer needs to enhance overall customer experience. We are committed to make a tangible, lasting impact on our customer’s financial well-being. We have taken substantial steps to keep up with evolving customer expectations through investing in the latest technology.

While developing our digital infrastructure which allows our customers seamless transition between channels, we sustain and improve on our physical touchpoints. We also invest in our people, processes, products, and service propositions that contribute to heightening customer experience.

Material focus areas

Key priorities

To improve customer satisfaction and to lower complaints

To be recommended by customers

To provide a seamless digital customer

experience

To increase revenue from existing and

new customers

Progress in 2018

Strengthened our multi-channel delivery across all our touchpoints

See pages 83 to 85

Offered new products to match

with customers’ requirements

See page 112

Increased awareness of NSB’s offering through multiple

channels

See pages 83 and 109

Reduced delays and simplified the payment process

by redesigning documents and

forms

See page 91

Strengthened IT system stability

and enhanced security with no major service

interruptions

See pages 86 and 87

Priorities in 2019 and beyond

Continue to improve digital experience of our customers by improving our digital infrastructure

Simplifying and increasing

process efficiency and automation of payments to reduce delays

and errors

Migrating to standardised technology platforms

Conducting data analytics

to deliver a more connected, focused customer

experience

Providing our customers with the

ability to seamlessly shift between NSB

digital platforms and physical NSB

touchpoints


Our Strategy

41


Key trade-offs

Development of innovative, state-of-the-art digital solutions

Safeguarding customer privacy and combating cybersecurity risk

Enhance customer experience and operational efficiency through digital infrastructure

The cost involved in relation to regular investments to maintain stability

and security and the sharp depreciation of IT infrastructure

Heightening customer experience – operational KPIs KPI Stakeholder

groupValue created YoY

Change2018 2017 Outlook

Interest paid to depositors (Rs. Bn.)

Return for the depositors

69.0 60.2 Increase the return for customer investments

Loan payouts (Housing, Project and Personal (Rs. Bn.)

New loans disbursed to customers

87.5 88.5 Managing credit responsibly

Customer satisfaction index (%)

Quality of service experienced

82 – Improving service quality

Number of customer complaints

Quality of service experienced

2,644 3,678 Reducing customer complaints

Investment in IT infrastructure (Rs. Mn.)

Digitally-enabled solutions and operational efficiency

772 712 Providing customers with a superior digital experience

New style outlets converted as model branches

Accessibility and convenience

16 1 Improving customer experience in branches

Number of enquiries received Direct mode of communication between the Bank and customers

251,516 228,332 Improving overall customer experience


Our Strategy

42



An engaged employee is more productive and delivers better customer outcomes and experiences. Creating a team of engaged, energised employees who embody the values of NSB is an essential step in delivering value to

our customers. NSB is committed to create a team of engaged employees who are highly-skilled, transparent, leads by example, possessing good communicative skills, receptive, and responsible.


Key priorities

To attract and retain the best of the best

To increase productivity

through engaged, and energised

employees

To create a professional, customer-centric,

flexible working culture and connecting employees to a shared purpose

To produce thought leaders of the industry and empower career growth

To create a diverse, inclusive,

and equal opportunity

working environment

Progress in 2018

Invested in training and development initiatives to empower employees

See page 98

Initiated health and wellness programmes

to employees


Provided employment opportunities for

school-leavers

See pages 96 and 97

Increased benefits and incentives offered to

employees



Improving all digital platforms and internal digital systems and processes to support our employees to better meet customer expectations

Identifying and attracting talent to NSB and continue employee retention efforts

Continue to provide first-job work experience

for school-leavers and graduates

Optimise training and development programmes to meet employee training

needs and expectations


Our Strategy

43


Key trade-offs

Delivering our strategic objectives

Employees are key to remain competitive as they are changing the way we do business

Managing digital infrastructure in a responsible manner

Balancing commercial pragmatism and social consideration

Attracting, developing and retaining scarce or emerging skills

Significant cost related to training and development

Enhancing employee engagement – operational KPIsKPI Stakeholder



Staff costs (Rs. Bn.) Remuneration, benefits, and other incentives

9.3 6.9 Maintain competitive remuneration

Unionised salary increases (Based on three-year collective agreement) (%)

Salary increases upon bargaining

22 18 Being a competitive salary paying employer

Employee turnover (%) Employee retention 2.0 3.3 Maintain and improve employee retention ratio

Gender ratio (male: female) at all levels

Diverse, equal opportunity workplace

6:5 6:5 Continue women empowerment

Percentage of women in Executive level and above (%)

24 26

Employee grievances as a percentage of total employees

Employee satisfaction 0.85 1.1 Reducing the grievances

Investment in training and development (Rs. Mn.)

Highly-skilled, engaged workforce

38.7 34.4 Continue investments in training and developmentNumber of training hours 13 12

Number of training programmes

Highly-skilled, engaged workforce

312 252 Increasing number of training programmes according to training-need analysis

Number of distance learning activities (Webinars)

Convenience, and the creation of a highly-skilled, engaged workforce

3 – Increasing e-training methods


Our Strategy

44


Reinforcing risk culture Developing a solid risk culture where we anticipate and manage risks arising from a multitude of factors including the external operating context is an essential component of the Bank. We have aligned our strategies,and operations along with a robust business

model to prudently manage and respond to uncertainties and risks. At NSB, we work towards reinforcing our risk culture by being compliant with regulations and following required standards and international best practices in ethical and responsible business in all our operations.


Key priorities

To conduct the right business in the right way, without exception

To assess current and

emerging risks

To educate employees on complying with

regulatory frameworks

To avoid any material breaches

of legislation

To adopt sophisticated fraud

detection and mitigation tools

Progress in 2018

Analysed the impact of Basel III Capital Adequacy Ratios, LCR, NSFR requirements by January 2018

See pages 50 to 52

Successfully implemented Basel III requirements in capital adequacy,

liquidity standards, and leverage ratio

See pages 50 to 52

Bolstered IT security capabilities to reduce

digital fraud

See pages 85 to 87

Successfully adopted SLFRS 9, the international best practices in

financial accounting standards on financial

instruments

See pages 52 and 53

Conducted regular awareness

programmes for customer and staff on risk identification and prudent management

See page 115


Regularly review and amend the risk appetite as a response to evolving context

Align our strategy, risk, compliance and processes to better respond to changes in the operating environment

Manage risk prudently Continue to inculcate a culture

of ethical behaviour

Invest in IT capabilities to

combat financial crime and cyber risks


Our Strategy

45


Key trade-offs

Compliance with evolving regulatory requirements to become a trusted organisation

Technology-based risk and compliance solutions

Hinders revenue generation and growth in customer base

Increase the complexity of processes and causes inconvenience to customers

Cost incurred in compliance requirements, systems, employee training, and adoptions

to business operations

Managing the lending exposures considering social impacts

Tightening of risk measurement and narrowing our risk appetite

KPI Stakeholder group Value created YoY Change

2018%

2017%

Outlook

CAR – Tier 1 and Total Capital Ratios – Basel III compliance

Strength of capital position

13.325

16.138

11.931

15.311

Achieving a ratio above regulatory minimum

LCR – Basel III compliance(All Currency)

Strength of liquidity position

321.3 376.2

NSFR – Basel III compliance

Strength of stable funding

147 135

Leverage – Basel III compliance

Strength of borrowing position

4.86 2.23

Regulatory fines or penalties during the year

Adherence to regulatory requirements

– Nil Nil Continue to comply with regulatory requirements

NPL ratio

Strength of asset quality

1.44 1.34 Maintaining below, than the industry average

Number of technology-related incidents during the year (e.g., Cyber crime)

A resilient IT infrastructure

– Nil Nil Continue to invest in the latest technology to prevent technology-related incidents

Reinforcing risk culture – operational KPIs


Our Strategy

46


Promoting organic growth Since our inception in 1972, we have directed our systems, operations, and strategic priorities to achieve our mandate to foster a savings culture in Sri Lanka. In our 46 years of operations, we have become an entity that is trusted by all Sri Lankans. We leverage our already

existing systems and processes to achieve financial stability and organic growth. Through bank-wide, multi-channel efforts, we focus on improving customer experience, employee engagement, and prudent risk management to grow and create sustainable returns to our stakeholders.


Key priorities

To increase market share

To improve revenue generation capacity by

diversifying income base

To reduce earnings volatility

To enhance cost efficiency and cost

reduction

Progress in 2018

Managed cost base below industry average

See page 71

Conducted regular risk assessments

and adjusted risk appetite

See pages 50 to 52 and 140

Maintain the capital well above

the regulatory requirements

See pages 50 to 52

Introduced new products and services

and expanded our operations and

delivery channels

See page 112

Expanded international

operations



Continue to respond effectively to macroeconomic challenges

Continue to diversify NSB’s

offerings to generate

revenue and reduce earnings

volatility

Streamlining internal systems

and processes to drive organic

growth

Improving shareholder

returns by raising medium-term

ROE target range from 10%-15%

Increase deposits and lending

growth in line with the industry

growth

Arresting the declining market share


Our Strategy

47


Key trade-offs

Growth in market share

Satisfying customer requirements

Efficiency of resource usage

Streamlining internal systems and processes

Reinforcing internal systems and processes for organic growth

Increasing complexity

Failure to adoption to changing conditions

Increased requirements of capitals

Cost incurred in meeting customer needs

Diversification of NSB’s portfolio Cost of investment in people, processes and systems

KPI Stakeholder group

Value created YoY Change

2018 2017 Outlook

Dividend per share Dividend for shareholder 0.75 8.24 Improve the capacity to pay more dividends

Shareholder’s funds (Rs. Bn.)

Retaining for future growth 43.7 39.1

ROE (%) Returns that shareholders receive on their capital

10.87 27.24 10% – 15% in the short to medium term

Profit after tax (Rs. Bn.)

Contributing to the national economy and value for the shareholder

4.5 9.7 Driving continuous growth

Fee-based income (Rs. Bn.)

Reducing earnings volatility and dependency on interest income

1.25 4.31 Enhance fee-based income through card, international, and credit operations

Cost to income ratio (%)

Managing costs effectively 54.2 37.7 Maintaining a ratio below the industry average

Market share – Deposits (%)

An attractive source of funding for while maintaining customer loyalty

9.58 9.65 Maintaining current market share in the short term and improving in the medium to long term

Market share – Loans and Advances

Driver of revenue growth 5.62 5.89 Maintain and increase the market share

Net interest margin Extent to which interest income covers interest expenses

2.43 2.61 >2.6% in the short to medium term

Brand value ranking in Sri Lanka (Rank)

Growth of customer base – 5 5 Improving brand ranking

Promoting organic growth – operational KPIs


Our Strategy

48


Leading by example

As a government entity with deep social roots, NSB has a responsibility of being an exemplary corporate citizen and leading by example. We strive for sustainability in all endeavours of our business and we are committed to achieve the UN SDGs. Sustainability has become a

cornerstone of our long-term strategic objectives as well as our short to medium-term objectives. We are aware of our impact on society and environment and committed to create social value through engaging in exemplary, responsible, and sustainable business practices.


Key priorities

To secure a prosperous future for all our stakeholders through our business decisions and growth philosophy

To proactively manage environmental and societal impacts of

our business

To maintain accessible and

affordable banking facilities

To generate economic value in a

sustainable manner

To become a responsible provider of financial services

Progress in 2018

Supported GOSL’s initiatives towards achieving Vision 2025

See page 112

Made progress towards aligning

our strategies with UN SDGs

See pages 34 to 37

Conducted, initiated, and continued

community development

programmes in 2018

See pages 116 to 119

Supported financial

growth through our lending operations

See pages 79, 80 and 116

Adopted green building principles

to reduce impact on the environment

See page 122

Continued efforts in green lending

initiatives

See page 121


Continuing our efforts towards the achievement of UN SDGs and alignment of SDGs with our strategy and business operations

Reducing our environmental footprint

in all our business operations

Uplifting local communities and supporting community

building initiatives

Managing social and environmental concerns

in relation to lending operations


Our Strategy

49


Key trade-offs

Investment incurred to develop NSB’s portfolio

Risk of default

Viability of customer’s business

Restructuring debts for sectors affected by climate change

Reducing profitability

Operate responsibly

Diversification of NSB’s portfolio

Supporting small and medium businesses in vulnerable sectors

Positive impact on the society/community

Maintain sustainability of the Bank Cost related to capacity development of systems, processes and people

Leading by example – operational KPIsKPI Stakeholder



Total investment in CSR (Rs. Mn.) Community development 17 20 Achieving the budgetary targets and making a positive impact to the society

Number of lending schemes for low-income earners

Financial inclusivity 3 2 To be in line with lending targets

Number of student scholarships offered under children with special needs category Supporting education

20 13 Aligning impact with strategy

Number of students participated at the seminars held during the year

90,000 72,000

Number of entrepreneurs supported

Accessible finance for small and medium business customers

1,525 331 In line with lending targets

Females in executive level and above (%)

Women empowerment and diversity

24.2 25.5 Continue to drive diversity

Infrastructure financing (Rs. Bn.) Contribution to the economic development

5.1 19.14 Continue to support infrastructure development

Direct and indirect taxes paid (Rs. Bn.)

Contribution to the National Treasury

6.7 7.9 Continue to contribute directly to the national economy

Number of suppliers, and service providers Contributing to local

community development

153 147Continue to support local suppliersProportion of spending

on local suppliers (%)– 100 100

Number of eco-loans granted

Supporting low carbon economy

781 902

Continue investing in sustainable initiatives

Number of solar panel installed branches connected to net metering

13 5

Number of plants distributed through NSB Agroforestry

76,000 25,000


Our Strategy

50


Capital funding and liquidity management

Capital management NSB manages its capital levels in line with a number of factors, including our internal assessment of the level of risk being taken, the expectations of the rating agencies, the requirements of the regulators and the returns expected by shareholder. NSB also seeks to ensure that its capital structure takes full advantage of the range of capital instruments and capital management activities available in optimising the financial efficiency and loss absorption capacity of its capital base. NSB has performed extensive and comprehensive stress testing during this period and concludes that the Bank remains well-capitalised relative to its business activities, the Board’s strategic plans, risk appetite, risk profile and the external environment in which it operates.

Capital management objectives The main purposes of capital management are to support Bank’s business strategy and to ensure a sufficient level of capital to withstand even severe downturns without breaching regulatory requirements.

The Bank’s capital management objectives can be summarised as follows:

Maintain sufficient capital to meet minimum regulatory capital requirements

Hold sufficient capital to support the Bank’s risk appetite

Allocate capital to businesses to support the Bank’s strategic objectives

Ensure that the Bank maintains capital in order to achieve debt rating objectives and to withstand the impact of potential stress events

Factors affecting capital Restrictive capital definitions, difficulty in raising fresh capital, higher risk-weighted assets, additional capital buffers, and higher capital adequacy ratios required under Basel III regulations are already in place pressuring capital requirements of banks. In addition, higher impairment provisioning based on the expected credit loss model under SLFRS 9 as opposed to the incurred loss model under LKAS 39 which makes the provisions better aligned with the higher revenues from riskier loans, too have implications on capital. In addition, the Debt Repayment Levy proposed in

the Government Budget 2018 which is borne by the financial institutions and the removal of most of the tax concessions increases the tax payments, also resulted a significant impact on the amount of capital that banks can internally generate.

Progress in 2018 CBSL imposed BASEL III capital adequacy requirements on the Sri Lankan Banking industry with effect from 1 July 2017, with the full implementation taking place in three phases over a period of 18 months and completed on 1 January 2019. Accordingly, with effect from January 2019, NSB being a “Domestic Systemically Important Bank” will be required to maintain its Tier I Capital Adequacy Ratio (CAR) at 10% and its total CAR at 14%. In order to fall in line with these new regulatory requirements, the Bank raised Rs. 2.7 Bn. worth of Tier 1 Capital by way of capitalising the unclaimed deposit reserves in December 2018. During the year, the Bank assessed its capital requirements under the Internal Capital Adequacy Assessment Process (ICAAP) using standardised approach for credit and standardised measurement approach for market risk and basic indicator approach for operational risk, taking into account a broader range of risks and the Bank’s risk and capital management capabilities.

NSB has maintained its strong capital adequacy position over the years, which enabled the Bank to absorb the adverse impact of SLFRS 9, day 1 capital impact associated with the adoption of SLFRS 9’s Expected Credit Loss model. As per the directive by Central Bank of Sri Lanka on adoption of Sri Lanka Accounting Standard – SLFRS 9 – “Financial Instruments”, for the purpose of calculating Capital Adequacy Ratio, Bank has considered the day 1 impact arising from the adoption of SLFRS 9 at the transition date, 1 January 2018. Accordingly, the Tier 1 Capital Adequacy Ratios as at 31 December 2018 of the Bank decreased only by 0.13% after adjusting 25% of the Day 1 impact to the retained earnings.

NSB also has a conservative Risk Weighted Assets (RWA) density of 21.7%, which compares favourably with local and international peers.

Total RWA under Credit Risk has increased to Rs. 185.4 Bn. in 2018 from Rs. 157.3 Bn. reported in 2017. Total RWA for Market Risk has reduced to Rs. 11.4 Bn. in 2018 compared to Rs. 22.1 Bn. in 2017. The RWA for Operational Risk meanwhile has decreased to Rs. 31.2 Bn. during 2018 compared to Rs. 34.9 Bn. in 2017. The overall increase in RWA during 2018 was Rs. 13.8 Bn.


Our Strategy

51


which has been mainly contributed by the growth in loan book. The CET 1 Capital stood at 13.325% as against the regulatory requirement of minimum 8.875%. The total capital ratio had improved to 16.138% in 2018 compared to 15.311% in 2017 which was well above the regulatory requirement of 12.875%.

Commencing 1 January 2019, the minimum ratio under Basel III Leverage Ratio for licensed banks shall be 3%. According to the circular No. 3 of 2018, the CBSL has decided to permit NSB to exclude investments in Government Securities representing 60% of the money deposited in savings and deposit accounts of the Bank from the exposure measure when calculating Leverage Ratio. Leverage ratio as at 31 December 2018 stood at 4.86%.

Corporate Management of the Bank met periodically to assess the capital adequacy and other capital-related issues and to formulate and escalate its suggestions for implementation by way of strategies. The Bank has been historically generating capital through retained earnings. Dividend payout ratio for 2018 was only 11.1%.

Outlook A substantial Tier 1 capital surplus of Rs. 30.43 Bn. in 2018, is prudent and includes management buffers earmarked to absorb the impact of new accounting and regulatory changes (SLFRS 16 in 2019) and other regulatory reforms (prudential requirements and tax) over the medium to long term and are aligned with Bank’s capital plan.

Implementation of SLFRS 9 and Basel III have a material impact on regulatory capital requirements. The capital planning therefore has become a critical exercise for banks. Bank also aligned its strategies to optimise the level of capital. Bank will upgrade risk profile of its asset portfolio by continuously striving to maintain a high-quality asset book through careful and strict risk assessments at the time of on-boarding new customers.

Funding and liquidity management Liquidity risk is the risk of not having sufficient funds to meet financial obligations in time and in full, at a reasonable cost. Liquidity risk arises from mismatches in the timing of cash flows, while funding risk arises when illiquid asset positions cannot be funded at the expected terms and when required. Liquidity and funding risk is measured using a range of metrics, including Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR).

Bank accords as much importance to funding and liquidity as for capital, for ensuring that the Bank has sustainable sources of funding and maintains adequate levels of liquidity at all times to maintain public trust in the Bank and the financial services system. NSB never compromises on its liquidity in its drive to generate returns for shareholder. 60% of deposits are invested in Government Securities as per the NSB Act which are highly quality liquid and risk-free assets.

The liquidity risk management process includes regular analysis and monitoring of the liquidity position by Assets Liability Committee (ALCO) and maintenance of market accessibility. Regular cash flow forecasts, liquidity ratios and maturity gap analysis are used as analytical tools by the ALCO.

Objectives of the Bank’s funding and liquidity management efforts comprises honouring customer deposit maturities/withdrawals and other cash commitments efficiently under both normal as well as stressed operating conditions, compliance with the regulatory requirements, supporting the desired credit rating and ensuring smooth transition to Basel III funding and liquidity requirements.

The Bank relies on deposits from customers, debt securities, term loans, securities sold under repurchase agreements and subordinated liabilities as its primary sources of funding. Deposits from customers generally have shorter maturities and a large proportion of them are repayable on demand. The short-term nature of these deposits increases the Bank’s liquidity risk and the Bank actively manages this risk through maintaining competitive pricing and constant monitoring of market trends.

Progress in 2018 Bank maintained optimum levels of funding and liquidity throughout the year. The Bank has a well set out framework for liquidity risk management and a Board-approved contingency funding plan.

Major portion of the Bank’s assets are funded by customer deposits and customer deposits made up 84.5% of the liabilities as at 31 December 2018. The Bank’s concentration of funding remains low due to high concentration towards retail deposits since 80% of the deposits are funded by retail depositors. Relative to the wholesale funding sources, retail customer deposits tend to be more stable since a core component therein is likely to remain with the Bank for the medium to long term.


Our Strategy

52


NSB’s liquidity ratios are significantly higher than the prescribed minimum due to its large holding of Government Securities. As at 31 December 2018, Statutory Liquid Asset Ratio was 54.88% and the LCR was 321.29% (for all currencies), well above the minimum requirement of 20% and 90% respectively. The NSFR, which became a prudential requirement with effect from January 1, 2019, was at 146.67% as at 31 December 2018 against the minimum requirement of 90%.

In September 2018, NSB redeemed USD 750 Mn. senior note at maturity with the funds internally existed and

obtained a term loan of USD 100 Mn. for 3 years as a low cost foreign currency borrowing.

Outlook In order to comply Basel III funding and liquidity requirements, NSB will continue to migrate short term reliance for funding towards medium to long-term tenors and also concentrate on improving the funding profile of the Bank. In this regard, the Bank is well-prepared for the settlement of USD 250 Mn. senior notes which falls due on September 2019.

Key accounting concept The Bank and the Group has adopted SLFRS 9 – “Financial Instruments” SLFRS 9, which came into effect from 1 January 2018. Since SLFRS 9 changes the way that the Group classifies and measures financial assets and liabilities and, most notably, the way the Group estimates its expected credit losses, we have provided a summary of how the adoption of SLFRS 9 affected the Group from 2018.

Key change The requirements of expected credit loss impairment under

the SLFRS 9 have materially impacted on the Group Financial Statements. Furthermore, the credit impairments is recognised on expected credit loss basis which differs significant from the

incurred loss basis under LKAS 39 – “Financial Instruments: Recognition and Measurement”. The expected credit loss basis

requires us to consider past, current and future expected events in determining ECL requirements.

It is important to note that the ultimate cash credit loss recognised on loans to customers will not be changed because

of SLFRS 9. If a customer is going to default, the ultimate cash loss under both IAS 39 (the requirements applied in preparing

the Group’s 2017 financial results) and SLFRS 9 will be identical. The only difference between LKAS 39 and IFRS 9 is the

timing of how we recognise credit losses.

SLFRS 9 – Financial instruments

Capital implicationsAs per the Directive No. 4 of 2018 issued by Central Bank of Sri Lanka on “Adoption of Sri Lanka Accounting Standard – SLFRS 9: “Financial Instruments”, for the purpose of calculating capital adequacy ratio, Banks shall stagger additional credit loss provision arising from SLFRS 9 at thetransition date 1 January 2018. Accordingly, Bank has charged

only 25% of the Day 1 impact (Rs. 281.5 Mn.) against the Retained Earnings of the Bank for the purpose of calculating Capital Adequacy Ratio as at 31 December 2018. Due to this adjustment, the Tier I capital adequacy ratio and total capital adequacy ratio were decreased by 0.13%.

Accounting standards on financial instruments

LKAS 39Financial instruments:Recognition and Measurement

SLFRS 7Financial instruments: Disclosures

LKAS 32Financial instruments:Presentation

SLFRS 9Financial instruments (Replacement of LKAS 39)


Our Strategy

53


1 12-month expected credit loss for performing exposures

All financial investments should be subjected to expected loss provisioning in line with SLFRS 9, and for the financial investments which are not significantly deteriorated, the Bank shall consider 12 months ECL.

3 ECL held for unutilised credit exposures, guarantees and letters of credit

The requirement for impairments to be recognised for unutilised credit facilities, guarantees, and letters of credit will result in additional balance sheet impairments.

2 Lifetime credit losses for exposures that exhibit a significant increase in credit risk

All financial investments should be subjected to expected loss provisioning in line with SLFRS 9, and for the financial investments which are significantly credit deteriorated, Bank shall consider Lifetime ECL.

4 Forward-looking economic expectations for ECL

The inclusion of forward-looking economic information is expected to increase the level of provisions held on our balance sheet due to the nature and timing of both current and forecasted economic assumptions.

SLFRS 9 – Drivers

Significant risk in credit risk (PD) since initial recognition

Object evidence of impairment

Stage 3Stage 2Stage 1

SLFRS 9 – Forward-looking expected credit loss model

Recognises 12 months loss allowance at initial recognition and lifetime loss allowance on significant increase in credit risk

General provision/collective provisions Specific provisions

Performing assets Watch-list assets

Lifetime expected credit loss

Gross carrying amount

12-month expected credit lossImpairment

Net carrying amountRecognition of interest

Non-performing assets

Expected Credit Loss Model

IAS 39 – Incurred loss model

Credit losses are recognised only on the occurrence of a loss event balance sheet impairments



Stakeholders

At NSB, we engage with a wide range of stakeholders who are vital for all operations. Over the years, we are recognised as a trusted financial partner acting in accordance with our values and mandate, creating long-term value for all our stakeholders. We consider close dialogue with our stakeholders is an integral part of all our operations. Constructive stakeholder engagement allows us to serve the needs of customers more effectively and helps us continuously improve and make progress towards our strategic goals.

We conduct an annual materiality assessment (see page 60) to understand what our stakeholders consider to be important. We secure insights that matter most to them and that are relevant to our business

by taking into consideration their expectations and concerns by gathering stakeholder feedback through dialogue, collaboration and cooperation, assessing the environmental, social and governance risks, as well as our opportunities across our business.

This approach allowed us to identify topics that have a direct or indirect impact on our Bank’s ability to create, preserve or erode economic, environmental and social value – not only for ourselves, but also for our stakeholders. Feedback from our stakeholders helps us to build on our strategy which outlines clearly our commitment to deliver sustainable value to our stakeholders, expand our offering, and initiate programmes and services to better serve our stakeholders.

Stakeholder engagement process

GRI 102-42

Identification of stakeholders

Our stakeholder engagement process involves three stages:

Engagementwith stakeholders

1 3Prioritising and identifying key

stakeholders

2


Stakeholders

55


Customers

Individuals Institutions Corporates Entrepreneurs

Customers are at the centre of our business and customer focus provides the basis to achieve a profitable and sustainable business.

Customers provide the source of funds that allow us to fund lending activities.

Employees

Permanent employees Employees on contract basis Outsourced personnel Trade unions

Skills, experience, and activities that our employees carry out drive the day-to-day operations of our business.

How our people think and feel about work are directly connected with customer satisfaction levels.

Shareholder

The Government of Sri Lanka Government of Sri Lanka as the sole shareholder expects the Bank to be a major contributor for financial stability and resilience of the economy.

Regulators and Government institutions

CBSL Ministry of Finance Auditor Generals Department Other Government and professional organisations

They provide the licence to operate the Banking business.

Business partners

Suppliers Utility service providers Other service providers Exchange houses and correspondent banks

They provide the equipment and expertise support services needed to develop and maintain our operations.

Impact on our ability to provide products and services cost effectively.


Society at large Pressure groups Community organisations Non-Government organisations Media

Social relevance is fundamental to our survival and success, and underpins our purpose and vision.

Ensures continued viability of the business into the long term. We aim to contribute positively to the communities and environment in which we operate.

Identification of stakeholders GRI 102-40

We define our stakeholders as those individuals or groups we influence through our activities, products and services and in turn those individuals and groups that have an interest in our success or failure and whose opinions and actions can impact on our ability to execute our strategy and conduct our business activities.

The first step of the process is to identify NSB’s stakeholders (Individuals, groups, and organisations) that directly or indirectly influence our operations. We have identified the following six stakeholder groups with whom we consistently strive to build and maintain relationship:



Key playersShareholder and customers

Keep satisfiedRegulators and

Government institutions

Minimum effortBusiness partners and

society and environment

Keep informedEmployees

High

Low

Low High

Interest

Pow

er

Engagement with stakeholders GRI – 43, 44

Based on the assessment we carried out, we engage with a number of stakeholder groups on issues that impact our business. This engagement is fundamental to our operations where stakeholder insights help us make better decisions, to fulfil needs, and to become a better bank.

We build different communication platforms for each stakeholder group and attaches great importance to engaging in a dialogue with them. The following table outlines NSB’s methods of engaging with stakeholder groups and its outcomes in 2018:

Stakeholder group

Method of engagement

Frequency of engagement Stakeholder’s concerns Value created

As r

equi

red

Regu

larl

y

Peri

odic

ally

Ann

ually

Qua

rter

ly

Mon

thly

Onc

e in

thre

e ye

ars

As i

ssue

d

Con

tinuo

usly

Annual report Sustainable financial return and growth strategy

Attractive dividend stream

Sound balance sheet to protect downside risk through strong and experienced management

Strong governance and transparent disclosure

The Bank’s resilience to challenging economic conditions

Generating sustainable financial returns (while respecting environmental limits), enabled by growing revenues, managing risks within an acceptable risk appetite and managing our expenses wisely, while optimising our cost base

Maintaining a strong balance sheet, which contributes to a safe and stable banking system that instils confidence and protects against downside risk

Financial statements

Corporate websiteMedia releases and press conferences

Prioritising Key Stakeholders GRI 102-42

We identify key stakeholders based on their relevance and ability to impact our business operations. We use the Mendelows matrix to analyse our stakeholder groups based on “Power” (the ability to influence business operations) and “Interest” (how interested the stakeholder groups are in the Bank’s operations).

The Bank continuously address and monitor these stakeholders’ needs and expectations to create value, stay in business or grow as well as to find a way to balance the conflicting priorities of our stakeholders.

Stakeholders


Stakeholders

57


Stakeholder group



As r

equi

red

Regu

larl

y

Peri

odic

ally

Ann

ually

Qua

rter

ly

Mon

thly

Onc

e in

thre

e ye

ars

As i

ssue

d

Con

tinuo

usly

One on one meetings

Safety for their money and investments

Cheaper and more convenient banking services

Improving banking experience

Excellence in customer service

Value for money banking

Combatting cybercrime and fraud

Responsible banking services and solutions

Reducing delays, errors, and complexity in processes

Safeguarding deposits and investments while growing returns

Rolling out more efficient channels and providing cheaper, more convenient banking options

Understanding the needs of our customers and providing personalised and comprehensive financial solutions

Enabling our people to provide excellent and consistent customer service and experience

Increasing digitaisation and innovation while making it safer

Proactively responding to cybersecurity threats and ensuring customer privacy and security

Maintaining the stability, security and speed of our IT systems.

Financial inclusion through our products, delivery channels and markets

Increasing process efficiency and automation

Increased capacity in our contact points and strengthen multi-channel delivery

Simplifying process

Customer access pointsSchool collection centresCall centre

Surveys on customer satisfaction

Corporate eventsCorporate website

Customer awareness programmesCSR activities

Promotional campaigns

Print and electronic mediaSocial media channels


Stakeholders

58


Stakeholder group



As r

equi

red

Regu

larl

y

Peri

odic

ally

Ann

ually

Qua

rter

ly

Mon

thly

Onc

e in

thre

e ye

ars

As i

ssue

d

Con

tinuo

usly

Formal meetings Recognition and career advancement opportunities

Training and development to enhance current skills and develop new skills in a changing operating environment

Employee health and well-being in a changing working environment

Competitive remuneration and effective performance management

Safe, positive, and inspiring work environment

Providing new employment opportunities with emphasis on diversity and inclusivity

Ability to raise voices and grievances individually and collectively

Offering attractive remuneration and reward for the value they are adding

Developing our workforce to be agile and remain relevant in rapidly changing environment

Creating an inspired environment which enables our people to be engaged

Employing people in the community in which we operate leveraging diversity and inclusivity

Training and development programmes

Job security and freedom for collective bargaining

Informal/Adhoc meetingsReview meetings

Performance appraisalsInternal newsletter

Operational circulars and guidelines

Training programmes

Intranet

Welfare events and activitiesNegotiations on collective agreements

Directives and circulars

Compliance with all legal and regulatory requirements

Embedding risk and compliance culture

Enhancing trust and maintaining stability in the banking sector

Being a responsible tax payer

Being in compliance with rules and regulation to mitigate against systemic risk

Embracing sustainable banking practices and regulatory compliance that enable a safe and stable banking system and a thriving society

Ensuring customer confidence in the Bank and reducing potential for reputational risk

Providing timely and detailed regulatory updates and disclosures

Contributing meaningfully to Government budgets through our own corporate taxes, staff paying PAYE taxes

Active participation in Government securities investments

Financial statementsStatutory ExaminationRegulatory reporting

Interviews and meetings with representatives of regulatorsIndustry forums and meetings Onsite surveillance


Stakeholders

59


Stakeholder group



As r

equi

red

Regu

larl

y

Peri

odic

ally

Ann

ually

Qua

rter

ly

Mon

thly

Onc

e in

thre

e ye

ars

As i

ssue

d

Con

tinuo

usly

Procurement plan

Fulfilling contractual obligation with prompt payment

Transparency in procurement practices

Long-term business relationships

Maintaining healthy, mutually beneficial relationships with suppliers and service providers

Having regular direct communication with major suppliers

Awarding the contract within the minimum time period possible and making the payments promptly

Procurement from local suppliers

Procurement processMeetings with suppliers and service providersSite Inspections

Tender notices

Product demonstrationsPublication of information/notices

Delivery channels

Playing major role in society with social, economic, and environmental concerns

Reducing the environmental footprint and using resources efficiently

Contributing to initiatives that address societal, economic and environmental challenges across the nation

Accessibility to everyday banking facilities at affordable prices

Accelerating inclusive economic growth and facilitating transactions that are the backbone of economic value exchange

Creating stable and permanent jobs that helps to improve the development of society and enhance the standard of living

Transforming economy and society positively through supporting Sustainable Development Goals (SDGs)

Making a difference through our community engagement projects

Investing in Sri Lanka’s infrastructure notably in transport, health and other sectors

Corporate websiteCall centre

Press releases, conferences and media campaigns

Sponsorships

Public relation activities

Funding Government infrastructure projects

CSR projects



NSB’s has adopted an integrated approach to reporting on material matters related to socio-economic, environmental, and governance information. We consider a matter to be material if it could substantively affect the Bank’s ability to create value over the short, medium, and long term. In the formulation of our strategy, we identify and assess material issues, which enables us to prioritise certain areas over others to better focus our energy and resources.

Materiality assessment process

Our materiality assessment process is aligned with UN SDGs, GRI Standards, and the IIRC Framework. It is a process that continuously evolve. It includes three principal steps: Identification, prioritisation, and application and evaluation.

Material matters are identified through studying internal input and reviews from our key business lines and divisions, committee reports, etc., and using external information such as publications and reports from regulatory bodies, issues raised by the parliament, reports from industry analysts, and etc. Once identified, material issues are plotted on a materiality map, according to its impact on operations and stakeholder relationships and the boundary of the topic. Then material matters are applied in our long-term strategic objectives and short to medium-term strategic objectives which leads to creating better value. The matters are evaluated annually to ensure that the Bank’s strategy remains robust and relevant.

Internal information

Issues that received the most attention of the Board and the Management during the year:

Management Committee Reports

Board Committee Reports

Research analysis done by the Research and Development Division on market conditions and sentiments

Internal Audit Reports

Employee workshops

External information

Reports and publications from regulatory bodies

Issues raised in parliamentary speeches, committees, statements, and policy documents

Reports and articles by industry analysts

Media coverage

Global and regional development concerns

Application and evaluation

Highly material Material Important

Prioritisation

Identification of material issues

Materiality Matters


Materiality Matters

61


NSB’s material issues

GRI 102-47

Following our materiality assessment process, we identified 15 material issues that have the potential to impact our operations and are of great importance to our stakeholders. The material issues have been grouped under three main pillars: Economic, environment, and social, as illustrated by the following diagram. We have also prioritised matters and plotted them on the materiality matrix diagram below:

1 Customer service and experience

6 Regulatory compliance

11 Diversity and inclusion

2 Risk-focused organisational culture

7 Responsible lending

12 Environmental footprint

3 Digital transformation 8 Financial Inclusion

13 Workplace safety, health, and well-being

4 Cyber security, fraud prevention, and anti-money laundering

9 Economic and social impact

14 Supply chain responsibility

5 Economic value for contributors

10 Attracting, developing, and retaining talent

15 Operational efficiency

%

Materiality matrix

100

60

80

40

20

200 40 60 80 100

14

2

6

5

3

10

15

7

11

8

13

9

1214Impo

rtan

t to

the

Ban

k

Stakeholder Concern

Economic



Financial inclusion


Environment


Social


Risk-focused organisational culture


Cybersecurity, fraud prevention, and anti-money laundering


Responsible lending






Important

Material

Highly material


Materiality Matters

62


Material issue Value creation GRI topic GRI Boundary*

Stakeholders Short to medium-term strategic objective

Related risk**

Reference

1. Customer service and experience

Understanding customer needs and meeting them

Treating customers with integrity, trust, and respect

401 employment communities

416 Customer health and safety

417 Marketing and labelling

Within and outside

4 5

6 9

pages 107 to 112

2. Risk-focused organisational culture

Maintaining high standards of corporate governance and a robust risk management framework to protect the interests of our stakeholders

Being agile to seize business opportunities amidst a fast-changing environment

205 Anti- corruption

206 Anti- competitive behaviour

403 occupational health safety

418 customer privacy

Within and outside

1 – 11 pages 89, 90, 110 and 115

3. Digital transformation

Making banking simpler and safer for our customers through innovation and technology

418 Customer privacy

413 Local communities

401 employment

Within and outside

4 – 9 pages 90, 91, 109 and 110

4. Cyber security, fraud prevention, and anti-money laundering

Protecting customers from cyber security threats through robust risk management systems and processes

Assisting regulators in preventing cyber crime, money laundering, and funding of terrorism


205 Anti- corruption

Within and outside

4 – 9 pages 86, 110 and 115

5. Economic value for contributors

Delivering consistent returns for our investors.

Contributing to the local economies through taxes, job creation, facilitating trade and industries, and building financial resilience of our stakeholders

201 Economic performance

203 Indirect economic impacts

Within and outside

1 – 11 pages 66 to 78 and 116 to 118

* Where the impact occurs within or outside NSB.** To know more about our related risks see “Statement on Risk Management” on page 140.

1 Credit risk 2 Market risk 3 Liquidity risk 4 Operational risk 5 Compliance risk 6 Reputational risk

7 Strategic risk 8 Cybersecurity risk 9 Regulatory risk 10 Model risk 11 Contingent risk


Materiality Matters

63


Material issue Value creation GRI topic GRIBoundary*


Related risk**

Reference

6. Regulatory compliance

Maintaining sound risk management systems

Complying with applicable laws, rules, regulations, and standards

205 Anti-corruption

206 Anti-competitive behaviour

Within and outside

4 5

6 7

9

page 115

7. Responsible lending

Addressing environment, social, and governance issues when making lending decisions

201 Economic performance


417 Marketing and labelling


Within and outside

1 4

5 6

7 9

pages 121 to 123

8. Financial inclusion

Making banking services and products accessible to all segments of society to meet their needs and expectations



Outside 1 – 11 pages 110, 111 and 116, 117

9. Economic and social impact

Supporting social development in the areas of art, children, and education

Encouraging innovation and enterprise

Nurturing start-ups and SMEs

202 Market presence

203 Indirect economic Impacts


Outside 4 7 pages 66, 112 and 116 to 118

10. Attracting, developing, and retaining talent

Treating our people with care and respect.

Investing in training and development

202 Market presence

401 Employment

404 Training and education

407 Freedom of association and collective bargaining

Within and outside

4 pages 96 to 99

11. Diversity and inclusion

Hiring from diverse cultural backgrounds, age groups, gender, and abilities

401 Employment

405 Diversity and equal opportunity

Within and outside

4 6 pages 97 to 100





Materiality Matters

64


Material issue Value creation GRI topic GRIBoundary*


Related risk**

Reference

12. Environmental footprint

Managing our resources wisely by saving energy, reducing carbon emissions and resource consumption, and minimising waste

302 Energy

303 Water

305 Emissions

306 Effluents and waste

Within and outside

4 6 pages 122 and 123

13. Workplace safety, health, and well-being

Providing our people with a conducive work environment

403 Occupational health and safety

Within

4 6 page 102

14. Supply chain responsibility

Addressing sustainability risks in our supply chain

204 Procurement practices

407 Freedom of association and collective bargaining

Within and outside

4 5

6 7

9

pages 113 and 114

15. Operational efficiency

Streamlining operations to improve process to provide quality service

Optimising cost and deliver at better prices

205 Anti-corruption

401 Training and education

Within

1 – 11 pages 90 and 91






Management Discussion

and Analysis

66 83 88Financial Capital Manufactured

CapitalIntellectual Capital

93 106 120Human Capital

Social and Relationship Capital

Natural Capital

125GRI Content Index in accordance with Core Criteria

This section is a comprehensive overview of NSB’s operations, performance, challenges, and future outlook according to each capital. Further, it outlines NSB’s position with regard to sustainability as a binding part of our business operations and performance.




Financial Capital

Funds generated through financial capital are utilised for operations, capital investment projects and to create sustainable returns within the approved risk appetite.

Economic value added NSB utilises the six capitals to create the value that sustains the business and provides shareholder returns. The value created is shared with our stakeholders to support the economy, government and communities where our employees live.

GRI 201-1

Depositors Direct economic value generated

Employees Economic value retained

Providers of capital

(Dividend)

Government Suppliers and operational

charges

Rs. Mn.

125,000

100,000

75,000

50,000

25,000

0

107,

996

111,

902

4,50

93,

955

5,11

150

0

4,71

65,

526

8,32

97,

036

9,26

36,

887

85,6

2278

,445

2017 2018

4.25%Special fee paid to Treasury

42.86%VAT, NBT and DRL

0.60%Contribution to

National Insurance Trust Fund

6.63%Dividend

45.66%Income tax

2018

Contributions to the Nation

LOANS DEPOSIT

Rs. 101.6 Bn. Deposits mobilised

Loans to deposits ratio

49.7%

NPL ratio

1.44% One of the lowest in

industry

Total capital ratio

16.138%

Financial Capital



Analysis of Income Statement

Analysis of Statement of Financial Position

Total income

Interest income

Interest expense

Net interest income

Impairment charges

Net operating income

Operating expenses and taxes on financial services

Profit before tax (PBT)

Income tax

Profit after tax (PAT)

Non-interest Income

Operating income

Liquidity

Asset quality Risk weighted assets

Other assets

Investments

ROA (Profit before tax)

Loans and advances

Deposits

Borrowings

Other liabilities

LeverageAverage equity

ROE (Profit after tax)

Profit attributable to the shareholder was considered

CETEquity

Total equity and total liabilities

Average assets

Total assets

Financial Capital



Total income The Bank recorded a total income of Rs. 111.9 Bn. during the year 2018, a marginal growth of 3.6% from 2017 underpinned by strong growth of interest income which represented 98.7% of the total income. The rest comprises non-interest income, namely, net fee and commission income, net gains and losses from trading activities, and other operating income.

Interest expense

Interest expense increased by 9.1% to Rs. 85.6 Bn. against Rs. 78.4 Bn. reported in 2017. This could be mainly attributable to the increase of 14.6% in interest expense due to depositors which amounted to Rs. 68.9 Bn. The increase is due to the increase in higher cost funding base of fixed deposits by 17.1%.

Interest income

Interest income increased by 6.7% to Rs. 110.5 Bn. in 2018 compared to Rs. 103.6 Bn. reported in 2017. Interest income from retail and corporate lending accounted for 45.2% of the total interest income which recorded a notable growth of 17.0% to reach Rs. 49.9 Bn. from Rs. 42.6 Bn. in 2017 supported by 12.7% increase in lending portfolio. Interest income from Government securities continues to be the largest contributor to the Bank’s interest income with a share of 51.8%. During the year there was a marginal decline of 2.8% to Rs. 57.2 Bn. from Rs. 58.9 Bn. in 2017. This was largely due to the maturity of Sri Lanka Development Bonds (SLDB) of USD 375 Mn.

2018

85,6

22110,

507

2017

78,4

45103,

579

2016

60,9

2386

,390

2015

51,1

4678

,128

2014

52,6

4274,0

23

Rs. Mn.

125,000

100,000

75,000

50,000

25,000

0

Interest income vs Interest expenses

Interest income Interest expenses

Analysis of Income Statement

Financial Capital



Net interest income

Net interest income marginally declined by 1.0% to Rs. 24.9 Bn. compared to Rs. 25.1 Bn. in 2017 due to increased interest cost associated with the funding profile. Consequently, net interest margin (NIM) dropped to 2.4%. in 2018 compared to 2.6% reported in the previous year. Withholding tax on interest income from Government securities was removed with the implementation of new Inland Revenue Act with effect from 1 April 2018. As a result, a loss of Rs. 3.6 Bn. of interest income on investments in Government securities made prior to 1 April 2018 adversely affected the NIM.

2014 2018201720162015

24,8

85

25,4

67

25,1

34

26,9

83

21,3

80

Rs. Mn.

30,000

24,000

18,000

12,000

6,000

0

Net interest income

Non-interest income

The non-interest income witnessed a sharp decline of 70.9% to reach Rs. 1.3 Bn. compared to Rs. 4.3 Bn. reported in previous year. This resulted from mark to market losses and reduction in realised gains in both Government securities and equity trading portfolios due to unfavourable market conditions along with non declaration of cash/scrip dividend by the subsidiary. Nevertheless, net fee and commission based income mostly related to debit cards, trade finance, remittances, and credit operations surged by 28.3% during the year to reach Rs. 0.9 Bn.

2014 2018201720162015

1,25

4

872

4,30

8

1,04

3

3,79

8

Rs. Mn.

5,000

4,000

3,000

2,000

1,000

0

Non-interest income

Financial Capital



2014 2018201720162015

26,1

39

26,3

38

29,4

42

28,0

25

25,1

78

Rs. Mn.

30,000

24,000

18,000

12,000

6,000

0

Operating income

Impairment charges

The impairment charges of Rs. 1,111.5 Mn. on lending portfolio net of the reversal of Rs. 260.1 Mn. on other financial assets due to maturity of SLDB was charged to the income statement. Further, Rs. 19.6 Mn. also has been charged to the income statement during the year as write-off/wave-off of capital and interest on loans and advances. Accordingly, total impairment charges to the income statement increased by 13.7% to Rs. 871.0 Mn. during the year 2018 against Rs. 765.8 Mn. reported in the previous year mainly due to increase in personal lending portfolio and implementation of SLFRS 9. Also, a sum of Rs. 1,126.1 Mn. was provided as Day 1 impact against the shareholders’ equity as of 1 January 2018.

2014 2018201720162015

25,2

68

26,4

38

28,6

76

25,8

86

21,7

02

Rs. Mn.

30,000

24,000

18,000

12,000

6,000

0

Net operating income

Financial Capital



Operating expenses and taxes on financial services

Operating expenses consisting of staff costs and other administrative expenses surged to Rs. 14.1 Bn., an increase of 27.6% from Rs. 11.0 Bn. in 2017 due to the increase of salary and non-salary benefits once in every three years according to the collective agreement. The Bank absorbed contract, outsourced employees to the permanent cardre and invested heavily on IT infrastructure. Staff expenses that comprise 65.7% of the operating expenses reached Rs. 9.3 Bn., an increase of 34.5% compared to 2017 which consequently increased the cost to income ratio to 54.2% from 37.8% in 2017. Further, the VAT and NBT on financial services declined to Rs. 2.9 Bn. during the year from Rs. 3.5 Bn. in 2017, recording a decrease of 16.4%. Nevertheless with the introduction of Debt Repayment Levy on financial services effective from 1 October 2018, the Bank has paid Rs. 308 Mn. during the last 3 months of 2018.

Rs. Mn.

2015 2014 201720163,

494

4,16

1

6,88

7

2,79

14,10

9

6,23

5

2,43

74,

5045,

911

4,39

7

2,03

6

4,79

7

2018

3,23

04,83

4

9,26

3

10,000

8,000

6,000

4,000

2,000

0

Personnel expenses Other expenses Taxes on financial services

Profit before tax

The Bank has reported profit before tax (PBT) of Rs. 7.9 Bn. compared to Rs. 14.1 Bn. in 2017, a decline of 43.8%.

2014 2018201720162015

7,94

1

13,3

03

14,1

35

13,0

34

10,4

72

Rs. Mn.

15,000

12,000

9,000

6,000

3,000

0

Profit before tax (PBT)

Financial Capital



Income tax

The income tax for the year decreased by 22.1% to Rs. 3.4 Bn. against Rs. 4.4 Bn. reported a year before. However, the effective income tax rate increased from 31.3% in 2017 to 43.3% in 2018 due to the removal of tax exemptions.

Rs. Mn.

Profit before tax (Rs. Mn.)

Effective income tax rate (based on PBT) (%)

Effective income tax rate

%

2014 2018201720162015

50

40

30

20

10

0

15,000

12,000

9,000

6,000

3,000

0

31.2

29.633

.5

34.4

43.3

Profit after tax

The Bank reported profit after tax (PAT) of LKR 4.5 Bn. compared to LKR 9.7 Bn. in 2017, a decline of 53.7%. A sharp increase in the effective tax rate due to the reasons explained above under taxation caused this decline.

2014 2018201720162015

4,50

0

9,49

8

9,71

6

8,67

2

6,86

7

Rs. Mn.

10,000

8,000

6,000

4,000

2,000

0

Profit after tax (PAT)

Financial Capital



Total assets

Total assets of the Bank grew marginally by 2.6% during the year and reached Rs. 1.04 Tn. at the end of 2018 compared to Rs. 1.01 Tn. as at end 2017. This is mainly due to the maturity of USD 375 Mn. SLDB investment and usage of foreign currency placements for the settlement of USD 750 Mn. bond which matured in September 2018. While 76.7% of the growth in assets were driven by loans and investments, 23.3% of the assets grew due to the increase in non-interest earning assets.

2015 2014 201820172016

13.7

710

.89

14.7

82.

62

12.0

07.

50

15.8

68.

80

17.3

419

.12

%

25

20

15

10

5

0

Asset growth

Banking industry NSB

Investments

Investment portfolio at the end of 2018 closed at Rs. 565.8 Bn. a dip of 4.6% compared to Rs. 593.3 Bn. last year, primarily owing to the maturity of Sri Lanka Development Bonds (SLDB) of USD 375 Mn. Accordingly, Government securities portfolio also decreased to Rs. 523.2 Bn. from Rs. 548.5 Bn. in 2017, thereby bringing down the Government securities to Deposits ratio from 62.0% to 60.9% at the end of 2018.

2014 2018201720162015

565,

841

554,

235

593,

333

549,

743

534

,485

Rs. Mn.

600,000

580,000

560,000

540,000

520,000

500,000

Loans and advances

Total loans and advances rose by 12.7% to reach Rs. 423.5 Bn. in comparison to the previous year of Rs. 375.7 Bn. underpinned by increased credit demand from the retail credit lines of personal loans, loans against deposits, and pawning advances. Contribution to the total assets from the total loans and advances increased to 40.8% at the end of 2018, compared to 37.2% in 2017. The loans and receivables portfolio was diversified across several industry sectors concentrating on infrastructure, construction/housing, agriculture and fishing, financial and business services, educational sectors, green energy products, and consumption purposes.

Analysis of Statement of Financial Position

Financial Capital



Asset quality

Gross Non-Performing Loans (NPL) and Net NPL ratios increased to 1.44% and 1.22% respectively in line with the growth in lending portfolio of the Bank and the deteriorating asset quality witnessed across the industry. Despite being the lower than the industry average of 3.4%, the increase in the NPL ratio as well as NPL in absolute terms reflects the deteriorating asset quality.

2015 2014 201820172016

2.50

1.34

3.40

1.44

2.57

1.55

3.24 3.464.

257.

61

%

8.75

7.00

5.25

3.50

1.75

0

NPL ratio – Gross

Banking industry NSB

Liquidity

The Bank’s Statutory Liquid Assets Ratio (SLAR) stood at 54.88%, a reduction from 73.44% in 2017 although well above the regulatory minimum requirement of 20%. In accordance with Basel III the Liquidity Coverage Ratio (LCR) which explains the availability of high-quality liquid assets at the disposal of the Bank within 30 days amounted to 321.29% as at the end of 2018, well above the statutory minimum of 90%.

The Bank’s liquidity position was healthy based on availability of stable funding as per the definitions prescribed by CBSL. The Net Stable Funding Ratio (NSFR) stood at 146.7% as at 31 December 2018 against the minimum requirement of 90% by 1 January 2019 and 100% by 1 July 2019.

%

Liquid Assets Ratio (LHS)

Liquidity Coverage Ratio (LCR) (All Currencies) (RHS)

Liquidity ratios

100

80

60

40

20

0

500

400

300

200

100

0

%

2014 2018201720162015

445.

9

394.

0

376.

2

321.

3

Financial Capital



Total equity and total liabilities

Total equity of the Bank has increased by 11.9% to Rs. 43.7 Bn. during the year compared to Rs. 39.1 Bn. in 2017 mainly due to increase in stated capital and other reserves. Total liabilities encompasses deposits (84.5%), borrowings (14.5%), and other liabilities (1.0%). Total liabilities for the period under review increased to Rs. 993.7 Bn., recording a minimal growth of 2.2% against last year, led by expansion in customer deposits. Accordingly, the Bank has a strong and resilient funding profile.

Borrowings

Borrowings comprising REPO borrowings, debt securities issued, and other borrowings plummeted by 35.6% to Rs. 144.3 Bn. as at the end of 2018, compared with Rs. 224.1 Bn. reported a year ago. This resulted in 67.8% drop in debt securities issued, which was caused by settlement of USD 750 Mn. bond in September 2018. However, a foreign borrowing of USD 100 Mn. for the settlement of the above bond as well as REPO borrowings which accounted for 51.0% of the total borrowings, triggered an increase in borrowings.

REPO borrowings FC borrowings Other borrowings

Borrowings

2015 2014 201820172016

6,08

9

6,18

7

6,12

2

7590

64,5

66

156,

703

152,

928

146,

898

134,

273

73,

658

61,

253

54,1

12

60,

127

56,8

29

Rs. Mn.

175,000

140,000

105,000

70,000

35,000

0

Financial Capital



Deposits

Deposits accounted for 80.9% of total assets as at end of 2018, an increase from 72.9% recorded in 2017. The Bank’s deposit base recorded its highest mobilisation in the history of the Bank by mobilising Rs. 101.6 Bn. during the year to reach the total base of Rs. 839.6 Bn., a 13.9% increase from 2017 base of Rs. 737.2 Bn. The growth of the banking industry moderated to 14.8% during the year under review.

Time deposits increased by 16.8% to reach Rs. 641.2 Bn. against Rs. 549.0 Bn. in 2017 which compelled the time deposits in the deposit mix to increase from 74.5% to 76.4% during the year under review. Meanwhile, savings deposits reported a moderate growth of 5.4%, registering Rs. 198.3 Bn. compared to Rs. 188.2 Bn. in 2017. These funds were mainly utilised for disbursement of loans rather than investment in Government securities. Accordingly, loans to deposits ratio increased to 49.7% from 47.0% reported in 2017.

12.2 13

.9

Rs. Mn. %

Deposits (Rs. Mn.) Deposits growth (%)

Deposits growth

2014 2018201720162015

1,000,000

800,000

600,000

400,000

200,000

0

15

12

9

6

3

0

7.5

10.4

10.3

2014 2018201720162015

49.6

8

44.0

5

47.0

2

40.6

5

36.2

6

%

50

40

30

20

10

0

Loans to deposits

Financial Capital



Leverage

The Bank was able to maintain the Leverage Ratio at 4.86% at the end of December 2018, above the minimum requirement of Basel III Compliance of 3%, effective from 1 January 2019.

CET

Equity

The Bank’s stated capital increased by Rs. 2.7 Bn. through capitalisation of unclaimed deposits reserve balances at the end of 2018 to Rs. 9.4 Bn. against the Rs. 6.7 Bn. registered in 2017. Increased stated capital combined with retained earnings has led to the moderate growth of 11.9% in shareholders’ funds, which closed at Rs. 43.7 Bn. at the end of 2018 against the Rs. 39.1 Bn. in 2017. Equity was utilised to fund 4.2% of the total assets as at the end of the current year, an improvement in comparison to the 3.9% at end of year 2017.

The CBSL introduced BASEL III Capital Requirements to the Sri Lankan Banking Industry with effect from 1 July 2017. The full implementation would take place in three phases over a period of 18 months, targeting to be completed by 1 January 2019, at which point the Bank would need to maintain its Tier I Capital Adequacy Ratio (CAR) at 10.0% and its total CAR at 14.0%. The Tier 1 CAR and Total CAR of the Bank clocked at 13.325% and 16.138% respectively at the end of 2018 which remained well above the regulatory limits of 8.875% for Tier I and 12.875% for Total CAR.

Financial Capital



Average assets

2014 2018201720162015

0.78

1.51

1.471.

60

1.46

%

1.75

1.40

1.05

0.70

0.35

0

ROA (Profit before tax)

2017

6.8

2018

3.6

2016

7.5

Rs. Mn.

Risk-weighted Assets (Rs. Mn.) Return on average RWA (Pre-tax) (%)

RWA and return on average RWA (Pre-tax)

250,000

200,000

150,000

100,000

50,000

0

%

12.5

10.0

7.5

5.0

2.5

0

2014

10.3

2015

9.8

Average equity

2014 2018201720162015

10.8

7

29.3

7

27.2

431.1

5

30.2

0

%

35

28

21

14

7

0

ROE (Profit after tax)

Financial Capital



Review of key business lines

To provide for our extensive customer base and to achieve operational excellence, we have diversified our operations, services, and products along segmented business lines. The management of the core business lines have led to better performance and the increase of capital. The following discusses our core business lines in details:

Branch banking

Products and services and customers

Performance in 2018 Key metrics Outlook Target

Products:

Full range of services including deposit taking, retail lending solutions, card solutions, and transactional banking, (See more on page 111)

Customers:

Natural persons and legal persons

Delivery channels:

Branches, ATMs, Post offices and Sub-post offices, CDM/CRM Machines, Online banking, iSaver points, and call centre

Achieved “Excellent” in customer satisfaction score for:

Savings – 82%

Fixed Deposit – 85%

Lending – 81%

Achieved highest ever mobilisation of Rs. 101.6 Bn. deposits through branches and postal network

Credit quality remained strong, maintained NPL at 1.44% lower than the industry average of 3.4% due to proactive risk management

Reduced loss-making branches by 28%

Review of forms and procedures for improving customers’ payments and widened the authority delegations to increase efficiency

Revamp the product targeted to youth segment and introduced the new product for teen age segment

Increase the ATM operations by 6% from previous year

13.9% of Growth in Deposits

19% of growth in retail lending

Market share of 9.6% in deposits

Transaction value through digital channels

Continue to innovate and roll out digital channels enable customers to migrate and empower our staff with digital tools to serve customers

Continued focus on people with a shift towards digital talent

Ongoing focus on cost optimisation strategies and leverage technology to drive operational efficiency

Increasing deposit market share by 40 basis points through a delightful customer experience, simpler processes and cost effective operations

Increasing retail lending portfolio by over the mid-single digit growth

Strengthening credit quality more than the industry average

Reducing cost level by over the mid single digital level through by managing costs wisely

Interest income growth more than the nominal GDP growth

Financial Capital

PreamblePreamble HighlightsHighlights MessagesMessages Our Value Creation ModelOur Value Creation Model Management Discussion and AnalysisManagement Discussion and Analysis GovernanceGovernance FinancialFinancial Reports Reports


Corporate finance



Products:

Direct lending to financial institutions and their subsidiaries

Structuring financial facilities (Derivative products for the clients)

Plays the role of agent for syndicated facilities who coordinates the settlement and transactions between the lenders and the borrower/s

Investing in trust certificates, private placements and debenture issuance

Leading industry expertise in funding for infrastructure projects

Customers:

Corporates, State-owned enterprises, financial institutions, and private institutions

Medium-scale entrepreneurs who have an annual turnover of Rs. 10-300 Mn. and 10-300 employees (Enterprise Lanka – Jaya Isuru)

Delivery channels:

Direct approach

Granted the Bank’s first foreign currency loan for RPI (Private) Ltd. to constructing resort with a facility limit of USD 9 Mn. (disbursed around 85%)

Successfully implemented risk-based pricing policy

Maintaining NPA ratio at zero level

Successfully implemented the strategies by leveraging low cost funding, to repay the 750 Mn. worth of USD Bond which was matured on September 2018

14.7% of growth in corporate lending – local currency

165.5% growth in fee-based income

Enabling revenue generation through stronger client relationships and new client acquisition.

Looking for opportunities for collaboration

Contribute to increase fee-based income by achieving mid-single digit YoY growth

Non-performing loans at current desired level

Achieving mid-single digit growth in corporate lending

Financial Capital



International



Products:

Foreign currency deposits (Savings and FD) in USD, EUR, GBP, AUD and JPY

Inward and outward remittances

Foreign currency exchange

Issuance of import letter of credit

Handling of import bills

Issuance of shipping and air freight guarantees

Customers:

Residents in Sri Lanka

Sri Lankans resident outside the country

Foreigners resident in Sri Lanka

Delivery channels:

Branches, online banking, correspondent banks, exchange houses, world-wide money transfer companies, Eurogiro postal network and overseas representatives, telephony, and call centre

Recorded Rs. 39 Bn. worth of foreign remittances

Recorded Rs. 278 Mn. worth of letter of credit value

Identified new markets and expanded remittance arms which include Doha Bank Qatar, Small World Global and Commerz Bank AG as a correspondence bank

Performance-based incentive structure for International Business Relationship Officers

Delivered new differentiated loyalty and reward programmes

17.3% of growth in Foreign Currency deposits

3.1% market share in remittances

1% growth in letter of credit value

268% growth in trade-related fee and commission income

Deepening collaboration and pursuing new opportunities for growth

Driving market share growth in remittances market

Penetrate markets in prominent countries for inward remittances (LKR/FC) and outward remittances

Access market for trade services permitted to the Bank through arrangements with Government institutions/ trade unions/new automobile dealers

Achieving double digit growth in foreign currency deposits and remittances

Financial Capital



Treasury



Products:

Investment in Government securities, equities, FX, REPO borrowings and reverse REPO lending

Customers:

Financial institutions, non-financial institutions, individuals, SOEs

Delivery channels:

Direct access, online trading platforms

Trading income and earnings were impacted by subdued markets, negative investor sentiments and higher interest rates of Government securities

60.9% Government securities to deposits ratio

Portfolio growth

– Government securities – 6.9%

Portfolio return

– Government securities – 10.6%

Contribution to the total interest income – 51.8%

Ongoing focus on delivering outstanding and long-term investment performance track record

Capitalising opportunities in higher growth markets

Contributing significantly to Bank’s profit through a sensible expansion approach (risk mitigation and capital efficient)

Simpler processes, cost effective operations

Executing strategies to raise the funds for settlement of USD 250 Mn. bond payment of the bond to be matured in September 2019

Automation of cash management among the NSB branches to minimise the unutilised cash balances

Double digit growth in trading gains on fixed income securities, Foreign exchange and equity portfolio

Enhance yield of Government securities held for collection portfolio at double digit




255Branches

288 ATMs

22 CRMsNSB Connect Zone

NSB Reach

300hand held

POS machines

NSB iSaver

16,000+mCash retailers

4,062Postal and

sub postal offices

Online banking platform

Pertinent material issues

Pertinent strategic objectives

Why manufactured capital is important to us

We use our manufactured capital, which includes properties, plant, equipment, and infrastructure including digital platforms, IT systems and software, and network of retail branches to create value to our stakeholders. The ongoing evolution of financial

services gives customers a choice from a range of relevant physical and digital channels suitable to their needs and preferences. Our multi-channel strategy provides customers with a range of platforms from face-to-face and technology based solutions. They are:

Physical infrastructure: Network of branches, ATMs, CRMs, Merchant Point of Sale, Hand held Point of Sale machine, Post offices and sub-post offices, and mCash retailers

Digital platforms: Internet banking, Chatbox, and presence in social media.

We envisage that expanding our manufactured capital is strategically important to us. Our branches are key outlets for our customers as it plays a vital role in maintaining human interactions typically for financial advice and routine transactional banking to the some extent. However, customer behaviour is changing and there are more ways to bank now than ever before. More customers are choosing physical outlets like ATM and digital platforms such as, mobile and online over traditional branch counters and we must envision to respond to these changes.

The proper management of manufactured capital plays an integral role to the success of the Bank since it will directly affect the customer experience, operational efficiency, profitability, and sustainable growth.




The proper management of manufactured capital plays an integral role to the success of the Bank since it will directly affect the customer experience, operational efficiency, profitability, and sustainable growth. We continue to invest in the components of manufactured capital which in turn helps to better serve our customers.

Our presence GRI 102-4, 6

One of the founding principles of NSB is financial inclusion where NSB has become the Bank that serves all segments of the society. Our greatest asset is our

extensive, island-wide reach with 255 branches including 6 super grade branches, 9 regional offices, 4,062 post offices and sub-post offices, and 310 ATMs network providing MasterCard and Visa debit card facilities. Further, we are accessible through over 16,000 mCash retailers island-wide and through hand-held Point of Sale (POS) machines. NSB is also a part of LankaPay, the national payment network that connects over 4,400 ATMs including Cash Deposit Machine (CDP) and Cash Recycling Machine across the nation. Our services are offered every day of the year through our 365 day banking in selected branches implemented in 2018.

Northern Province 20 22

1 Jaffna 14 16

2 Kilinochchi 1 1

3 Mannar 2 2

4 Mullaitiv 2 2

5 Vavuniya 1 1

Branches ATMs

Western Province 80 113

10 Colombo 43 68

11 Gampaha 25 31

12 Kalutara 12 14

Branches ATMs

Southern Province 36 40

13 Galle 13 14

14 Matara 13 15

15 Hambantota 10 11

Branches ATMs

North-central Province 15 17

6 Anuradhapura 12 14

7 Polonnaruwa 3 3

Branches ATMs

North-western Province 26 32

8 Puttalam 8 10

9 Kurunegala 18 22

Branches ATMs

Uva Province 12 14

22 Badulla 6 8

23 Monaragala 6 6

Branches ATMs

Sabaragamuwa Province 21 23

24 Kegalle 10 11

25 Ratnapura 11 12

Branches ATMs

Central Province 28 32

16 Matale 4 5

17 Kandy 17 20

18 Nuwara Eliya 7 7

Branches ATMs

Eastern Province 17 17

19 Trincomalee 2 2

20 Batticaloa 7 8

21 Ampara 8 7

Branches ATMs

1

24

19

20

21

23

22

3 5

6

8

10

11

16

1724

25

18

12

13 14 15

9

7




How we nurture manufactured capital

The net book value of property, plant and equipment reflected in the Statement of Financial Position at the end of 31 December 2018 with the value of Rs. 13.5 Bn., comprises land and buildings of Rs. 10.2 Bn., while the rest represents leasehold properties and improvements to rent/lease hold buildings, computer hardware and software, furniture fittings and equipment, and motor vehicles. New additions to property, plant and equipment during 2018 amounted to Rs. 2.1 Bn. due to increased investment in digital as well as physical infrastructure. Investment in physical infrastructure reflects branch openings, relocations, improvements, and refurbishmentsmade to owned, rented, and leased branches, whileinvestment in digital infrastructure represents systemsfor automation, strengthening digital and self-service channels, and IT security.

Expanding NSB’s physical presence in 2018 While we invest in digitalisation of all banking operations to heighten our customer experience, we recognise our strength in manufactured capital in the form of nation-wide physical touchpoints. We continue to improve existing branch network, while adding new branches in strategic locations. Two new branches were established in Deyandara and Pannala during the year. We also undertook relocation, expansion, and renovation in branches and divisions in terms of upgrading safety and interior aspects during the year to increase customers’ service quality and convenience, enhance their experience, as well as to energise our work force enabling a positive working environment.

Model branch In the current banking climate where customer needs are fulfilled at the touch of a button, customers look for a bank that can provide a superior banking experience. In the drive to provide access to digital, state-of-the-art services and to enhance customer experience, the model branch concept was launched in 2017 to bring the uniformity for all the branches with a bespoke “Smart Zone” to enhance customer convenience. As a part of phase 1, a total of 16 branches were completed during 2018. Branding works and signage displays were designed and fixed according to the 5S standards.

Access at NSB branches for differently-abled people

NSB is aware of the particular needs of people with disabilities or physical restrictions. That’s why we are always focused to meet these needs and enable them to bank with us without difficulties. We continued to provide accessibility to customers with disabilities in our branches. Disability access is provided at 221 branches in the country. The Bank has taken measures to ensure this requirement is addressed in the construction of new branches as well expansions and relocations of existing branches.

Energy efficient buildings

Tapping into a wide array of proven technologies and policies to improve energy efficiency and capture cost-effective energy savings in buildings will move the Bank towards sustainable growth and saving the planet. We have taken tangible steps towards making our branches energy efficient through the use of technology and the adoption of renewable energy such as solar power. Our branch premises are designed with glazed windows that creates thermal insulation that reduces the flow of incoming and outgoing heat. This results in lower energy consumption as less energy is used to cool down spaces.

All new branches are constructed according to our green building concept, as followed in the Kataragama circuit bungalow, where the building is designed to maximise the usage of natural air and light. In 2018, we have installed solar power systems as an alternate source of power in 30 branches and 13 branches have connected with net metering in 2018. This initiative will continue in 2019.

Digital infrastructure Investment in digital infrastructure encompasses strengthening digital capabilities and self-service propositions, expansion of payment solutions, information security, and investments in digital solutions for simplifying process.




Enhancing technical capabilities Our IT Division underwent a restructuring process, to facilitate the implementation of new digital-based solutions to the Bank and to standardise all IT operations of the Bank in accordance with international best practices. Considering future requirements of becoming a digitalised bank in medium term, we recruited 10 IT professionals in diverse areas and we will continue to attract talent with digital skills. With the view of improving the internal service standards in terms of technology, the Bank selected an industry leading solution for Help Desk Management and the implementation of the system is expected to complete by 2019.

Strengthening self-banking propositions We understood that strengthening our self-banking channels is a crucial aspect in the execution of our strategic priority “customer experience”. We step into next generation ATM technology adding Cash Recycle Machine (CRM) which enables the capability of cash withdrawals as well as deposits and Integrated Digital Media Signage (IDMS) to the existing ATM machines under the brand of “NSB Connect”. We have initiated the project in 2017 and we commissioned (3) three new ATMs along with 21 cash recycler machines during the year, bringing the total network as at 31 December 2018 to 310.

Expansion of payment solutions The Bank was recognised by MasterCard as the leader in MasterCard debit card issuance in Sri Lanka. The Bank completed the Visa Direct Connectivity Project in early 2018 and a project for issuing of Visa PayWave debit cards was commenced at the latter part of the year. A new Card Management System (CMS) was implemented providing the CMS access to all the Branches enhancing customer service.

To combat fraud and protect sensitive payment data, the Bank commenced the issuing of Non Personalised Master Card EMV debit cards from May 2018 and along with that enabled the MasterCard EMV chip debit cards for e-commerce transactions. There are number of projects in the pipeline to enhance the card operations of the Bank which includes providing PIN to customers via secured SMS, converting entire magstripe card base to EMV cards, issuing of NFC debit cards and enabling Visa debit card for e-commerce transactions and obtaining Payment Card Security Standards (PCIDSS) certification.

Information security Information security is of paramount importance to all IT/digital operations given the intense threat of IT and cybersecurity risks. We have a team of Information Security specialists who monitor, detect, and respond to potential cybersecurity threats. In order to comply with the baseline security standards of CBSL based on ISO 27001:2013, we implemented Information Security Management System (ISMS), which outlines our cybersecurity policies, guidelines, and tools to protect our customers’ and the Bank’s data and assets such as financial information, intellectual property, employee details, or information entrusted to the Bank by third parties. We also provide all employees with ongoing training about cybersecurity threats. We are committed to develop an Internal Security Operations Centre in the future to monitor and mitigate all risks related to security.

Digital systems implemented and improved in 2018 In the digital age of banking, we recognised the importance of integrating ICT to all banking operations and we continue to maintain and improve our systems and processes. Following our strategic objective of heightening customer experience, we strive to create a safe, secure, and trusted banking system. Improving our systems and processes help us to stay ahead of the curve to respond to the evolving customer expectations in the digital age and to achieve operational excellence.

Core banking solution The ground work for the core banking solution was completed in 2017 and 2018, and NSB expects to complete the procurement of a core banking solution in 2019. This modern solution will have the breadth of functionality to handle the most sophisticated banking requirements with high levels of automation, risk-free deployment, ease of use, and maximise operational efficiency. The solution will ensure compliance with regulatory requirements and to maintain international best practices.

New data centre facility NSB has recognised that the key to 360 customer view and seamless customer experience is the Bank’s ability to handle bigdata or the management of the scale and volume of data and its storage. Thus, the Bank has taken




steps to build a state-of-the-art primary data centre based on TIA 942 (Tier III) international standard. This will ensure speed of service, reliability, and availability and integrate banking services to fulfil customer satisfaction and internal service excellence.

Document Management System (DMS) This system was initiated in 2017 and has been implemented in 2018 to increase the operational efficiency of banking operations via expanding the digital storage of customer related documents. This enabled retrieving customer documents by any branch and enhance the customer service levels.

Anti-Money Laundering (AML) solution This facilitates the monitoring and tracking of transactions to prevent fraud and money laundering activities. The AML solution used by the Bank will complement with the introduction of core banking solution and other cloud-based solutions to digitalise and automate all banking operations at NSB.

Treasury management system The Bank is in the process of implementing a new treasury management solution that integrates, strengthens, and streamlines all treasury functions of the Bank. The solutions will offer greater flexibility in reporting, workflow and intraday reconciliation process and to reduce risks from manual error.

Slip-less banking As an initiative of introducing green banking concept, the Bank implemented a pilot project for slip-less banking and digitalised account opening. The Bank will roll out those facilities throughout the entire branch network during the year 2019.

Challenges

Capital spending, particularly with regard to energy and operational efficiency, involves large investment of money and requires a thorough financial review to reduce the possibility of over-improved and underused capital assets.

Striking the balance between the banking experience of aging population which requires physical banking and millennials who are seeking digitalisation and AI based banking.

Capital trade-offs

Enhance customer convenience and accessibility through expanding our networks improve Social and Relationship Capital but reduce our Financial Capital and negatively affect Natural Capital.

However, this investment made over our network and efficient modern equipment will bolster our business and led to the increase in financial capital in the longer term.

Outlook

To realise the medium-term target of converting the Bank to a digitalised bank, the Bank has initiated several IT projects including a procurement of a core banking solution. With the implementation of a new core banking solution and other related state-of-the-art IT solutions, the Bank is looking forward to achieving the goal of a fully-automated, secure, digital platform which will enhance the customer convenience and reachability while conforming to industry standards and best practices. This will empower the Bank to modernise customer interactions by driving channel optimisation, improve customer engagement, and identify the right customers to increase profitability. We will continue to revamp our other self-service banking channels like internet banking and introduce banking app under the brand name of “NSB e-connect” in the medium term.




USD 168 Mn. Brand value

5thmost valuable brand

Brand finance ranking

B StableGlobal ratings from

Fitch Ratings

B StableGlobal ratings from

S&P Global

Safest Bank in Sri Lanka

Global Finance Magazine

100% Government guarantee on deposits and interest

thereon

AA+(lka)National rating from

Fitch Ratings Lanka Ltd.

126Professionally-qualified employees at the Bank

511Employees completing more than

20 years of service



Why intellectual capital is important to us

Our intellectual capital comprises institutionalised knowledge, customer confidence, brand and reputation, internal systems and process and internal ethical standards policies, and corporate culture that we use to create value. These components are largely intangible assets that give us a source of sustainable, competitive advantage. Intellectual capital components interact to create value to our customers and are closely linked with our performance. Therefore, we regularly study the interaction effects between intellectual capital and organisational performance. Since intellectual capital is a strategic enabler, we take into account the role of intellectual capital in formulation of our strategy. Thus, intellectual capital and our strategy is intricately woven.

How we nurture intellectual capital

We develop our intellectual capital through strong process flows, partnership with other institutions and encouragement for learning and experimentation. We nurture our intellectual capital through development of new products, improvement of systems and processes that enable us to be more efficient while reducing the environmental impact and operating costs, by enhancing our corporate image, and consumer confidence.

We develop our intellectual capital through strong process flows, partnership with other institutions, and encouragement for learning and experimentation.




A trusted brand Over the years of our journey we have become a respected bank associated with trust, safety, and strength. As a deposit-taking bank, sine our establishment in 1972, we have earned the trust of all our stakeholders to become a household brand in Sri Lanka. In 2018, NSB was ranked 5th among the 10 most valuable brands in Sri Lanka by Brand Finance Lanka and Global Finance Magazine has affirmed NSB as the safest Bank in Sri Lanka for the 3rd consecutive year in 2018. These accolades, among numerous others, serve to strengthen the NSB brand with each passing year.

To maintain the sustainable, competitive advantage the NSB brand provides, we engage in a number of brand building initiatives throughout the year such as special marketing campaigns, advertising, events, exhibitions, and sponsorships.

Building and retaining customer confidence with our brand is a top priority for NSB. Over the last 46 years, we have been able to retain customer trust and confidence in all our operations. NSB is the safest bank in the country, where the Government has offered 100% statutory guarantee on people’s deposits with NSB and due interest. This guarantee and our long-standing success in the sector has contributed to maintain customer confidence.

Values aligned corporate culture GRI 102-16

An essential component of the theme for year 2018, Our ethos…our strength, is the corporate culture that exists in NSB. It aligns digitalisation and our operations, embraces innovation and sound strategic direction, promotes an openness and transparency. It is a culture of utmost professionalism, teamwork, transparency, diversity, and respect among individuals.

Corporate values NSB’s corporate values that have evolved over 46 years, provide a clear statement of our corporate vision, what we are trying to achieve, and what drives our actions. These values are embedded in the culture that exists at NSB and contributes our ethos, our identity, and our philosophy. They guide us to fulfil our mission and our mandate.

TrustBuilding relationships

through having complete confidence in the interests

of all involved

Mutual respect Recognising the inherent worth of every individual

and treating everyone with dignity

IntegrityBeing honest, consistent, and transparent in all our

actions and decisions

Creativity Challenging existing

practices whilst continuously seeking out for novel concepts

SafetyConsistently making

prudent decisions to meet the community needs and

protect their value

Business ethics and integrity As a leading financial services entity in Sri Lanka, we recognise that our business goes beyond banking. Our Code of Conduct guides us to be accountable and to be respectful with all our endeavours with stakeholders. Ethics and integrity forms an integral part of NSB, its corporate culture, and is embedded in our values.

Risk and compliance-focused culture We constantly monitor industry developments, the pace and complexity of regulatory change, coupled with the increase in regulatory scrutiny and enforcement action by relevant authorities. Risk management and compliance is a top concern for the Board, driving a growing cultural shift within the Bank to view compliance and risk




management as an integral strategic investment. Our compliance accountability starts with a strong culture of risk awareness starting at the top and across the Three Lines of Defence. We review and enhance high standards of corporate governance, robust risk management framework, and compliance capabilities within our Bank and strengthen our values-based risk focused organisational culture.

A culture of innovation In order to survive in a continually evolving market and cater to the expectations and requirements of rapidly changing customer demands, we encourage a culture that sustains and supports innovation. We constantly strive to doing things differently, catering to market needs, and adapting to changing technologies to improve on processes, people, and productivity. As outlined under social and relationship capital, we launched new products for teens, migrant community, and small and medium entrepreneurs during the year.

Culture carriers As an employer of choice, NSB attracts, inspires, and empowers employees with opportunities to learn, foster personal responsibility and accountability, and lead change. All our employees are committed to fulfil the vision and mandate of the Bank. To nurture the corporate culture and the sense of family that prevails within NSB, we organise various events and programmes as outlined in our human capital throughout the year.

To promote a sense of fellowship, other activities were organised through NSB Sports Club, Buddhist Society, Christian Society, NSB Welfare Society, and Kala Kawaya (Arts Circle). For more details on how we care about our people and how we have developed communication channels for the exchange of ideas and understanding our employees and other stakeholders could be found on human capital on page 93 and engagement with stakeholders on page 56 respectively.

Engaging with community Since we are a national organisation, connecting with and giving back to the local community are also a part of the fabric of our corporate culture. See more details on our commitment to the national and community development in social and relationship capital on page 116.

Institutionalised knowledge Our institutionalised knowledge comprises the tacit knowledge, skills, and experiences derived from serving the nation for over 46 years. We understand that the knowledge is a quintessential resource that affects all our operations and we have made efforts to manage knowledge and especially to ensure that there exists a system such as structured training programmes, culture of mentoring and informal ways for knowledge management, sharing, and transition.

Our employees belonging to different geographies, generations, and backgrounds bring diverse knowledge and skills to the NSB family. The top executives of Corporate Management hold more than fifteen years of experience in the financial sector while 26% of total employees completed more than 10 years of service in 2018.

Our internal training and induction programmes conducted by our experienced staff members serve to transfer existing knowledge to our new employees. We recognise that our ability to retain experienced employees is a vital step in the management of institutionalised knowledge that is clearly unveiled through our staff retention ratio of 98% in 2018.

Robust systems and processes We maintain the robustness of our systems and processes to uphold our role in ensuring a safe, secure, and trusted banking system, improving operational excellence in all we do and delivering innovative products to enhance customer experiences. Following key process improvements during the year have reduced turnaround times, enhanced accuracy and customer service quality and freeing resources for more value adding activities.

5S Implementation We continued the implementation of “Seiton”, one of the 5S concepts, under the guidance of the National Productivity Secretariat (NPS). The Boralesgamuwa branch, which was developed as a model branch with its interior and façade development completed the process of implementing Seiton in order to obtain the 5S certification from the NPS. Following this, the concept will be expedited in other branches as well as in all divisions.




New payment dispute management system At present, our customers opt for electronic payments using cards over cash payments in all transactions. With the growth of card transactions, so does the number of fraud or disputable transactions. We have implemented a new dispute management system to facilitate rapid and efficient resolution of disputes to card transactions.

Other measures in 2018, to streamline and simplify processes

Streamlined the process of issuing duplicate passbooks on savings accounts for lost or damaged books

Expedited the execution of mortgage bonds and examination of title, providing title comments to execute a mortgage bond within three days from the date of receiving instructions

Appointed recovery officers at regional level to fasten the loan recovery process

Introduced a process to facilitate fund transfer requests made by overseas customers along with redesigned forms for money changing, remittances, and trade services to increase efficiency

Simplified the process to release the funds held in the accounts of mentally-disabled customers

Redesigned the standing order form and KYC form for the convenience of customers and to facilitate internal operations

Introduced a single payment voucher to simplify the payment process

Our corporate website was revamped and relaunched with a fresh outlook and easy navigation

Awards and recognition Witnessing numerous awards and accolades received during the year at national, regional, and international level endorsed our enhanced know-how knowledge and approach to building the NSB brand among our stakeholders.

NSB secured The Silver Award at the Annual Report Awards – 2018 for State Banks Category by CA Sri Lanka

NSB won the Most Popular Corporate Website Award at Bestweb.lk 2018 competition




Silver AwardCover Photo/Design: Banks: Savings and Loan

Among top 10 Best Integrated Reports

Award for the Best Integrated Report in

State-owned Enterprises

Award for the Most Improved

Integrated Report

Bronze AwardWritten Text:

Banks: Savings and Loans

Bronze AwardNon-Traditional Annual Report:

Banks: Savings and Loans

CA Sri Lanka Annual Report Awards 2018 –

Silver Award – State Banks

Bronze AwardInterior Design: Banks: Savings and Loans

Challenges Retirement of some employees with critical knowledge and expertise that formed a part of institutionalised knowledge leads to intellectual losses.

As a dynamic industry, continuous innovation of products and services is essential.

We require new skills to develop new revenue streams.

Capital trade-offs Investment in systems, processes and people reduced our financial capital in the short term.

However, in the long term, financial as well as manufactured, natural, human, and social and relationship capitals are likely to enhance as positive impact on skills and innovation, new products and services and new revenue streams will boost the human capital, social and relationship capital and financial capital.

OutlookIn 2019, we will continue to implement the 5S concept in our branch network. We will establish a productivity resource centre, Kaizen Concept and quality circles. Our investments in digital banking will continue where we will implement digitalised banking solutions and automations of payment processes to improve convenience.



133Number of promotions in 2018

91.6%Employees covered by the collective agreement

145New recruitments in 2018

Categorisation of employees based on experience

1,836Less than 5 years

1,2065 to 10 years

48611 to 15 years

9216 to 20 years

511More than 21 years

25Senior Grade

1%

540Managers

13%

1,235Executives

30%

1,917Staff assistants

46%

414Office assistants

10%

Category of employees

Human Capital

As we look to the future it is our human capital that will help us achieve our goals in an unpredictable environment.

Pertinent material issues Pertinent strategic objectives

GRI 102-8

Human Capital



Why human capital is important to us

Our employees play a pivotal role in our endeavours to create value. The implementation of our strategies, the achievement of our goals and the positive bearing we have on the nation are only possible because of them.

Their skills, experience, and commitment have provided the Bank with a unique understanding of our customer’s particular banking needs. Their loyalty, diversity, and years of service at the Bank have translated into long-standing relationships with our customers. Their dedication, creativity, and enthusiasm have made it possible for the Bank to successfully ride out storms or take on new ventures for the benefit of all our stakeholders over the years. Staying true to the values of the Bank, our people continue to offer customers straightforward products and services that they can trust. In turn the Bank makes every effort to deliver value to them, as outlined in the pages that follow.

As we look to the future it is our human capital that will help us achieve our goals in an unpredictable environment. The world of banking has never seen such rapid and unexpected developments as we are seeing today. Through this explosion of change our employees learn and adapt while remaining engaged to ensure that the Bank continues to be a pillar of strength to all its stakeholders. Our employees remain the cornerstone of the Bank’s success.

Our team

The total staff strength stood at 4,512 in 2018 consisting of 381 contract employees. During the year there were a total of 145 people who joined the NSB family. Our retention rate stood at a competitive 98% and over 26% of our employees have been in the Bank for more than 10 years which illustrates the trust and loyalty that our employees have placed on us. The following offer a detailed statistical representation of NSB’s workforce in 2018:

Male Female

13

276

513 62

1

404

264

722

1,29

6

1012

Staff grade category by gender – 2018

Senior grade

Managers Office assistants

Staff assistants

Executives

Nos.

1,500

1,200

900

600

300

0

Male Female

13

299

507 59

8

16128

1

683

1,25

0

47

Staff grade category by gender – 2017

Senior grade


Staff assistants

Executives

Nos.

1,500

1,200

900

600

300

0

Human Capital



92%Permanent

8%Contract

Employees by employment type

2018

85%Permanent

15%Contract

2017

Permanent employees by age and gender 2018

Less than 25 years

25-35 years

Above 55 years

46-55 years

36-45 years

Nos.

1,750

1,400

1,050

700

350

0

81

983

408

261

94 61

19429

3

1,63

0

126

Male Female

207

2,61

3

701

455

155

Permanent employees by age

Less than 25 years

25-35 years

Above 55 years

46-55 years

36-45 years

Nos.

2,750

2,200

1,650

1,100

550

0

Analysis of employee service years by grade and genderGrade category Less than 5 years 5-10 years 11-15 years 16-20 years More than 21 years Total

Male Female Male Female Male Female Male Female Male Female Male Female

Senior grade 2 – 2 3 1 1 2 3 6 5 13 12

Managers 23 24 47 37 31 19 19 14 156 170 276 264

Executives 111 251 141 225 205 170 10 15 46 61 513 722

Staff assistants 282 756 247 501 21 37 20 – 51 2 621 1,296

Office assistants 378 9 2 1 1 – 9 – 14 – 404 10

Total 796 1,040 439 767 259 227 60 32 273 238 1,827 2,304

Senior grade (GM/CEO, Senior DGM, DGM, AGMs) Managers (Grade I, II, III - I, III, II) Executives (III-III and IV), Staff Assistants (V and VI), Office Assistants (VII)

Human Capital



Service years by gender

Less than 5 years

5-10 years

More than 21 years

16-20 years

11-15 years

Nos.

1,250

1,000

750

500

250

0

796

439

259

60

273

238

32

227

767

1,04

0

Male Female

Service years analysis

73.6%Up to 10 years

26.4%More than 10 years

2018

73.8%Up to 10 years

26.2%More than 10 years

2017

Professionally qualified employees in permanent cadre

97.13%Others

2.87%

1.67%IT professionals

0.39%Engineers

0.18%Accountants

0.63%Lawyers

2017

3.05%

96.95%Others

1.77%IT professionals

0.48%Engineers

0.22%Accountants

0.58%Lawyers

2018

How we nurture human capital

Attracting and retaining talent GRI 202-2 401-1

Taking care of our employees begins with the recruitment process. Ensuring we attract a diverse group of people that reflects our varied customer segments is essential for maintaining our relevance and effectiveness in serving the latter’s banking needs. It is for this reason that we aim at all times to recruit the best personnel in terms of qualifications, skills, and experience in relation to the respective roles, without bias.

Human Capital



During the year under review our permanent employee cadre increased to 4,131 from 3,803 in 2017. Where possible we hire from local communities especially for the Senior Management roles, this ensures that the diversity within the Organisation reflects that of our customer base. A healthy male-female ratio of 6:5 (at all levels) is testament to the emphasis we place on equal opportunity.

Male Female

Geographical diversity of staff by gender Nos.

500

400

300

200

100

0

Western 2Province

Western 1Province

Head Office

Central Province

Eastern Province

Northern Province

North Western Province

Postal Sabaragamuwa Province

Southern Province

453

154

99 97

154 18

0

119 17

8 215

178

343

174

101

76

176

248

172

264

338

412

we consistently hire the right people for the job. In addition, we use a diverse range of competitive exams and interviews and require selected candidates to complete a probationary period of one year. We are committed to recruiting employees from local community and 100% of our Senior Management is hired locally.

We recognise our responsibility as a State-bank serving the people of the Nation to offer opportunities for our younger generation to gain valuable experience working at a leading corporate in the country. We thus, provide employment and internship opportunities for youth and school leavers. In 2018, we recruited 133 of youth and provided internships to 19 school leavers.

Our recruitment also focuses on skills-based recruitment, where we hire people who have specialised skills. This process has helped to streamline the recruitment process by matching the skills required to perform set tasks with an applicant’s skill.

During the year under review we recruited 145 people down from 216 the previous year, a total of 3.2% of the total cadre down from 5.3% in 2017 including permanent and contract based employees. The majority of our recruits joined us at entry level.

19.27%Head Office

7.94%Central

Province

4.84%Eastern

Province

4.19%Northern Province

7.99%North Western

Province

13.39%Western Province 1

10.70%Southern Province

7.04%Sabaragamuwa Province

10.36%Postal

14.28%Western Province 2

Geographical diversity of staff 2018

Our recruitment process is exacting, with suitable assessments specifically designed for each role type. This stringent and transparent process ensures that

Human Capital



New recruits by age and gender

Less then 25 years

Above 45 years

36-45 years

26-35 years

Nos.

1449

83

2050

Male Female

1

60

48

36

24

12

0

New recruits by grade and gender


Staff assistants

Executives

Nos.

8 6

3831

46

2

113

Male Female

50

40

30

20

10

0

Developing our people GRI 404-1, 2

At NSB we value creativity and innovation but in the banking world these must be exercised within the complex framework of regulatory obligations and established systems and processes to ensure the strength of the financial capital entrusted to us. For this reason, ensuring that our employees remain highly skilled, qualified, and experienced remains of paramount importance, as we strive to achieve our strategic goals.

Training Needs Analysis (TNA) Using our Training Needs Analysis, we identified the training and development needs of our employees using various methods such as the annual training needs survey, interviews with the respective team leaders, consultations with the General Manager (GM)/Chief Executive Officer and DGMs, reviews of customer complaints, performance appraisals, and questionnaires. We then took the necessary steps to fill any gaps with quality material.

The TNA process includes:

Identifying the required skills set Assessing existing skill levels Determining the training gap Assessing findings Determining the required types of training and development programmes

Nurturing our people through training and development NSB provides its employees with a range of professional development opportunities including on-the-job, in-house, and external training in both local and foreign locations, sponsorships, and educational incentives.

Throughout the career lifecycle we offer our employees many types of training including:

Induction On-board training Learning through feedback Technical skills development Soft skills development Leadership skills development

These training programmes are geared towards developing functional and technical expertise that is required as an employee of NSB from the day he/she joins the Bank. The programmes focus on new recruits to gain valuable experience and job-specific skills, as well as to enhance the skills of employees who have been with the Bank for a longtime.

Training through webinar: During the year under review, the HRD Division enlisted the help of the Training and Development Division to launch formal webinars for branches. Training programmes through three webinar sessions under “Knowledge sharing via E-Learning” programme was conducted for greater employee awareness. This programme allows Head Office staff and the branches to connect, share information and solve problems in real time no matter where in the country they may be stationed.

Human Capital



During the year under review, we invested over Rs. 38.6 Mn. in 312 foreign and local training programmes, up from Rs. 34.4 Mn. the previous year. Together our employees logged in 58,590 training hours up from 45,347 in 2017. During the year, 41 staff members participated at overseas training programmes. The average number of training hours per employee was 13 hours and the participation ratio was 91% up from 12 hours and 88% respectively year on year.

Managing our people Once recruited, all employees are inducted to the wider family of the Bank. This ensures that they bring with them their individuality and creativity in a way that enriches our talent pool. While career progression in banks tends to be much slower than that of start-ups or non-traditional types of businesses, we make every effort to support career growth and promotion within the ranks. Promoting the best for each role Whenever vacancies appear in either banking or non-banking streams which can be filled by internal promotions, we make every effort to do so. This allows us to speed up career progression while also retaining people who have already garnered experience at the Bank.

When employees apply for promotions, we conduct a comparative review of work-related factors such as their qualifications, ability, and the quality of past work performance. No extraneous, unrelated factors are taken into consideration to ensure that in all our selection and employment processes all individuals are granted equal employment opportunity.

During the year, we promoted a total of 69 women and 64 men – a majority of whom were in the 46-55 age group.

Promotions by grade and gender

AGM DGM Grade I

Grade IV

Grade III-I

Grade II

Nos.

1 67

4444

107

32

63

100

80

60

40

20

0

Male Female

48%Male

52%Female

Promotions by gender

Performance management

GRI 404-3

The Bank employs a performance management system to continually assess performance. For employees, this means receiving continuous constructive feedback on areas of weakness and commendations for their performance. This motivates them to optimise their performance throughout the year rather than learning about any performance gaps at the end of the year when there is little time for corrective measures.

The Bank’s performance management policy focuses on the following key elements in pursuit of achieving the Bank’s overall objectives:

Identifying performance gaps and improving employee performance

Identifying individual and team for training and development needs

Identifying increments, promotions, and reviews for employee remuneration packages

At NSB, we possess an equitable, transparent appraisal system. All employees are evaluated formally on an annual basis and assessed against a set of predetermined criteria each year. Appraisal of the Corporate Management is based on the Key Performance Indicators (KPI) using Balanced ScoreCard system. However, the Bank is in the process of introducing comprehensive KPI based performance management and appraisal system across the Bank to develop a performance driven culture. This system aims to eliminate any biases and instead encourages objective evaluation.

Upholding the highest professional and ethical standards

GRI 205-2

The NSB’S Code of Conduct sets out the principles of personal and professional conduct expected of our people. It also reflects the Bank’s commitment to ensure merit-based, equal employment opportunities. It defines the

Human Capital



standards we require to offer a safe working environment that is free from discrimination, bullying, and harassment. All new employees upon joining Bank are informed of their obligations and rights under the Code of Conduct.

The Bank’s Disciplinary Code of Conduct is designed to guide and educate employees in matters relating to discipline. The Disciplinary Code of Conduct has been revised in 2017 based on the provisions of the Government Establishments Code Volume II and modified to suit the particular needs of the Bank. Maintaining “zero-tolerance” for all forms of corruption, bribery, and extortion practices, the Bank takes strict disciplinary actions against employees who violate the Disciplinary Code or indulge in malpractices.

Supporting diversity and equal opportunity

GRI 401-3 GRI 406-1

The Bank provides equal employment opportunities for all persons regardless of race, colour, religion, gender, age, marital status, national origin, or disability, except

where a bona fide occupational qualification is required. This applies to every aspect of an employee’s experience with the Bank, including:

Recruitment Training and development Compensation Educational assistance Benefits Recreational programmes Transfers Promotions

Females accounted for 56% of our permanent employees as at the end of 2018 and 29% of all the hires in 2018. In Senior Management and middle management roles, women made up 48% and 49% respectively.

We offer female employees parental (maternity) leave of 84 days, with full benefits and no constraints. We also make it a point to facilitate their return to work. The Bank offers paternity leave of three days to male employees. Accordingly, during the year 269 females took maternity leave, while 122 paternity leaves were recorded. 99.7% of them returned to work upon completion of their leave.

While the Bank promptly investigates all complaints regarding violations of the policy of equal employment opportunity, during the year 2018, there were no such complaints reported.

Number of foreign training programmes

18

Number of local training programmes

294

Total number of training hours

58,590

Total investment in training

Rs. 38.7 Mn.

133promoted

Promotions above managerial level

40

Promotions for manager level

88

4,131permanent employees

381contract

employees

145recruited

Human Capital



Rewarding performance GRI 202-1 GRI 401-2 GRI 405-2

The Bank offers employees fair, competitive, and attractive compensation packages. In 2018, the Collective Agreement for Salary Revision for the period of 2018 – 2020 was successfully signed between the Management and the Trade Unions. Salaries and other financial benefits from the Chief Manager’s grade and below are structured according to the agreed terms and conditions set out in the Collective Agreement with the Trade Unions.

All salary scales are published on the Bank’s intranet to ensure transparency. Agreements for both salary and non-salary benefits are revised once in every three years subsequent to the discussions between the Management and the Unions of the Bank. We ensure that all personnel who have similar responsibilities are paid within the same salary range irrespective of gender, though individual salaries will vary based on an employee’s length of service and past performance.

Financial benefits Defined as all payments an employee receives apart from his or her salary, financial benefits are provided for all regular, full-time employees who are confirmed in their service. These include:

Fixed and variable cash benefits

Competitive salary Bonuses, provided in April and December if the Board decides to reward achievement of set targets for the year

Encashment of privilege and medical leave up to a maximum of seven days for each type at year end

An annual increment for those who perform satisfactorily over the preceding 12-month period

Fuel/travelling, accomadation assistance, subsistence and duty travel provisions

Job-specific allowance and overtime

A non-contributory pension scheme and a contributory widows and orphans scheme

Reimbursement

Membership fees for professional institutions

Honoraria payment for employees completing at the intermediate level in Applied Banking and Finance and Diploma level in Applied Banking and Finance Institute of Bankers of Sri Lanka (IBSL)

Sponsorship of selected, relevant study courses completed by employees

Subsidised loan benefits

Housing, Vehicle loans, other subsidised loans such as consumption and distress loans and festival advances.

Medical assistance schemes

Employee medical assistance scheme which offers coverage for specialist/OPD medical charges, hospitalisation, critical illnesses, eye and dental care for all permanent employees including probationers

Compensation scheme for permanent employees, in case of death, permanent disabilities, or partial disabilities up to a maximum of Rs. 1 Mn.

Human Capital



Retirement benefits

GRI 201-3

All permanent employees are covered by non-contributory pension schemes where terms and conditions vary depending on the pension scheme in place at the date of appointment.

The types of retirement benefit plan obligations include:

Pension Fund (Scheme I and Scheme II) Contributory Widows/Widowers and Orphans Fund (only for Scheme II)

Contributory retirement medical scheme

The Bank’s Pension Fund is fully insured. The projected unit credit actuarial valuation method is used to ascertain the cost of providing benefits under the defined benefit pension plan.

The Pension Fund (Scheme I) applies to employees recruited before 1 October 1995. The Bank’s contribution to it, during the year, was Rs. 523 Mn. Unfunded liability stood at Rs. 2,596 Mn.

Pension Fund (Scheme II) applies to employees recruited on or after 1 October 1995. The Bank’s contribution to it, during the year, was Rs. 167.8 Mn. We contribute 12% of the employee’s gross salary to this fund.

The Retirement Medical Scheme and Widows, Widowers and Orphans Fund are both contributory schemes. Bank contributed Rs. 135.7 Mn. to Retirement Medical Scheme and unfunded liability stood at Rs. 1,234.7 Mn. at the year end. The amount of monthly contribution to the Retirement Medical Scheme is determined by age. The employee/member’s contribution of Widows, Widowers and Orphans Fund is determined by the basic salary of employees. Members of the Fund should contribute 5% of their basic salary as a monthly contribution.

New additions to employee benefits in 2018 New or amended employee benefits launched during the year under review include:

Increase of deductions allowed from gross salary for loans granted

Increase in medical reimbursement facilities for retired employees under Contributory Medical Assistance Scheme – hospitalisation, routine/specialist, eye, lenses, corrective appliance and dental, critical illnesses along with increase in monthly contribution by pensioner

New payment of subsistence allowance for recovery assistants on contract basis

Performance-based incentive structure for International Business Relationship Officers

Recognising our employees’ dedication To thank our people for their commitment and loyalty to NSB, we recognise and reward employees’ long service at our annual felicitation ceremony to recognise employees who have completed 25 and 35 years of service. In 2018, 26 employees received the reward, 14 of whom were honoured for their 35 years of service.

Also, the annual Achievers Award Ceremony is held to felicitate academic achievements (GCE Ordinary Level, GCE Advanced Level, and Grade Five Scholarship Examinations) and non-academic achievements in sports and extracurricular activities of the children of the employees.

Ensuring health, safety and well-being of our employees

GRI 403-9

Taking care of our employees’ health and safety is a key focus at NSB. A range of initiatives are already in place to ensure the best conditions for a positive working environment. This includes:

In-house medical centre at NSB Head Office run by a leading private hospital and managed by the Bank’s Welfare Division

Bi-monthly visits by specialised doctors at the medical centre.

Medical clinics conducted by leading private hospitals Regular seminars conducted by professional resource personnel on stress management, eye care, and prevention of cardiovascular diseases.

The Security Division of NSB is present at every NSB branch and is under strict instructions to follow stringent procedures, from crisis management to alarm systems, which ensure a safe, secure workplace.

During the year, the Bank reported three minor accidents on its premises.

In the near future NSB’s focus on health and safety will encompass:

Enhancing an occupational safety and health system at National Savings Bank with adherence to the provisions of the National Occupational Safety and Health Policy and the Shop and Office Employees Act No. 19 of 1954.

Human Capital



To appoint two individuals from each branch/division to ensure health and safety work environment in the respective branch/division.

Secure the health, safety, and welfare of employees at work.

Identify potential risks to employees at workplace. Promote an office environment for employees that are adapted to their health and safety needs.

Promoting work-life balance We use smart management methodologies to achieve work-life balance which allows our employees to feel as if they are paying attention to all of the important aspects of their lives. We assist our employees by offering such opportunities as sponsoring tours, establishing circuit bungalows to provide affordable accommodation at popular holiday destinations, and flexible working arrangements for new mothers by providing a feeding hour for six months since child’s birth.

The Bank maintains 15 holiday resorts in different areas of the country as at December 2018: in Anuradhapura, Kandy, Ambalantota, Nuwara Eliya (two bungalows), Mahiyanganaya, Galle, Bandarawela, Badulla, Dambulla, Chawakachcheri, Beliatta, Marawila, Katharagama and Diyathalawa.

Throughout the year, multireligious ceremonies and events like Vesak Bakthi Gee, Avurudu Pola, and Christmas Carols are organised by the Welfare Division to spread spiritual and religious harmony among the members of the staff. We also organise an “Avurudu Uthsawaya” every year with the participation of employees and their families. A sports meet is also held annually, with regional sports meets held before the final sports meet held in Kandy. There are also various sports teams of our employees ranging from cricket, football, volleyball, and etc.

Our employees also come together for the numerous CSR events that are conducted throughout the year. Moreover, the Bank provides library facilities and NSB Sports Club maintains an in-house gym in the Bank’s Head Office premises. Concessionary rates for food from the Head Office canteen is provided to our employees and the Bank provides monetary assistance for day outings organised by branches and divisions.

Focusing on retention GRI 401-1

The retention rate for permanent employees for the year under review stood at 98% up from 96.7% while our turnover rate for the year was 2% down from 3.3% the previous year. Our high retention rate and low turnover rate has given us a reputation for being a coveted employer. Our retention ratio was one of the highest among the industry. We attribute this achievement to the safe working environment and culture at NSB which is conducive to high productivity and supports employee development.

Turnover by age and gender

Less than 25 years

Above 55 years

46-55years

25-35 years

36-45years

Nos.

2 1 3

44

4

19

39

Male Female

50

40

30

20

10

0

Human Capital



Turnover by grade and gender

Senior grade

Office assistants

Staff assistants

Managers Executives

Nos.

31

126

117

1

2717

Male Female

30

24

18

12

6

0

Reasons for turnover by gender

To join other organisations

OtherRetirementMigration Personal reasons

Nos.

14 31

1947

22

6

Male Female

50

40

30

20

10

0

Further, contributors to our high employee retention levels are the benefits and incentives provided by NSB. The fact that only 19 employees left the Bank during the year for reasons other than retirement shows the sustainable working culture we have created at NSB.

Keeping communication lines open We understand the importance of keeping communication channels open between Management and employees. For example, our Management actively encourage employees

to bring suggestions, problems, and solutions to them in a proactive manner. This goes a long way towards creating a friendly work atmosphere that is conducive to employee engagement and boosts productivity. Despite this, we have also employed formal channels to provide employees with the necessary opportunities to collaborate, communicate, and flag any issues that could hinder the productivity of the Bank.

Employee communication channels Many other effective communication channels are also available to ensure that employees are aware of everything from strategic direction to policies and procedures. They also provide an avenue for employees to provide feedback to Management. Where possible all employee communications are provided in English, Sinhala and Tamil. Our other employee channels include:

Employee Surveys Intranet Circulars Staff notice board Emails from Management Formal letters from HR Department

Freedom of association and collective bargaining

GRI 102-41 GRI 407-1

Keeping communication lines open with trade unions is equally important to the Bank. During the year under review, the Collective Agreement for Salary Revision for the period of 2018 – 2020 was successfully signed between the Management of the Bank and the trade unions. The freedom of association of its employees and the effective recognition of the right to collective bargaining continue to be upheld by the Bank.

The Bank’s relationship with trade unions operating within the Bank, including the Jathika Sevaka Sangamaya, Ceylon Bank Employees’ Union, Sri Lanka Independent Bank Employees’ Union, Executive Officers’ Association, and All Ceylon Bank Employees’ Union, continues to be very healthy.

Its relationship with unions and other representative associations sustains its long-term developments and is mutually beneficial to the Bank and its employees. Such strong relationships and effective communications allow union members to gain a complete understanding of the Bank’s goals and business activities. The agreed terms

Human Capital



and conditions set out in the collective agreement with the trade unions affect the salaries and other financial benefits of the Bank’s employees.

Employee grievance mechanisms The Bank applies both the “Step Ladder System” where a grievance can be resolved according to a hierarchy, beginning with the person’s immediate superior, and the “Open Door Policy” where the grievance can be directly forwarded to an independent party nominated by the HR Committee. Employees are encouraged to resolve issues using the former as much as possible.

During the year, the total number of grievances filed through formal grievance mechanisms numbered 35, of which all were addressed during the year and 19 resolved. All grievances are handled impartially.

Whistle-blower policy NSB’s whistle-blower policy was established to assure employees that they would not be penalised in any way – through discrimination or dismissal for example – for reporting instances of corruption or fraud. The policy covers prevention, early detection, reporting, monitoring, recovery, and follow-up actions. Through it, employees can blow the whistle on misconduct relating to a range of areas including accounting, auditing, coercion, collusion, corruption, internal controls, irregularity, financial reporting, frauds, and misappropriation.

Challenges of 2018

The challenges continued to be largely the same as the previous year. These include:

Contending with an aging workforce combined with shortage of qualified, tech-savvy talent

Connecting new generation employees who are less traditional, more technologically savvy and ambitious to the goals and culture of the Bank

Attracting and meeting the expectations of multiskilled, qualified millennials who may expect fasttrack career progression and higher wages and benefits

Managing organisational change resulting from greater pressure for profitability and the need for continued mergers, acquisitions, and strategic alliances

Navigating union and political influences that may disrupt best practices

Keeping up with new competitors and new labour markets which require more sophisticated skills in managing and operating human resources

Capital trade-offs

Recruitments, promotions, health benefits and well-being has positively impacted human and social and relationship capitals and negatively affected financial capital.

Through investments in training employees of the Bank and efficient use of employees we have grown our in-house skills and has resulted in a growth of intellectual capital.

Outlook

To overcome the challenges outlined above, the Bank is investing in sustainable IT solutions including automating and integrating HR functions and expediting the disciplinary inquiry process aimed at improving the efficiency of human capital. Other HR processes and documentation will also be improved.

A comprehensive plan has been drawn up to provide new entrants and existing employees with a thorough grounding in product knowledge, customer service techniques, and soft skills to ensure that NSB stands out in the field of customer service. The target-based performance evaluation system will improve employee evaluations, ensuring that the best people are selected for business critical and other roles.

The Bank will continue to look for ways and means to attract and retain accountable employees who are keen on providing quality, accurate, and speedy customer service that increases productivity. To ensure the achievement and results, we will implement a learning culture with a special focus on employee development and engagement. Special focus will continue to be on frontline employees and the provision of world-class customer service.



Why social and relationship capital is important to us

We are cognisant that the viability of our social and legal license to operate depends on our ability to sustain strong relationship with the customers and with the wider community for whom we create value individually as well as collectively. These relationships shape crucial perceptions of our Bank. Our relationship with all our stakeholders are essential to build trust and to make informed decisions that create value for all.


20.4 Mn. Total number

of accounts

Rs. 7,292 Mn. Value of POS transactions

Rs. 85,622 Mn. Interest paid to

customers

Rs. 125.9 Mn. Loans granted to POS customers

Rs. 17 Mn. Total investment in

CSR projects

1,525Number of small scale

entrepreneurs supported

248,977 Number of enquiries

received over the phone

2,173,770 Number of

cards in use

153 Number of suppliers

4,536 Number of elders

supported

We have identified customers, employees, investors, Government and regulatory bodies, business partners and society, and environment as our key stakeholders. Identifying our key stakeholders, our process for managing these relationships, and how we create value for these key relationships are laid out on page 54 on stakeholders and page 60 on our materiality matters. Relationship with our employees outlined in human capital on page 93 while relationship with environment will be covered in natural capital on page 120. Thereby, this section discusses the relationship with our customers, regulators, business partners, and community.

Our relationship with all our stakeholder is essential to build trust and to make informed decisions that create value for all.






Why customer capital is important to us

With over 20 million accounts, NSB can claim of possessing the most diversified customer base in the island. Our focus is to meet all needs of our customers and to improve their financial well-being which is why we have identified service quality and customer experience as our primary material issue and to be customer driven is our primary strategic objective. The customer is at the heart of everything we do, and to retain existing and acquire new customers, we have to remain relevant by offering appropriate and innovative products and solutions at their right cost.

We have an integrated approach to provide a superior customer experience in all our interactions through multiple channels like our extensive branch network, mobile and Internet banking, and other platforms. To improve our customers’ experience, we have adopted the latest methods in measuring customer satisfaction, responding to customer queries and complaints, providing an extensive product portfolio aimed at customers from all segments of society, and continuing the multi-generational relationships we have built as a bank for all Sri Lankans.

How we nurture customer capital Customer service and measuring satisfaction In our efforts to improve customer service, we are dedicated to offer our customers with a wholesome

Customer Capital experience delivering exceptional service. In this endeavour, we have appointed a customer service officer at branch level for selected branches, implemented loyalty programmes and reward schemes for Debit card holders, and continue to measure customer satisfaction to identify customer-centric improvements.

Customers can forward their queries, complaints, grievances, and other remarks to the NSB Call Centre which is operational 24/7, our trained staff at our branches island-wide, suggestion boxes at branch premises, through social media, and the website www.nsb.lk, and other digital methods such as email, skype, and web chat.

In the process of measuring customer satisfaction, we conducted a survey in 2018 to measure the quality of services provided by each sector. The primary objective of the survey is to identify the shortcomings by section and to take corrective measures that contribute to building customer loyalty and helps improve overall customer experience. We recorded over 80% satisfaction rate in all sections in 2018.

Section Excellent%

Very good%

Good %

Poor %

Fixed deposit 85 12 2 1

Savings 82 13 4 1

Loans 81 12 6 1

Bank counter 81 15 4 –

Pawning 82 13 5 –

Resolving customer concerns effectively We take customer complains seriously and have robust procedures to address them. We have provided numerous platforms to forward their grievances through Call centre, online channels, and branches. Our Call Centre is the primary mode of communication between the Bank and our customers dedicated to handling customer queries and grievances. A customer can reach the Call Centre where calls are handled by trained, highly-skilled customer service representatives. The query is initially handled by the agents and then directed to the relevant departments. Customers are given a reference number which could be used to follow up on their query. Complaints are tracked until they are resolved and the actions taken are compiled every month to be presented to the Management.




Number of inquiries received over the phone

Number of email inquiries

Number of customer complaints made by customers

Number of customer complaints resolved

Number of complaints related to cards – Point of Sale

Number of complaints related to cards – Card Queries

Number of complaints to CBSL

Number of complaints to Financial

Ombudsman

Average time taken to answer a call

2018

248,9772017 – 222,9502016 – 200,045

2018

8362017 – 1,5342016 – 1,673

2018

N/A2017 – N/A2016 – N/A

2018

N/A2017 – N/A2016 – N/A

2018

<30 Sec2017 – <30 Sec2016 – <30 Sec

2018

2202017 – 1762016 – 184

2018

1602017 – 282016 – 26

2018

1,5882017 – 1,9682016 – 1,673

2018

2,5392017 – 2,3822016 – 2,218

Through our “across the Bank” training programme, we equip our employees with the necessary skills to attend to customer complaints, to resolve issues and to turn difficult situations around. There is a significant increase in handling and resolving customer complaints in 2018 that recorded 73% of resolved cases from 16% in

2017 which show the improved efficiency in the handling of complaints.

Customer enquiries over digital mediums such as facebook, twitter, linkedin, and the website, have also increased by 86% (56,932 interactions) in 2018 compared to 2017.




www.youtube.com/c/NationalSavingsBankNSBSLOfficial

557 Subscribers - Purely organic growth

Growth 731%

www.nsb.lk

Average monthly visitors 47,000. New website was launched on 26 April 2018.

Visitors 47,000 Growth 48%

Website

www.linkedin.com/company/nsbslofficial/

385 Followers - Purely organic growth

Growth 96%

LinkedIn

Youtube

twitter.com/NSBSLOfficial

63 Followers – Purely organic growth

Growth 142%

Twitter

www.facebook.com/NSBSLOfficial

Facebook reach per month 1,502,194 (average)

Followers 86,579Growth 185%

Facebook

A superior customer experience with NSB Customer experience is of critical importance to the sustained growth of our business. We strive to create unforgettable customer moments across every stage of customer journey through our channels, people and products. In 2018, we provided delightful customer experience by improving customer convenience, accessibility, efficiency, financial well-being and literacy and introduction of new products in our engagements with our customers.

Engaging customers digitally and enhance digital experience We enhance our customers experience through newly established NSB Connect anytime zones including ATM, CRM (Cash Recycling Machines) and IDMS 24/7 at their own convenience. For further details see more on manufactured capital on page 83.

In a banking eco-system that is undergoing rapid change, we have taken necessary steps to facilitate our customers

who prefer to access banking facilities digitally. We continue to invest in technology to enhance our product and service offerings and capabilities that fit our customers’ fast-changing lifestyles and business needs. In 2018, we redesigned our corporate website and in process to revamp our Internet banking platform to offer a better and more consistent customer experience.

To expedite obtaining of Internet banking facility, we delegated the authority to our branches to approve Internet banking requests while the required IT infrastructure needed to complete these requests have also been provided to the branches. Further, with the increased withdrawal limit of debit card, Internet banking facility has also been improved to provide fund transfer facility from Personal Foreign Currency Accounts (PFCAs) to Rupee (LKR) accounts with improved security measures. We enable our customers to carry out e-commerce transactions on locally hosted websites but cross boarder e-commerce transactions upon the customer request.

During the year, we deepened our online engagement with our customers through social media.




Banking made simple We continue to focus on becoming efficient with the flexibility to respond fast-changing customer needs and to provide a flawless and faster customer service. During the year, we re-engineered and simplified process in relation to savings accounts, credit and payments to customers and suppliers by removing non-value adding activities (See page 91) and delegating authority levels which reduce waiting times and freeing up top level management to concentrate on what matters most. Furthermore, several projects have been commenced during the year to increase automation of end to end customer journeys through system enhancement and integration. (See page 86)

Serving customers with special needs

Treating all the people who come to our Bank with individual respect and courtesy is at the heart of excellent customer service. Taking acting role in championing more inclusive society, we understand the special needs of customers and provide a smooth banking experience for them in our branches. During the year, we reviewed and eased the procedures of releasing funds held in the accounts of mentally disabled customers. We strive to establish our branches with facility of access for differently abled people and this is compulsorily provided for all new branches and relocations of existing branches

Protecting customer data and privacy

GRI 418-1

We have identified cyber security as a material issue at NSB, since protecting customer data and privacy is crucial to maintaining customers’ trust. Thus, our commitment to safeguard customer privacy extends to the digital domain as well, where we use the latest technology in digital banking. The NSB Act, customer charter, as well as our Information Security policy outline how the Bank ensures the security of our system. We also conduct regular tests to assess and to ensure the security of our systems. The Bank has appointed a Chief Information Security Officer (CISO) who independently monitors and informs the Board on implementation and any exceptions

if any with regard to cybersecurity risk management. There were no complaints pertaining to the breach of customer privacy or loss of customer data, nor any fine or other sanction imposed on the Bank in 2018.

Dealing with responsibility

GRI 417-2, 3

Responsibility is deeply embedded in all aspects of our relationship with customers from how we develop our products and services to marketing and sales. We ensure being responsibility is rooted to our corporate culture by:

Offering products and services that are suitable for our customers

Communicating clear, relevant and timely information to make informed decisions

Dealing with feedback in an effective and prompt manner Building competency of our workforce to understand customers and provide quality service

We display all relevant data on our loan and deposit products, such as interest rates, exchange rates, lending rates via displays at branches, electronic media and corporate website. The Customer Charter, prepared according to CBSL guidelines, provides details on all terms and conditions applicable to products and services and the Bank’s complaints handling procedure. The Bank has displayed complaints redress process through the Financial Ombudsman at all branches in accordance with CBSL guidelines.

In line with the Right to Information Act, the Bank has appointed a public information officer and set out the procedure to ensure the right to access the information for the public. During the period under review, there were no instances of non-compliance to any product and service labelling or marketing communication related regulations or other guidelines.

Being there when it matters We serve customers that come from all segments of the Sri Lankan society and our leading products are aimed at providing for every banking need. We offer a range of innovative and affordable solutions effectively at every life events of our customers and delight customers by being with them at right moments. Our products and services meet customer needs at every life stage, as illustrated by the following diagram:




First savings account

Higher education

First Job

Marriage and starting a family

Acquiring property or vehicle

Planning for retirement

Retirement

0 10 30 40 50 60 70+20

Pension +

Hapan

Prathana

Personal Loan (Individual)

Ran Sahana

Auto loan

Home Loans (Gedora, Alankara, and Vikasitha)

Eco loan

Charika

Gaurawa

Senior citizen

I’m

Neo

Happy

Pas Avurudu

Reach

Buddhi

Diriya

Sthree




Products and services added to our portfolio in 2018 NSB offers personalised products and services that satisfy all needs of customers that come from different segments of society. Following a comprehensive marketing strategy, NSB launched new products responding and satisfying customers’ needs and desires effectively.

i. Launch of Neo savings account

To fulfil the goal of fostering a savings culture in Sri Lankans, NSB launched Neo, designed for teenagers. Neo accounts can be opened without the presence of a guardian. Concessionary rates are offered and account holders are entitled to an international debit card with special discounts from selected merchants. Neo account holders will be eligible for scholarships upon university entrance.

ii. Launch of NSB reality savings planA new savings plan was introduced for Sri Lankan migrant community with attractive interest rates to encourage them to save for a long-term time horizon to ensure their future financial stability. The new savings plan will come under the Five Year Savings Scheme of the Bank with a new brand name.

iii. “Enterprise Sri Lanka”

This programme was instituted by the Sri Lankan Government to revive the entrepreneurial spirit of young entrepreneurs of the country in line with Vision 2025 which underscores priority reforms to help the country become more prosperous. Under the theme of the “Enterprise Sri Lanka”, the Government is driven it forces to emerging the production economy in order to achieve the Government medium target such as per capita income of USD 5,000, one million new jobs, doubling exports, more than 5% continuous GDP growth. NSB, in partnership with the programme, is committed to provide loans at a concessionary rate to entrepreneurs starting businesses or an industry. The following are the new loan products that were introduced under the programme during the year:

Govi Navoda This loan scheme is designed to encourage farmers

to utilise the latest technology and practices in agriculture. It provides financial assistance to farmers to purchase machinery needed for agricultural purposes.

Ran Aswenna Another loan scheme aimed at farmers to

enhance productivity by using the latest methods and technology. This scheme is aimed at small-scale farmers, agro and fish processing, and commercial-scale farmers.

Loans for homestay owners This loan scheme is aimed at those who operate

homestays for local and foreign tourists registered under the Sri Lanka Tourist Development Authority (SLTDA). Loans are given at a concessionary rate. This initiative will help boost revenue from tourism to Sri Lanka.

Jaya Isura This scheme is directed at medium-scale entrepreneurs

under two categories in the agriculture, fishery, gardening, printing, tourism, handicraft, and information technology sectors.

Green loans This scheme is to encourage micro and small scale

manufacturers of green, environmentally-friendly products. The loan is offered at attractive rates to manufactures of bags and packing utilising biodegradable materials such as banana, fibre, palm leaves, coir, or bamboo.

iv. Lakdiriya programmeNSB, in partnership with Enterprise Sri Lanka, the Ministry of Public Enterprise, and Kandyan Heritage and Kandy City Development introduced Lakdiriya special loan scheme to provide financial assistance to middle and low income earners and young entrepreneurs. The beneficiaries are able to obtain loans under concessionary rates and relaxed credit terms.

v. Auto loans for permit holdersThe Bank offers auto loans after a reduction of 1% p.a. from the rate applicable for all permit holders and to further reduce 0.5% p.a. to the permit holders who open LCs through the Bank.

vi. Vikasitha middle income home ownership programmeThis scheme was launched in 2018 under the Fiscal Budget to grant housing loans to middle-income citizens at a concessionary rate.






Why business partner capital is important to us

We are a trusted entity in the Sri Lankan financial sector and our high-impact partnerships with local and international bodies have yielded interdependent results. Further, long-term, productive partnerships have been maintained with corresponded banks, exchange houses, suppliers, outsource service providers, and other business partners. We see our business partners as an extension of our business and key in helping us become the Bank of Choice. These relationships help us deliver a high quality services to our customers seamlessly and helps to run a business in a smooth way without any interruptions.

How we nurture business partner capital

Policies for strategic partnership As a State-owned bank, we set an example through clear, systematic, transparent policies in our engagement with local and international bodies. The following are the policies followed by the Bank in strategic partnerships:

Procurement

GRI 204-1

We see our suppliers as strategic partners and in return, demand that they adhere to the highest standards of quality, service and ethics. We work closely with our

local community and 100% of our goods and services are procured from local suppliers. Total procurement spend across the Bank amounted to Rs. 2.1 Bn. during the year. Ethics is strongly entrenched in our supplier selection and in the procurement process revolving around non-discrimination and equality treatment, transparency, confidentiality, fairness, openness and accountability.

NSB’s procurements policy encourages a diversified supply chain to help generating value in a balanced manner.

The Bank has implemented a robust procurement process in place to promote the goals of economy, efficiency, fairness, and transparency in the procurement process.

Maximise economy and efficiency in procurement Adhering to prescribed standards, specifications, rules, and regulations

Maximising income in the disposal of acquired assets or in granting of rights, concessions, or exclusive benefits

Providing fair and equal opportunity for interested parties to participate in procurement

Expeditious execution of works and delivery of goods and services

Compliance with local laws and international obligations

Ensuring transparency and uniformity in the evaluation and selection procedure

Retaining confidentiality of information provided by bidder

The procurement plan is updated annually according to changing needs. We obtain the services of outside suppliers for services such as the purchase of fixed assets, consumable items, gift items, printing, marketing and promotional activities, maintenance and construction services, and consultancy assistance in special cases. The policy of the Bank clearly stipulates the various procedure for different procurements comprising general procurement of goods and services, non-consultancy services, uniforms for staff, procurement of spare parts, repairs and maintenance, repairs to motor vehicles and maintenance, periodicals and publications, purchasing of fuel and information systems. Procurement procedures are overseen by the respective procurement committees, Technical Evaluation Committee, and Bid Opening Committee appointed by Board of Directors, GM/CEO or delegated authority.

The most common selection criteria are quality of services or products, competitive prices, experience and competence, financial soundness, flexibility and capacity to meet our requirements in proposed timelines and compliance with legal requirements. We have taken initial steps to integrate economic, social, and environmental impact into our procurement process activities.

Business Partner CapitalGRI 102-9




Further, the Procurement Division is responsible to monitor and ensure Initial Environment Examinations (IEE), Environmental Impact Assessments (EIA) and obtaining necessary approvals from authorities when it is required.

Outsource service providers During the year, we made payments of Rs. 368.5 Mn. to our outsource workers including employees on contract basis within the Bank. NSB’s outsourcing policy is a framework that provides guidelines on outsourcing and specifies the criteria to assess the need of an outsourced activity, service, process, or function and its implementation. The policy is also put in place to manage risks arising from outsourcing. The policy is prepared in accordance with the Banking Act Direction No. 2 of 2012 in the exercise of the powers conferred by Sections 46 (1) and 76 (J) (1) of the Banking Act No. 30 of 1988, last amended by the Banking (Amendment) Act No. 46 of 2006, on outsourcing of Business Operations of a Licensed Commercial Bank and a Licensed Specialised Bank, respectively.

Communication between business partners All communications of the Bank are handled with utmost responsibility, accountability, consistency, and transparency in all internal and external communications outlined by communication policy. Our Communication Policy is an effective framework to facilitate timely dissemination of information with accountability to enhance brand image, customer loyalty, and stakeholder awareness.

Enhanced relationship with business partners NSB has formed strategic alliances with several international bodies during the year to share resources and expertise to achieve shared business objectives. These partnerships have resulted in a competitive edge for NSB and provided opportunities for increasing profit potential and enterprise value.

We strives to grow our global footprint by extending our reach beyond national boundaries. We have secured important links with global money transferring companies to enable secure remittances from anywhere in the globe. We are a member of SWIFT and Eurogiro postal, a low cost, secure, and speedy money transfer system. Through our remittance service, NSB U-Trust, we serve Sri Lankans expatriates and migrant workers.

We are connected to 35 exchange houses and 13 correspondent banks to facilitate global money transfer services.

The following are some of the initiatives towards improving business partnerships in 2018:

NSB expanded its remittances arm by forging new relationships with correspondence banks namely Doha Bank Qatar, Commerz Bank AG and exchange house of Small World Global. (See more details on exchange houses and correspondent banks on page 407 to 409).

Continued to build strong ties with exchange houses for money transfer services, remittances, and corresponding banks agreements to increase coverage of markets of Middle East, Italy, Cyprus, South Korea, Australia.

NSB staff representatives were deployed in the Middle East. Overseas representatives were appointed for Italy and South Korea.

165 MoUs were signed with Government and private-sector establishments to improve the housing and personal loan portfolios.

Industry networks GRI 102-13

Over the years we have played a vital role in contributing to the progress of the Sri Lankan financial sector, as a key player, through our engagement with industry peers. We hold memberships in the following organisations:

The National Chamber of Commerce Lanka Clear Private Limited Employers’ Federation of Ceylon Society for World-wide Interbank Financial Telecommunication (SWIFT)

The Sri Lanka SWIFT User Group Eurogiro Global Payment Community The World Savings Banking Institute






Why regulator capital is important to us

Government and regulatory bodies ensure a sound and stable banking system and promotes healthy functioning of an economy. We are incorporated by a special law, the National Savings Bank Act No. 30 of 1971 and its amendments and as a licensed specialised bank by the Banking Act No. 30 of 1988 and its amendments. As a State-owned bank, we have a responsibility to comply fully with regulatory requirements and having good governance as our failure would weaken public trust on the Bank as well as on the economy as a whole. Failure to comply with regulations lead to loss of operating license and affects our reputation. The taxes we pay to the Government also play an imperative role in economic and social development of the country.

How we nurture regulatory capital

Compliance with laws and regulations In a changing banking environment shaped by digitalisation, banks and regulatory bodies must evolve to meet emerging challenges. At NSB, there exists a culture of compliance where transparency is valued above all else and as a as a State-owned bank, is a highly regulated entity adhering to provisions of acts: The Banking Act, Finance Act, Financial Transactions Reporting Act, Exchange Control Act, NSB Act, and other regulations issued by the Central Bank of Sri Lanka (CBSL). NSB complies with all necessary regulatory requirements and maintains a close relationship with the Ministry of Finance, the Department of Inland Revenue, Auditor

General’s Department, Attorney General’s Department, Sri Lanka Accounting and Auditing Standards Monitoring Board, and the Parliament. NSB follows all directives issued by the CBSL and submits periodic information related to the Bank’s operations.

Anti-money laundering, bribery, and corruption GRI 205-2, 3 & 206-1

Effective anti-money laundering controls are necessary to protect the integrity of the financial system. NSB is aware of the growing concern of cyber security that digitisation brings which is why cyber security, fraud prevention, and anti-money laundering is one of the principal material issues identified by the Bank’s material analysis. There is a robust risk management system in place to protect our customers from fraud. NSB continues to assist regulators to prevent cybercrime, money laundering, and funding of terrorism by identifying and reporting suspicious activities.

During the period under review, no fines or non-monitory sanctions were imposed due to non-compliance with laws and regulations relating to corruption, anti competitive behaviour, anti trust, monopoly practices and use of product and services.

Strong integrated risk management and governance NSB possesses a strong risk management policy and governance system that monitors the effectiveness of the Bank’s risk management system. Reinforcing risk culture is one of the short-term strategic priorities of the Bank. Over the years, we have developed a strong risk culture where we are able to anticipate, manage, and mitigate risks arising from the internal and external environment. The governance at NSB supports prudent risk management where there is a systematic approach to supervising the Bank’s risk management system. See more details on our report on “Risk Management” page 194.

Paying and collecting taxes As a State-owned bank, NSB sets an example to financial entities of the country by paying and collecting taxes on behalf of the Government. NSB pays all relevant taxes payable on-behalf of and in respect of employees of the Bank, and all other known statutory dues to the Government and the other relevant regulatory and statutory authorities which were due and payable by the Bank.

Regulatory capital






Why community capital is important to us

As a responsible provider of financial services, we play an essential role in the community that we operate in. Long-term sustainability is one of the greatest challenges of our time and it will require unprecedented collaboration among all communities in order to create the kind of future we want for ourselves and future generations. Following our mandate as a State-owned bank, our legacy, we have a special responsibility to give back to the communities where our people and our customers build their lives and our role in the community results in our work towards creating a thriving local community.

How we nurture community capital

Ensuring sustainable economic growth through infrastructure development projects GRI 203-1

As part of our sustainable business approach, we support investment which facilitates long-term economic growth, empowers local communities, and improves all lives.

To drive progress in the country and uplift the local communities, we support the Government in large-scale infrastructure development projects in the country. We focus on investing in sectors which aim to deliver long-term progress and prosperity. The following projects were carried out during the year with the support of NSB:

Rs. 11.8 Bn. was provided to Road Development Authority in its improvements of the roads and highways network of Sri Lanka.

Rs. 50.0 Mn. was provided to National Water Supply and Drainage Board to carry out various development projects aimed at providing clean water to rural communities.

Rs. 5.0 Bn. was provided to Sri Lanka Telecom to enhance capital expenditure.

Financial inclusivity

We continue to focus on supporting initiatives that provides digital and non-digital channels to promote wider and more convenient access to financial services among underprivileged or unbanked customers.

We are able to inculcate the savings culture to remote or unbanked customers through our postal and sub-postal network. In our total deposit portfolio, the postal deposits represent 2%. NSB Reach provides door to door cash deposit facility for NSB customers who are unable to visit during the usual business hours through POS machines and Palm Top Machines.

NSB iSaver is a digital innovation which provides customer convenience through Mobitel outlets at any time during the day (extended operational hours) without any fees. This innovative service is expected to further inculcate the habit of savings amongst Sri Lanka’s populace, thus resulting in wealth creation and mobility of funds for investment. During the year, we have implemented 365-day banking service to three branches namely Maharagama, Kandy City Centre, and Kiribathgoda as a pilot project to ensure convenient banking experience for customers.

We offer products and services that meet customer needs and financial literacy to empower customers. In every branch activation programme and promotion conducted by branches and Marketing Division, the importance of thrift and savings is conveyed. Specially, iSaver and

Community CapitalGRI 413-1




NSB Reach promotional campaigns conducted by the Bank emphasise the importance of daily savings. Around 38,000 new accounts were opened through several programmes by educating the customers about the importance of the savings. The Lakdiriya mobile credit fair was held in Kandy and Ratnapura Districts for three consecutive dates with a view to provide convenient credit facilities for the people in the area and to reach untouched markets. More than 1,000 people attended the programme.

Grama Shakthi People’s Movement (GSP), launched in 2017, is especially designed to support the eradication of poverty by year 2030. Under the initial phase of the GSP Movement, Grama Shakthi People’s Societies will be setup in 1000 selected Grama Niladari Divisions and they will be registered under the Department of Registrar of Companies. Partnering with the Government, each Grama Shakthi People’s Society is expected to open an account with an initial deposit of Rs. 10,000.00 at a State bank.

Strengthening the social fabric We believe giving back to the communities in which we operate to strengthen our social fabric. Each year we continue, design, and implement community development programmes and initiatives to deliver balanced and sustainable outcomes for the community and people. We support a range of community organisations and community building programmes and initiatives where we address issues such as improving social well-being, uplifting education, supporting healthcare, and other various social, cultural, and religious programmes. In addition to the wide range of community initiatives that we drive, we contributed to the community during the year through our sponsorships, donations and scholarships, and fund raised by our people.

Advancing childcare and child education Hapan Scholarship seminar series 2018

NSB’s flagship CSR initiatives, Hapan seminar series, was conducted for the 18th consecutive year in 2018. This initiative is aimed at bolstering education of young Sri Lankans to prepare them to face the Scholarship Examination with confidence and self-belief. In 2018, 50 seminars were conducted by instructors of the National Institute of Education (NIE) in partnership with

branches, schools, and Zonal Education Offices. There were 25,000 students, 500 parents, and 100 teachers participated in the seminars and awareness programmes. Model papers were distributed to over 90,000 students island-wide.

The seminars also focus on educating parents and teachers of the dangers of non-communicable diseases. Awareness sessions were conducted on how to prevent child abuse and protect the rights of children. The awareness programmes were conducted by medical professionals from Sri Lanka College of Endocrinologists and officers of the National Child Protection Authority.

14th Hapan scholarship awards Each year, NSB recognises the high-achievers of the Grade Five Scholarship Examination. The 14th edition of the Hapan Scholarship Awards was held at BMICH on 31 October 2018. The Bank continued to support children with learning difficulties and applauds their courage and determination to succeed. At the ceremony, 20 students achievers of the examination were felicitated under the category of special needs for the forth consecutive year.

Campaign with National Child Protection Authority (NCPA) NSB in partnership with the NCPA commemorated the World Children’s Day 2018 by opening accounts for children from underprivileged backgrounds. The district offices of NCPA supported the identification of children in need. 1,000 new accounts were opened where the Bank contributed an initial amount. School stationary was also distributed among students.

Connecting the community through art Paata Paata Hapankam art competition 2018 To nurture and encourage art in children, the 3rd consecutive Paata Paata Hapankam competition was conducted in partnership with the Aesthetic Division of Ministry of Education in 2018. The competition was held alongside the 70th anniversary of independence under the theme “Nidhahase paata paata hapankam”. Over 10,000 Schoolchildren island-wide participated in the first round of the competition held at provincial educational offices. There were five categories and winners were awarded cash prizes and gifts. The winners of the provincial competitions (135 students) were selected to the Grand Finale held at the BMICH.




Art competition in the Mullaitivu District The Bank in partnership with the 64th Division Headquarters Sri Lanka Army (Oddusudan) organised an art competition under the theme “Paata karamu lama lokaya” to the students of the Mullaitivu District. The competition was open to school students of grades 1-13 under five different age categories. 210 students were selected to the final competition which was held at Oddusudan Maha Vidyalaya.

NSB contributed drawing materials, certificates, gift tokens and educational material for the final competition and award ceremony. The Oddusudan Army Camp of 64th Division renovated the Oddusudan Maha Vidyalaya for the final event.

Making a difference in elderly healthcare

Mobile medical camps with HelpAge Sri Lanka

In partnership with HelpAge Sri Lanka, an approved humanitarian organisation, NSB conducted mobile medical camps island-wide for those in need, with special focus on the elderly. The project is aimed at underprivileged elders in rural and suburban areas to receive mobile medical care. Accordingly eye clinics and free cataract surgeries were conducted. 15 mobile camps were conducted island-wide and over 2,000 elders benefitted from the project.

International elders day celebration Commemorating International Elders Day, a national event was organised in partnership with National Secretariat for Elders (NSE) along with the Ministry of Social Welfare and Primary Industries. NSB sponsored the event where special tribute were given to elders over 100 years. Consequently, 347 elders were honoured at the event.

Challenges

New entrants to the market who provides similar services at a lower cost which increases the cost of customer acquisition and retention

Developing innovative solutions to meet changing customer expectations in the digital age

Higher capital investment required to provide a seamless digital experience to customers

Challenges in the regulatory landscape Managing conflicting interests between the different stakeholders

Capital trade-offs

Investment made in Social and Relationship Capital reduces financial capital in the short term

Transform society through our various skills and localisation initiatives build the social and relationship capital, intellectual capital, natural capital and financial capital in the long run

Outlook

The year 2019 will usher in wealth of opportunities and challenges in our efforts to improve customer experience. The changing lifestyle of customers and expansion of middle-income earners can present new opportunities as well as challenges like the growth in market for youth products and investments plans in the coming years. We are equipped to handle these markets through innovative new products and by reorienting existing products to better serve our customer base. We have proposed to make the necessary capital investments to keep abreast of the latest technologies that potentially improve convenience and service delivery.

A renewed focus will be given to strengthen digital marketing where it will be directed at capturing new market segments. There is a drive to relaunch key products of the Bank to reinvigorate their offering and their customer base. Marketing campaigns will engage different segments of society, attract new customers, and will make existing customers aware. There will be reactivation programmes conducted at branches to increase customer engagement.




As a bank that serves the nation and plays a leading role in the Sri Lankan financial sector, NSB considers its responsibility to increase financial literacy of Sri Lankans. Programmes directed towards developing financial literacy of the rural population and effective financial management programme for women will be initiated through branch reactivation programmes.

A dedicated Customer Response Management (CRM) solution will be implemented at the NSB Call Centre linking the entire branch network and the head office to ensure prompt response to customer grievances as well as other queries. This would enable both higher customer retention proceeding a grievance as well as capture new customers who seek financial services. The customer service team will also be expanded to provide uninterrupted service

The Bank will continue to work towards the development of local community by strengthening existing CSR initiatives in multiple domains touching the lives of millions island-wide. NSB will add new projects to the existing programmes in 2019 especially designed for achieving Sustainable Development Goals:

Improving the standards of English education Supporting national education is one of NSB’s main

concerns. According to statistics, English literacy in the country, where English is one of the national languages, is only 22%. Recognising the critical need to improve the standards of English in schoolchildren, the Bank, in collaboration with the Ministry of Education, will introduce a new project that will contribute to the enhancement of English language proficiency in 2019.

Prevention of obesity and NCDs among schoolchildren

This initiative will address one of the pressing health issues in the country prevalent among the younger generation. Over the last few years, Sri Lanka has experienced a surge in health issues in both urban and rural areas. According to Health Promotion Bureau, Ministry of Health 15% of schoolchildren are obese most are addicted to sugar. With the aim of helping schoolchildren reach their full potential, NSB will initiate a systamatic programme to combat NCDs, obesity, and other health issues among schoolchildren. This programme will come into effect in 2019.



Rs. 1.6 Mn.Investment in

NSB Agroforestry

33,417 Gigajoules

Energy consumption

76,000 Number of plants

distributed through NSB Agroforestry

76,161 (M3) Water consumption

781 Number of Eco loans

disbursed

Rs. 656.6 Mn.Total amount of Eco loans

disbursed

30Solar panel systems installed branches

Why natural capital is important to us

Business organisations around the globe have been confronted with a myriad of environmental challenges and growing pressure to deliver products and services which are environmentally compatible. Our environmental approach is inspired by our sense of responsibility, our awareness that our activities have an impact on the environment, and the knowledge that we have an obligation to reduce that impact as much as possible. As an exemplary corporate entity of the country with deep social roots, our economic conduct is aimed at

As an exemplary corporate entity of the country with deep social roots, our economic conduct is aimed at promoting sustainability.

Pertinent material issues Pertinent strategic objectives

promoting sustainability. We help to drive changes aimed at processes that lead to harmful effects and minimising the impact of business operations on the environment. We have identified environmental footprint as a material issue affecting the Bank which have led to formulation of long term and short to medium-term strategic plans to address it. In doing so, we do not lose sight of the necessity of financial returns that safeguard and ensure sustainability of the Bank.

Natural Capital

Natural Capital



Our efforts towards environmental protection

Sense of responsibility

Our awareness that our activities have an impact

on the environment

Knowledge that we have an obligation to reduce

that impact

Green lending NSB Eco loan

We continued our efforts in the implementation and proliferation of renewable energy in the country by driving green lending schemes through our flagship product NSB Eco loan to support the community-based power generation project Soorya Bala Sangramaya. The programme was launched in 2016 in partnership with the Ministry of Power and Renewable Energy, Ceylon Electricity Board, and the Lanka Electricity Company Private Limited to promote the setting up of smaller solar power plants on the rooftops of households, religious places, hotels, commercial establishments, and industries. LECO and CEB have teamed up with us to introduce a concessionary scheme to purchase solar panels. Customers can select one of several options including Net Metering Scheme, Net Accounting Scheme and Net Plus Scheme enabling them to go green to save the planet while saving on their electricity bills.

Number of loans granted Amount granted Rs. Mn.

2016 35 26.42

2017 902 685.58

2018 781 656.61

How we nurture natural capital

The increasing importance of climate change raise the voice for a transition to a low carbon economy to ensure a sustainable world. This requires behavioural and management innovations in banking practices that contribute to reduce negative environmental impacts.

In 2018, we continued our work towards to help mitigate climate change, promote diversity, and protect the biosphere by integrating various environmental policies and programmes into our operations, strategy and specific decisions concerning operations we are engaged in. We have embraced green finance as a key to the future of sustainable development. In this endeavour, we promote green lending schemes through NSB Eco loan that supports middle-income households to invest in solar energy.

We are in the process of converting our branch buildings to use renewable energy sources, while adopting branch-wide practices in responsible consumption of all resources. We conduct awareness programmes for our customers and our employees to encourage them to switch to digital methods of communication in our bid to minimise paper use. The following describes in detail the initiatives that we have taken and continued in 2018 towards nurturing natural capital.

Natural Capital



Green loans under “Enterprise Sri Lanka”

As the savings giant of the country, we play an integral role in “Enterprise Sri Lanka”, the Government’s programme to reinvigorate young entrepreneurs of the country. In supporting the GOSL initiative, we are providing loans at a concessionary rate to entrepreneurs starting out business ventures. Loans are offered at attractive rates to manufacturers of bags and packing utilising biodegradable materials such as banana, fibre, palm leaves, coir, or bamboo.

Digitalisation and environment protection

Our strategy is aligned with digitalisation of the operations we are engaged in and encouraging our customers to migrate to online-based, Internet or mobile banking to complete their daily banking transactions through an extensive offering of digital products. We implemented a pilot project for slip-less banking and digitalised account opening during the year while the introduction to the entire branch network of these facilities will be completed in the coming year. Further, we have conducted three training programmes to branches using webinar which not only reduce the costs and time but also reduces our carbon footprint associated mainly with travelling.

Even though, our paper consumption during the year increased, we have taken steps to create a paperless environment within our Bank by implementing the following initiatives during the year:

Encouraging customers to subscribe e-renewal letters instead of printed statements to reduce the usage of paper

Encourage our customers to use Internet banking, mobile banking, and SMS Banking as a payment method to save time and resources

Increase the usage of digital and social media marketing instead of print media

Move towards biodegradable promotional materials in our way forward to be eco-friendly.

Promoting a culture to increase the usage of email instead of paper-based communication methods.

Redesigned and simplified application forms to reduce paper usage

Green buildings Being a responsible corporate citizen, we help save the planet through going green by transferring our existing branch network into energy-efficient buildings to drive our green finance initiatives. Our branch premises are designed with glazed windows that creates thermal insulation that reduces the flow of incoming and outgoing heat which is enriched with unique advantages such as lower energy consumption due to less energy used in cooling down spaces while bringing in the natural beauty of interior where our office premises becomes a happy place.

Our new branches are constructed following the green buildings concept where spaces are designed to maximise the usage of natural air and light. Our circuit bungalow was designed following our energy-efficient practices. Our conversion to renewable energy as an alternative source of power continued in 2018 with the installation of solar panel systems in 30 branches.

Responsible consumption Energy

GRI 302-1

Supporting the Vision 2025 of GOSL for economic growth and sustainable development requires us to reduce our ecological footprint by changing the way we produce and consume goods and resources. The efficient management of our energy consumption is an important target to achieve this goal.

The primary source of energy at NSB is electricity through the national grid and the electricity generated through solar panel systems. In 2018, energy consumption was 33,417 gigajoules. The solar panels were installed during the latter part of the year, therefore their impact in the overall annual consumption was insignificant. However, they will have a significant impact in 2019.

Natural Capital



We promote employee engagement on responsible consumption of energy and the collective commitment required to minimise the environmental footprint through usage of energy saving lamps, unplugging electronic equipment when not in use, and switching off unnecessary lights to go green at work. We are cognisant that substantial benefits from energy efficiency will be realised more quickly and at lower cost through collaborative action, and we are driving initiatives to accelerate the dynamic reduction of energy consumption through:

Using only energy-saving light bulbs and LED screen computer monitors

Limiting the use of air conditioning to normal banking hours

Restricting working hours on holiday Replacement of Split AC units with inverter operated systems at Head Office and branches is also identified as Eco-friendly initiatives.

Committed to reusing stationery items such as A4 papers, envelops and files

Using only CFC-free air conditioning units

Water

GRI 303-5

Water scarcity is a recognised global problem, with demand for water projected to exceed supply by 40% by 2030. We continuously improve current practices in managing water to identify opportunities for prudent usage. The average monthly consumption of water at our Head Office stands at 1,593 (M3). Our water consumption during the year was 76,161 (M3). Our systematic drainage system disposes storm water through the public water drainage system, and waste water is disposed through standard soakage pits inside the premises.

In our efforts to reduce the impact in environment, we have equipped some of our newly constructed branches with rainwater harvesting that can provide a key source of alternative water. Alternative water offsets the use of freshwater from surface and groundwater sources and helps our branches improve their water security. Rainwater harvesting captures, diverts, and stores rainwater from rooftops for later use.

Waste Managing waste more efficiently is a core component of achieving sustainability. Our employees are well-informed about waste management practices through awareness programmes conducted across the branch network. Waste paper is collected and handed over to the Paper Corporation for recycling. Food and polythene wastes are also collected and handed to municipal Solid Waste Management.

Responsible financing

We recognise that promoting long-term sustainable development is fundamental to our continuing success. In this regard, we are committed to advancing environmental and social progress and to conducting our business in a responsible manner.

Our responsible financing approach integrates environmental, social and governance (ESG) considerations into our credit and risk evaluation process for our lending practices. Our Corporate Credit Policy includes an exclusion list to which activities the Bank should not lend. We will not engage in or knowingly finance any activity where there is clear evidence of immitigable adverse impact to the environment, people or society. At a minimum, we expect our customers to meet all local ESG-related laws and regulations. Potential borrowers must produce an environmental impact assessment to obtain loans. Beyond that, we seek to positively influence our customers’ behaviour by engaging them in further adopting appropriate sustainable practices to meet higher ESG industry expectations over time.

We take a risk-based approach towards managing ESG risk where transactions that carry high ESG risks are subject to enhanced evaluation and approval requirements.

We have taken further strides to conduct financial operations in an environmentally responsible manner by formulating an Extensive Social Risk Management (ESRM) Policy with clear guidelines and roles and responsibilities for due diligence as well as governance.

NSB sustainability policy To deliver our strategy of being a transformation leader and our drive to become the most trusted financial institution in the country, we formulated a sustainability policy covering environmental, social and governance aspects in accordance with the guidelines of “The Sri Lanka Banks Association sustainable banking initiative” launched in 2015. This policy is complemented with our environmental policy that directs our actions towards minimising our environmental footprint. The NSB Sustainability Policy addresses long-term outcomes to make the world a more resilient place.

Natural Capital



NSB Agroforestry

Sri Lanka has a long, proud history of engaging in agriculture as its primary economic venture. NSB Agroforestry is our endeavour to continue this long tradition to retain, protect and where possible improve the existing biodiversity, and to inculcate the habit of saving from one’s very own garden. This programme was conducted in collaboration with the Ministry of Primary Industry’s Dhana Saviya programme and the Coconut Cultivation Board with the objective of creating a new source of income while protecting the environment.

This flagship project focused towards environmental preservation is initiated under two phases. Phase I was implemented in 2017 in celebration of the 93rd World Thrift Day (31 October 2017) where export-quality agricultural crops; mango (variety of Tom EJC) and sour sap (Hybrid) were distributed among the customers of NSB. The hybrid crops can be grown within a small space and these crops are in demand in both local and export markets. The total investment was Rs. 1.6 Mn. and 76,000 plants were distributed. Phase 2 was initiated commemorating the 94th World Thrift Day and 26,000 seed packs containing five types of vegetable seeds were distributed among NSB customers.

Challenges

The principal pillar of the banking sector is to generate profit. The added focus on the environmental sustainability aspect requires the Bank to invest heavily to implement energy efficient methods

Migration to renewable energy systems such as solar power systems requires high capital investment

The implementation of a proper waste management system across the branch network in the island and the difficulty to determine its outcome

The reduction of electronic wastage disposal The reduction of energy consumption in a continuously expanding business where new branches are constructed and new employees are recruited

Capital trade-offs

By pursuing growth projects to increase the stock of manufactured capital adversely impacting natural capital and in the short term financial capital.

But, our commitment to energy efficiency financing and reduce the environmental footprint ultimately build the human, intellectual and financial capital.

Outlook

We recognised that environmental sustainability is a journey. In this regard, we have incorporated the principles of sustainability in our strategy formulation, our policies, and all our operations. We are guided by and committed to the UN SDGs in our efforts to reduce negative impact of our operations on the environment.

We will continue our efforts in the expansion of renewable energy through our green lending products and through the installation of solar power systems in our branches. 30 branches were converted in 2018, and we are hoping to expand this to 50 in the coming year. Our investments in digitalisation will directly result in reducing our carbon footprint. We are hoping to reap the benefits our investments in the near future.

The following are some of the initiatives we have planned for the year 2019:

A waste water treatment plan to manage waste water and a sewage system will be constructed in the proposed new building at Anuradhapura

Lightning arresters will be installed along with solar power systems to secure electrical and electronics appliances in branches

IP Based PABX systems will be installed at Head Office building to enhance the system functions for effective communication

Issuing of the Green Pin Carry out carbon footprint verification and energy audit through SLCF at Head Office premises

Developing paperless business practices to protect resources and run various practices to reduce paper consumption at different departments

Enabling online digitalised functionalities such as account opening and slip-less cash deposits



GRI Standard

Disclosures Page Nos. Remarks/Omission


Global Reporting Initiative (GRI) Content Index – “In Accordance Core”GRI Standard Disclosures102-1 Name of the organisation 5102-2 Activities, brands, products, and services 258 and

382-385102-3 Location of headquarters 146102-4 Location of operations 84102-5 Ownership and legal form 146102-6 Markets served 84102-7 Scale of the organisation 8-9102-8 Information on employees and other workers 93102-9 Supply chain 113-114102-10 Significant changes to the organisation and its supply chain 5102-11 Precautionary principle or approach 18-30102-12 External initiatives 6102-13 Membership of associations 114102-14 Statement from senior decision-maker 10 and 12102-16 Values, principles, standards, and norms of behaviour 89-90102-18 Governance structure 150102-40 List of stakeholder groups 55102-41 Collective bargaining agreements 104102-42 Identifying and selecting stakeholders 54-56102-43 Approach to stakeholder engagement 54-59102-44 Key topics and concerns raised 54-59102-45 Entities included in the consolidated financial statements 5102-46 Defining report content and topic Boundaries 5102-47 List of material topics 61102-48 Restatements of information 5102-49 Changes in reporting 5102-50 Reporting period 5102-51 Date of most recent report 5102-52 Reporting cycle 5102-53 Contact point for questions regarding the report 7102-54 Claims of reporting in accordance with the GRI Standards 6102-55 GRI Content Index in accordance with core criteria 125102-56 External assurance 241

GRI Specific DisclosuresEconomicEconomic performanceGRI 103: Management approach

103-1 Explanation of the material topic and its boundary 62-64103-2 The management approach and its components 62-64103-3 Evaluation of the management approach 62-64

GRI 201: Economic performance

201-1 Direct economic value generated and distributed 66201-3 Defined benefit plan obligations and other retirement plans 102

GRI 102-55




GRI Standard


Market presenceGRI 103: Management approach


GRI 201: Market presence

202-1 Ratios of standard entry level wage by gender compared to local minimum wage 101202-2 Senior management hired from the local community 96-97

Indirect economic impactsGRI 103: Management approach

103-1 Explanation of the material topic and its boundary 62-64

103-2 The management approach and its components 62-64

103-3 Evaluation of the management approach 62-64

GRI 203: Indirect economic impacts

203-1 Infrastructure investments and services supported 116

Procurement practicesGRI 103: Management approach

103-1 Explanation of the material topic and its Boundary 62-64103-2 The management approach and its components 62-64103-3 Evaluation of the management approach 62-64

GRI 204: Procurement practices

204-1 Proportion of spending on local suppliers 113

Anti-corruptionGRI 103: Management approach


GRI 205: Anti-corruption

205-2 Communication and training about anti-corruption policies and procedures 99-100 and 115

205-3 Confirmed incidents of corruption and actions taken 115

Anti-competitive behaviourGRI 103: Management approach


GRI 206: Anti-competitive behaviour

206-1 Legal actions for anti-competitive behaviour, anti-trust, and monopoly practices 115

EnvironmentalEnergyGRI 103: Management approach

103-1 Explanation of the material topic and its boundary 62-64103-2 The management approach and its components 62-64

103-3 Evaluation of the management approach 62-64




GRI Standard


GRI 302: Energy

302-1 Energy consumption within the organisation 122

Water and effluentsGRI 103: Management approach


GRI 303: Water and effluents

303-5 Water consumption 123

SocialEmploymentGRI 103: Management approach


GRI 401: Employment

401-1 New employee hires and employee turnover 96-97 and 103401-2 Benefits provided to full-time employees that are not provided to

temporary or part-time employees 101-102401-3 Parental leave 100

Occupational health and safetyGRI 103: Management approach


GRI 403: Occupational health and safety

403-9 Work-related injuries 102

Training and educationGRI 103: Management approach


GRI 404: Training and education

404-1 Average hours of training per year per employee 98-99404-2 Programmes for upgrading employee skills and transition assistance programmes 98-99404-3 Percentage of employees receiving regular performance and career development reviews 99

Diversity and equal opportunityGRI 103: Management approach


GRI 405: Diversity and equal opportunity

405-2 Ratio of basic salary and remuneration of women to men 101




GRI Standard


Non-discriminationGRI 103: Management approach


GRI 406: Non-discrimination

406-1 Incidents of discrimination and corrective actions taken 100

Freedom of association and collective bargainingGRI 103: Management approach


GRI 407: Freedom of association and collective bargaining

407-1 Operations and suppliers in which the right to freedom of association and collective bargaining may be at risk 104

Local communitiesGRI 103: Management approach


GRI 413: Local communities

413-1 Operations with local community engagement, impact assessments, and development programmes 116-119

Marketing and labellingGRI 103: Management approach


GRI 417: Marketing and labelling

417-2 Incidents of non-compliance concerning product and service information and labelling 110417-3 Incidents of non-compliance concerning marketing communications 110

Customer privacyGRI 103: Management approach


GRI 418: Customer privacy

418-1 Substantiated complaints concerning breaches of customer privacy and losses of customer data 110



Governance

130 134 136Board of Directors Corporate

ManagementExecutive Management

138 139 140Chief Managers Statement on

Corporate GovernanceStatement on Risk Management

This section discusses the integrated systemic processes of corporate governance and compliance and a framework of regulations and practices by which NSB is governed. Corporate governance at NSB provides a sound basis for the Bank’s operations to maintaining a healthy relationship with all stakeholders.


Board of Directors

1 32

5

4

6

7


Board of Directors


1

Mr Jayaraja ChandrasekeraChairman

Mr Jayaraja Chandrasekera is a senior banking professional who has held Senior Corporate Management positions in Sri Lanka’s leading private commercial bank, Hatton National Bank PLC, during his career spanning over 35 years. He has held Senior Corporate Management positions and handled Banking and Bancassurance related responsibilities during his long term of experience in the Financial Services Industry. He was appointed to the Board of Directors of NSB on 31 January 2019.

Before joining the NSB Board, he served as a member of the Board of Directors of Pan Asia Banking Corporation (PABC Bank) since 2015.

He holds an MBA from the University of Sunderland, UK and a Postgraduate Diploma in Strategic Management. He is also a member of The Association of Professional Bankers, Sri Lanka and has undergone extensive training in banking, leadership, and management both locally and at prestigious overseas institutions such as Mount Eliza Business Faculty, Melbourne University, Australia, National University of Singapore, Lloyds Bank TSB, UK, Development Bank of Philippines and AOTS, Japan. He is 65 years of age.

2

Mr Anil RajakarunaSenior Director

Mr Rajakaruna holds First in Laws (LLB, Part 1) from the University of Colombo. He is an Attorney-at-Law with 22 years of experience. He holds a Diploma in External Affairs from the Centre for Bandaranaike International Studies.

Mr Rajakaruna was appointed to the NSB Board on 22 February 2019. This is the third term of Directorship with NSB including the period of serving as Working Director of the Bank during 2002-2004 and 2 November 2015 to 31 December 2018 as a Director. Mr Rajakaruna was appointed as Senior Director on 2 October 2018 and reappointed on 14 March 2019. He is 64 years of age.

Mr Rajakaruna currently serves as Vice Chairman, Compensation Board and a Council Member, University of Colombo.

3

Mr U G R AriyaratneDirector – Postmaster General

Mr U G R Ariyaratne was appointed to the Board of Directors of National Savings Bank on 31 August 2018. He holds Bachelor of Commerce, Master in Sociology and Postgraduate Diploma in Regional Planning from the University of Kelaniya. He has obtained-Postgraduate Diploma in Education from the University of Peradeniya. He is 54 years of age.

He has also obtained Certificate of Public Administration, Certificate of General Management and Capacity Building Programme for SLAS Class I Officer from SLIDA

He is currently serving as the Postmaster General, Department of Posts (from August 2018 to date) and has served the Government of Sri Lanka through various appointments during his 22 years of service including District Secretary of the District Secretariat of Polonnaruwa, Additional Secretary of Social Development, Additional Secretary of Rural Development of Ministry of Social Empowerment and Welfare, Director General of Coconut Development Authority.

He has undergone extensive training programmes on Child Rights Sensitisation, Thailand and Emotional Balancing for Higher Productivity, India. He has also been a resource person at MDTU, North Western Provincial Council and Police, Service Training Centre, North Central Province.

4

Mr P AlgamaDirector

Mr Algama was appointed to the NSB Board on 28 February 2019. He holds a Bachelor of Commerce, (BCom-Special) from the University of Kelaniya, Sri Lanka (March 1981 to October 1984) and Master of Business Administration (MBA) from Nanyang Technological University, Singapore and the Sloan School of Management of the Massachusetts Institute of Technology (MIT) Boston, USA (2001/2002). He is also an Associate Member of the CPA Australia. He is 58 years of age.

He is currently serving as the Director General of Department of Public Finance of Ministry of Finance and Planning (October 2012 to date). During his 18 years of service at the Ministry of Finance and Planning, he has served as the Director of


Board of Directors


Department of Public Enterprises, Director/Deputy Director Budget (Economic Infrastructure Development Cluster) of Department of National Budget and Assistant Director of Department of State Accounts.

He has undergone several overseas training programmes on Public Financial Management in changing world, Project Planning and Management Techniques, Financial Management, National Budgeting, Techniques of Financial Analysis and Programming at various prestigious institutions such as Kennedy Schools of Government, Harvard University, Boston, USA, Asian Institute of Technology, Bangkok, Thailand, National Institute of Financial Management, Faridabad, India, International Law Institute, Washington, DC, USA and International Monetary Fund, Washington, DC, USA.

5

Mr Ajith PathiranaDirector

Mr Ajith Pathirana has served as the Secretary of the Bar Association of Sri Lanka (BASL). He had been a Senior Committee member of BASL and held Chairmanship on many committees of the BASL.

Mr Pathirana is an Attorney-at-Law who possesses experience of more than 29 years. He is also an Unofficial Magistrate, a Justice of Peace, and a practitioner in Criminal Law and has appeared in many prominent cases in courts throughout the country.

He was appointed to the NSB Board on 22 February 2019. This is his second term of Directorship with NSB and NSB Fund Management Company Limited He has served as a member of the Board of Directors of NSB from 20 March 2015 to 19 July 2018. Mr Pathirana is 54 years of age.

6

Dr D ShanmugasundaramDirector

Dr D Shanmugasundram was appointed as a Director of the National Savings Bank on 19 July 2018. He holds an Honorary Doctorate in Business Administration. He is the Chairman of Union Development and Investment Co. (Pvt) Ltd. and the Vice Chairman of Rajathi Group of Companies. He is 63 years of age.

He serves as a member of the Board of Directors of following entities.

Director, Eswaran Brothers Exports (Pvt) Ltd.

Director, Eswaran Brothers (Ceylon) Ltd.

Director, Esika (Pvt) Ltd. Director, Eswaran Brothers Duty Free (Pvt) Ltd.

Director, V T V Foundation Ltd. Director, Wow Events & Productions (Pvt) Ltd.

Chairman, Eco Solar Rays (Pvt) Ltd.

He was an ex-member of the Board of Directors of following entities.

Road Development Authority Ceylon Ceramic Corporation Lanka Walltiles PLC Breeze Hotels Ltd.


Board of Directors


7

Mr Nazri NizarDirector

Mr Nazri Nizar holds a Bachelor of Science in Business Administration from University of Pennsylvania with a major in Economics.

He is the Co-Founder and Managing Director of Richardson Group and he serves as the Managing Director of Richardson Projects (Pvt) Limited, Richardson Outdoor (Pvt) Limited, Richardson Engineering (Pvt) Limited and Richardson Technologies (Pvt) Limited.

Training through first principles, Marketing, Micromanagement, Cost Oriented, Resiliency, Future Focused, Leadership, Creativity, Time Management, Persistence, Turning ideas into companies and long-term thinking are some of his skills and competencies.

He joined the Board of Directors of the National Savings Bank on 22 February 2019. He is 47 years of age.

Mr S D N PereraGeneral Manager/CEO

Mr S D N Perera was appointed as the 16th General Manager/CEO of National Savings Bank w.e.f. 12 March 2015. Prior to his appointment, he has been serving as the Acting General Manager/CEO and he has been serving the Bank covering all functional areas in his career for nearly three decades.

Mr Perera is a holder of a B.Com. Special Degree and a Diploma in Bank Management. He is also a Certified Information Systems Auditor (CISA) of USA.

He is a Director of NSB Fund Management Company Limited.

Mr Perera was a Director of “Rajarata Sanwardana Bank” and ‘Regional Development Bank’ for over 10 years.


Ms Anupama MuhandiramSecretary to the Board

Ms Anupama Muhandiram, an Attorney-at-Law holds Master of Laws Degree (LLM) from Cardiff Metropolitan University of UK, Master’s in Business Administration (MBA) Degree from Manipal University and Post-Attorney Diploma in Banking and Insurance Law from the Incorporated Council of Legal Education of Sri Lanka.

Prior to her appointment as the Secretary to the Board of Directors of National Saving Bank on 6 December 2016, she has served as Assistant Secretary to the Board of Directors from November 2015 to December 2016. She has served as the Company Secretary of NSB Fund Management Company Ltd., from 2015 to 2017. Out of 23 years experience in Banking and Finance sector, she had served more than 18 years at People’s Bank as a Legal Officer and an Assistant Secretary to the Board of Directors.

Ms Muhandiram is also a visiting Lecturer (Commercial Law) at the University of Sabaragamuwa, and she is the Founder Secretary of Association of Board/Company Secretaries of Banks Sri Lanka.



2

9

68

3

7

1




1

Mr K Raveendran DGM (Research and Development)

2

Mr J K Gamanayake Senior DGM

3 Mr S D N Perera General Manager/CEO

4

Mr K B Wijeyaratne DGM (Finance and Planning)

5

Mr M P A W Peiris DGM (Operations)

6Mr G W E Jayaweera DGM (Audit)

7

Ms G V A D D Silva DGM (Treasury)

8Mr K K V V L W Karunatilaka DGM (Marketing)

9

Ms B P J Gunasekera DGM (International)

10

Mr M Kiritharan Consultant (Legal)

11

Ms C S Jesudian DGM (Credit)

10

11

54




Executive Management

1

6

3

11

10

98

7

2


137


1

Mr K S Weerasena AGM (HRD)

2Mr J H T Chandraratne AGM (Engineering)

3

Mr A K L Illesinghe AGM (IT)

4

Mr A L A Haleem AGM (Support Services)

5 Mr K M W M Karunaratne AGM (Engineering)

6Ms I K L Sasi Mahendren Compliance Officer

7

Ms M A Gomes AGM (Planning)

8 Ms K P D M De Silva AGM (Operations I)

9

Mr M T A J F Gomis AGM (Operations II)

10

Ms W P U A De Silva AGM (Recoveries)

11

Ms R A N N Wijesinghe AGM (International)

12

Ms R P A M P Rajanayake Chief Risk Officer

13

Ms M N A Fernando AGM (HRD)

14

Ms H M S L FernandoAGM (Operations III)

15

Ms R C Samarasinghe AGM (Credit)

45

1513

12 14



Ms D D WickramasingheRegional Office Regional Manager – Southern

Ms H R Karunamuni Regional Office Regional Manager – Western II

Mr D C Olaboduwa Regional Office Regional Manager – North Western

Ms C N Ekanayake Regional Office Acting Regional Manager – Western I

Ms A M C Attanayaka Regional Office Acting Regional Manager – Sabaragamuwa

Mr S Sivasorupan Regional Office Acting Regional Manager – Eastern

Mr N Baheerathan Regional Manager Regional Manager – Northern

Mr G M S P FernandoInformation Technology DivisionChief Manager – ICT Operations

Mr W M R B Weerakoon Branch Management Division Chief Manager

Mr H M G P J Herath Treasury Division Chief Manager – Treasury

Mr P T A PereraCredit DivisionChief Manager(Retired w.e.f. 28 March 2019) Mr A B C R WijayapalaBranch Management Division Chief Manager – Pawning

Ms C W Pathirana Supplies Division Chief Manager – Supplies

Mr M C Rajapakse Information Technology Division Chief Manager – IT

Mr U Wattuhewa Internal Audit Division Chief Manager – Audit

Mr P A PereraInternal Audit Division Chief Manager – Audit

Mr M V G Susil KumaraInternational Banking Division Chief Manager

Ms S W A WeerasingheTreasury Division Chief Manager – Treasury

Mr L C Senanayake Information Technology Division Chief Manager – Systems

Ms M A P MuhandiramSecretaries Division Secretary to the Board of Directors

Mr K T S S GunawardenaSecurity Division Chief Manager – Security

Mr U MunasingheBattaramulla BranchChief Manager

Mr D L P AbayasingheNSB Fund Management Co. Ltd. Chief Executive Officer

Mr M W K C De Silva Research and Development Division Chief Manager – Research and Development

Mr S B Suranga Galle BranchChief Manager

Mr K D K K Wijeyawardane Card Centre Chief Manager


Mr D M C P B Dissanayake General Manager’S Division Chief Manager

Mr A P R De ZoysaInformation Technology Division Chief Manager – IS Security

Mr K A R GunathilakeWelfare Division Chief Manager – Welfare

Ms S S J P S De Silva Finance and Planning Division Chief Manager – Finance

Mr H S P Ranaweera Finance and Planning Division Chief Manager – Finance

Ms W D L AsokaVeyangoda BranchChief Manager (Retired w.e.f. 15 March 2019)

Ms S A M A C J S K Senarathne Legal Division Chief Manager – Legal

Mr S A A Batuwanthudawa Administration Division Chief Manager Ms D A V WijewanthaKiribathgoda Branch Chief Manager Ms S H A S KumariSuperannuation Division Chief Manager – Superannuation Ms N I Gunathilake Credit Division Chief Manager – Credit Administration

Chief Managers


“Trust begins with trustworthy leadership”

Corporate governance is the process of rules under which an institution is managed on behalf of shareholders and other stakeholders. The Bank’s corporate governance framework which includes governance structures and policy frameworks explicitly define how the Bank will conduct business in responding to the opportunities and threats presented by the operating environment whilst maintaining the right balance between rights and obligations of stakeholders.

We are operating in a highly regulated industry with increasing supervision and regulatory measures primarily uphold the public trust and protecting depositors. Therefore corporate governance is the key for stability, sustainable value creation, compliance, and managing business and reputational risk of the Bank.

The Board of Directors (the “Board”) of National Savings Bank (“NSB”) believes that corporate governance is a vital tool which enhances its influence, efficiency and independence while providing a sound basis for the Bank’s operations and maintaining a healthy relationship with customers, employees, shareholders, and all other stakeholders. As part of the Bank’s vision to be the most reliable and sought-after choice for savings and investment solutions, NSB sets itself high standards in corporate governance. NSB believes corporate governance should stem from the corporate culture and values of the Bank and not restricted to written laws and standards.

Accordingly, we are pleased to confirm that, as at the date of this Annual Report, we have complied with all the Corporate Governance Rules enumerated by laws, rules, regulations and codes on good corporate governance.

We periodically review the principles, structures, frameworks, and processes of our governance system to assess its effectiveness and refine it as necessary to suit the evolving needs of our enterprise and the regulatory environment enabling value creation and growth.For detailed information on corporate governance of the National Savings Bank refer to Book 2 Compendium.


Statement on Corporate Governance


“We understand the psychology and the mathematics of risk”

NSB takes an informed and transparent approach to risk management as a central component of its business model and strategy that are geared for sustainable value creation. NSB’s overall objective is to manage its operations and the associated risks in a balanced manner serving the interests of its customers, investors, and other stakeholders. Risk management function of the Bank requires to identify, assess, measure, aggregate, and manage risks and to monitor optimum capital allocation among business operations. Failure to manage the impact from internal and external risks may damage the Bank’s reputation, affect its financial performance, or lead to regulatory non-compliances; all negatively affecting the primary strategic objective of value creation.

Our business strategy is aligned with our enterprise risk management strategy and the risk appetite which is set at the Board level. Board-appointed Risk Management Committee i.e. Board Integrated Risk Management Committee operates with the objective of creating awareness about the effectiveness appropriateness of the risk management strategies put in to place by the Board.

The scope of risk management is not limited to NSB, but also with the fully-owned subsidiary NSB Fund Management Company. The subsidiary company engages in Primary Dealer functions.

Outlook

The Bank adopted a credit risk management system comprising rating and scoring models to evaluate, monitor and manage principal and material risks assumed in the course of its operations. Further, the procurement of the core banking solution and treasury solution will further improve effective risk management.

Emerging risk areas

Cyber security riskRegulatory riskModel riskContingent risk

Main risk areas

Credit riskMarket riskLiquidity RiskOperational risk Compliance riskReputational riskStrategic risk

Risk management at NSB

Our Bank remained sound and stable in its state on overall risk management throughout the year 2018, withstanding the financial stress and unexpected losses despite the headwinds in the macroeconomic and political environments, regulatory changes and increased risk levels. Our risk appetite is cascaded down to the more detailed portfolio level from the corporate level. Our risk appetite is measured and monitored against the pre-determined limits on a daily, monthly and quarterly basis.

Material Risk category YoY Change*

Credit risk IncreaseMarket risk DecreaseLiquidity risk IncreaseOperational risk StableCompliance risk StableReputational risks StableStrategic risks Stable

* YoY change in impact on earnings and capital

For detailed information on National Savings Bank’s risk management refer to Book 2 Compendium.





Financial Reports

142 143 144Income Statement Statement of

Comprehensive IncomeStatement of Financial Position

The Financial Statements along with the Notes to the Financial Statements are depicted in Book 2 Compendium under Financial Reports.



Income Statement

Bank Group

For the year ended 31 DecemberNote

2018

Rs. ’000

2017RestatedRs. ’000

Change

%

2018

Rs. ’000


Change

%

Gross income 3 111,902,078 107,995,784 4 112,760,454 108,234,622 4Interest income 110,506,931 103,578,838 7 111,718,948 104,424,417 7Less: Interest expenses 85,622,275 78,444,825 9 86,460,269 78,987,596 9

Net interest income 4 24,884,656 25,134,013 (1) 25,258,679 25,436,821 (1)Fee and commission income 1,005,262 782,776 28 1,008,482 785,077 28Less: Fee and commission expenses 141,196 109,082 29 144,685 113,037 28

Net fee and commission income 5 864,066 673,694 28 863,797 672,040 29Net gain/(loss) from trading 6 (707,433) 1,206,408 (159) (1,062,421) 1,520,740 (170)Net fair value gains/(losses) from financial instruments at fair value through profit or loss 7 – – – – – –Net gains/(losses) from derecognition of financial assets 8 6,906 707,491 (99) 6,906 707,491 (99)Net other operating income 9 1,090,412 1,720,272 (37) 1,088,539 796,897 37

Total operating income 26,138,607 29,441,877 (11) 26,155,500 29,133,988 (10)Less: Impairment charges 10 871,049 765,847 14 870,994 765,858 14

Net operating income 25,267,558 28,676,030 (12) 25,284,506 28,368,130 (11)

Less: Expenses Personnel expenses 11 9,262,705 6,886,505 35 9,302,548 6,918,813 34Depreciation and amortisation expenses 638,795 423,547 51 639,779 424,352 51Other expenses 12 4,194,979 3,737,364 12 4,160,782 3,682,765 13

Operating profit before value added tax (VAT), nation building tax (NBT) and debt repayment levy (DRL) on financial services 11,171,079 17,628,615 (37) 11,181,397 17,342,200 (36)Less: VAT on financial services 2,577,657 3,082,619 (16) 2,584,220 3,168,299 (18) NBT on financial services 343,688 411,016 (16) 344,563 422,440 (18) DRL on financial services 308,371 – 100 308,371 – 100

Operating profit after VAT, NBT and DRL on financial services 7,941,364 14,134,980 (44) 7,944,243 13,751,461 (42)Share of profits of associates and joint ventures – – – – – –

Profit before income tax 7,941,364 14,134,980 (44) 7,944,243 13,751,461 (42)Less: Income tax expenses 13 3,441,213 4,419,019 (22) 3,444,056 4,595,065 (25)

Profit for the year 4,500,151 9,715,961 (54) 4,500,187 9,156,396 (51)

Profit attributable to:Equity holders of the Bank 4,500,151 9,715,961 (54) 4,500,187 9,156,396 (51)Non-controlling interests – – – – – –


Earnings per share on profit Basic earnings per ordinary share (Rs.) 14 6.72 15.67 (57) 6.72 14.77 (55)

Diluted earnings per ordinary share (Rs.) 6.72 15.67 (57) 6.72 14.77 (55)



Statement of Comprehensive Income


Bank Group


2018

Rs. ’000


Change

%

2018

Rs. ’000


Change

%


Items that will be reclassified to income statement

Exchange differences on translation of foreign operations – – – – – –

Net gains/(losses) on cash flow hedges (291,924) 290,074 (201) (291,924) 290,074 (201)

Net gains/(losses) on investments in debt instruments measured at fair value through other comprehensive income – – – – – –

Share of profits of associates and joint ventures – – – – – –

Debt instruments at fair value through other comprehensive income (127,741) 693,559 (118) (149,144) 858,802 (117)

Less: Fair value gains/(losses) transferred to income statement on disposal of debt instrument at fair value through other comprehensive income 1,370 (690,388) 99 1,370 (690,388) 99

Less: Tax expense relating to items that will be reclassified to income statement – – – – – –

Total items that will be reclassified to income statement (418,295) 293,245 (243) (439,698) 458,488 (196)

Items that will not be reclassified to income statementChange in fair value on investments in equity instruments designated at fair value through other comprehensive income (690,435) (36,752) 1,779 (690,435) (36,752) 1,779 Change in fair value attributable to change in the Bank's own credit risk on financial liabilities designated at fair value through profit or loss – – – – – – Remeasurement of post-employment benefit obligations (210,861) (2,072,425) (90) (211,258) (2,072,155) (90)Changes in revaluation surplus – 4,508,480 (100) – 4,508,480 (100)


Less: Tax expense relating to items that will not be reclassified to income statement

– – – – – –

Total items that will not be reclassified to income statement (901,296) 2,399,303 (138) (901,694) 2,399,573 (138)

Other comprehensive income for the year, net of taxes (1,319,591) 2,692,547 (149) (1,341,392) 2,858,060 (147)

Total comprehensive income for the year 3,180,560 12,408,508 (74) 3,158,795 12,014,456 (74)

Attributable to:Equity holders of the Bank 3,180,560 12,408,508 (74) 3,158,795 12,014,456 (74)

Non-controlling interests – – – – – –



Statement of Financial Position


Bank Group

As at 31 DecemberNote

2018

Rs. ’000


Change

%

2018

Rs. ’000


Change

%

Assets

Cash and cash equivalents 16 3,434,524 3,849,530 (11) 3,436,929 3,853,989 (11)

Balances with central banks 17 – – – 177 94 89

Placements with banks 18 17,588,445 23,437,274 (25) 17,588,445 23,437,274 (25)

Derivative financial instruments 19 4,740,106 1,360,714 248 4,740,106 1,360,714 248

Financial assets recognised through profit or loss

20

– measured at fair value 16,680,382 6,472,314 158 26,867,533 9,389,950 186

– designated at fair value – – – – – –

Financial assets at amortised cost

– loans and advances 21 423,532,145 375,703,730 13 423,557,119 374,416,626 13

– debt and other instruments 22 518,947,969 555,468,618 (7) 522,973,159 559,319,752 (6)

Financial assets measured at fair value through other comprehensive income 23 6,184,430 5,693,829 9 7,788,560 7,513,932 4

Investments in subsidiaries 24 1,700,000 900,000 89 – – –

Investments in associates and joint ventures 25 – – – – – –

Property, plant and equipment 26 13,465,755 12,395,684 9 13,468,776 12,399,334 9

Investment properties 27 – – – – – –

Goodwill and intangible assets 28 – – – – – –

Deferred tax assets 29 – – – 73 – 100

Other assets 30 31,209,216 25,695,689 21 31,532,684 25,976,944 21

Total assets 1,037,482,973 1,010,977,382 3 1,051,953,560 1,017,668,610 3

LiabilitiesDue to banks 31 77,119,146 48,596,591 59 83,615,264 49,352,574 69

Derivative financial instruments 32 1,533 956,937 (100) 1,533 956,937 (100)

Financial liabilities recognised through profit or loss 33 – – – – – –

Financial liabilities at amortised cost 34

– due to depositors 839,574,411 737,212,640 14 839,574,411 737,212,640 14

– due to debt securities holders – – – – –

– due to other borrowers 14,804,802 12,837,008 15 21,750,178 17,545,212 24

Debt securities issued 35 52,389,133 162,709,027 (68) 52,389,133 162,709,027 (68)

Retirement benefit obligations 36 3,830,795 3,711,431 3 3,832,777 3,712,665 3

Current tax liabilities 37 – – – – 137,344 (100)

Deferred tax liabilities 29 582,463 507,063 15 582,463 507,138 15

Other provisions 38 – – – – – –

Other liabilities 39 5,447,277 5,350,244 2 5,452,317 5,394,795 1

Due to subsidiaries 40 750 750 – – – –

Total liabilities 993,750,308 971,881,691 2 1,007,198,076 977,528,332 3



Bank Group


2018

Rs. ’000


Change

%

2018

Rs. ’000


Change

%

Equity

Stated capital/assigned capital 41 9,400,000 6,700,000 40 9,400,000 6,700,000 40

Statutory reserve fund 42 3,227,960 3,002,952 7 3,227,960 3,002,952 7

Retained earnings 43 4,622,080 1,102,798 319 5,198,451 1,679,540 210

Other reserves 44 26,482,625 28,289,941 (6) 26,929,074 28,757,786 (6)

Total shareholders’ equity 43,732,665 39,095,691 12 44,755,484 40,140,278 11

Non-controlling interests 45 – – – – – –

Total equity 43,732,665 39,095,691 12 44,755,484 40,140,278 11

Total equity and liabilities 1,037,482,973 1,010,977,382 3 1,051,953,560 1,017,668,610 3

Contingent liabilities and commitments 46 4,481,397 18,320,312 (76) 4,481,397 18,320,312 (76)

Memorandum information

Number of employees 4,512 4,470

Number of branches 255 253

Note: Amounts stated are net of impairment and depreciation.

The Notes to the Financial Statements disclosed on pages 258 to 380 are integral parts of these Financial Statements.

CertificationI certify that the above Financial Statements give a true and fair view of the state of affairs of National Savings Bank and the Group as at 31 December 2018 and its profit for the year ended.

Kithsiri WijeyaratneDeputy General Manager (Finance and Planning)

The Board of Directors is responsible for the preparation and presentation of these Financial Statements.

Approved and signed for and on behalf of the Board,

Jayaraja Chandrasekera Anil Rajakaruna Dammika PereraChairman Senior Director General Manager/CEO

14 March 2019

ColomboSri Lanka



Name of the BankNational Savings Bank

Legal Form

GRI 102-5

A Government-owned bank incorporated in Sri Lanka by the National Savings Bank Act No. 30 of 1971 and was granted the status of the Licensed Specialised Bank in terms of the Banking Act No. 30 of 1988.

Registered Office and Head Office

GRI 102-3

“Savings House”, No. 255, Galle Road, Colombo 03, Sri Lanka.Tel: +94 11 257 3008-15Fax: +94 11 257 3178Email: [email protected] Website: http://www.nsb.lk Swift code: NSBALKLX

Service Outlets255 Branches310 ATMs

Agency Network653 Post Offices and 3,409 Sub-post Offices throughout the Island.

Credit Rating

The Bank has been assigned AA+ (lka) long-term credit rating by the Fitch Rating Lanka Ltd.B Stable International Credit Rating from Standard & Poor’s.B Stable International Credit Rating by Fitch Ratings.

Board of Directors*H N J Chandrasekera – ChairmanAnil Rajakaruna – Senior DirectorU G R Ariyaratne – Director (Ex Officio)D Shanmugasundaram – Director Ajith Pathirana – DirectorP Algama – Director (Ex Officio)M Nazri Nizar – Director

General Manager/CEOS D N Perera

Board SecretaryMs M A P Muhandiram

Board Audit Committee (BAC)*P Algama – ChairmanAnil Rajakaruna – MemberNazri Nizar – Member

Board Integrated Risk Management Committee (BIRMC)*P Algama – (Chairman)U G R Ariyaratne – Member Dr D Shanmugasundaram – Member

Board Human Resources and Remunerations Committee (BHRRC)*Jayaraja Chandrasekera – ChairmanAnil Rajakaruna – MemberAjith Pathirana – Member

Board Nominations Committee (BNC)*Anil Rajakaruna – Chairman U G R Ariyaratne – MemberDr D Shanmugasundaram – Member

Board Credit Committee (BCC)*Jayaraja Chandrasekera – ChairmanAnil Rajakaruna – MemberAjith Pathirana – Member

Board IT Strategic Committee (BITSC)*Jayaraja Chandrasekera – ChairmanU G R Ariyaratne – MemberNazri Nizar – Member

Compliance OfficerMs I K L Sasi Mahendran

AuditorsAuditor General

Subsidiary Name of the CompanyNSB Fund Management Co. Ltd.

Registered Office and Head Office1st Floor, “Savings House”, National Savings Bank, No. 255, Galle Road, Colombo 03, Sri Lanka.Tel.: +94 11 256 4601, 246 7731Fax: +94 11 256 4706Email: [email protected] code: NSBFLKLXXXX

Board of DirectorsH N J Chandrasekera – ChairmanS D N Perera – DirectorAjith Pathirana – Director D S Kudahetty – Director Ms R E Dangalla – Director K D A G Wickramasinghe – Director K D M P Weerasinghe – Director

Chief Executive Officer D L P Abayasinghe

AuditorsAuditor General

Company SecretaryMs Farzana Aniff

* Given information are of the present Board and Board Subcommittees. Refer page 152 to 153 in the section of Corporate Governance for details of the Board of Directors and Board Subcommittees during the year 2018.

Corporate Information

Governance

148 179 183Corporate Governance

Report of the Board Audit Committee

Report of the Board Human Resource and Remuneration Committee

185 187 190Report of the Board Nomination Committee

Report of the Board Integrated Risk Management Committee

Report of the Board Credit Committee

192 194Report of the Board Information Technology Strategy Committee

Risk Management

148

227Financial Reports

238 240 241Directors’ Statement on Internal Control over Financial Reporting

Independent Assurance Report on Internal Control

Independent Assurance Report

248 249 250Income Statement Statement of

Comprehensive Income


Our Ethos... our Strength

At our core we are an institution committed to fostering a healthy, sustainable, and secure savings protocol for all people of the Nation. The Bank is today one of the strongest and safest financial institutions in the country.

Our ethos is truly our strength

Preamble 4Milestones 4About this Report 5

Highlights 8

Messages 10Chairman’s Message 10General Manager/CEO’s Review 12

Our Value Creation Model 15Our Sustainable Business Model 16Operating Environment 18Our Strategy 33Stakeholders 54Materiality Matters 60

Management Discussion and Analysis

65

Financial Capital 66Manufactured Capital 83Intellectual Capital 88Human Capital 93Social and Relationship Capital 106Natural Capital 120GRI Content Index in accordance with Core Criteria 125

Governance 129Board of Directors 130

Corporate Management 134

Executive Management 136

Chief Managers 138

Statement on Corporate Governance 139

Statement on Risk Management 140

Financial Reports 141Income Statements 142Statement of Comprehensive Income 143Statement of Financial Position 144

Corporate Information 146


Compendium

Governance

148 179 183Corporate Governance



185 187 190Report of the Board Nomination Committee



192 194Report of the Board Information Technology Strategy Committee

Risk Management

148Supplementary Information

382 386 387Products and services

Income Statement in US Dollars

Statement of Comprehensive Income in US Dollars

388 389 402Statement of Financial Position in US Dollars

Basel III Disclosures as per Schedule III of Banking Act Direction No. 1 of 2016

Other Disclosure Requirements as required by CBSL

409 411 412Statistical Indicators 2009-2018

Analysis of Deposits

Correspondent Banks

413 415 416Exchange Companies

Eurogiro Members

Glossary of Financial and Banking Terms

381Contents

227Financial Reports

228 229 236Financial Calendar

Annual Report of Board of Directors

Statement of Directors’ Responsibility for Financial Reporting

243 245 247General Manager/CEO’s and Deputy General Manager’s (Finance and Planning) Statement of Responsibility

Auditor General’s Report

Content of Financial Statements

252 256 258Statement of Changes in Equity

Statement of Cash Flows

Notes to the Financial Statements


Governance Financial Reports Supplementary Information

Our governance philosophyCorporate governance is the framework that defines the relationship between shareholders, the Board of Directors, Management and other stakeholders, to help influence how an organisation operates. It aims to protect shareholder rights, enhance disclosure and transparency, facilitate effective functioning of the Board and provide an efficient legal and regulatory enforcement framework. A good governance system focuses on highest standards of business ethics, well-constructed policies and procedures and productive monitoring systems within the organisation. Therefore, the essence of Corporate Governance is accountability to all its stakeholders.

We believe Corporate Governance should stem from the corporate culture and values of the Bank and represents far more than legislative compliance and best-practice principles. Hence, the Bank has inculcated a culture that values sound corporate governance for safeguarding stakeholders’ interest in conformity with public interest on a sustainable basis. We therefore embrace world class banking practices and robust institutional frameworks to ensure our banking services are secure and stable. These practices are continuously reviewed to ensure that we consistently act in the best interest of our shareholder.

NSB applies the core principles of good corporate governance; fairness, accountability, responsibility and transparency in its governance framework to outperform as the Bank believes good corporate governance is a key factor in underpinning the integrity and efficiency within the Bank.

In our efforts to improve the quality of implementation of good corporate governance, NSB always follow the strategy of periodically performing a self-assessment of the adequacy of implementation of good corporate governance with evolving regulations and best practices which are becoming increasingly rigorous and onerous. This supports the Board in spearheading the stewardship role of the Bank and delegating them across Management and the staff, resource allocation, risk management, compliance, performance appraisal and compensation, related party transactions and financial reporting.

Key regulatory requirements and voluntary codes relevant to the Bank and elements of the corporate governance framework of the Bank The Corporate Governance Framework of the Bank is mandated by the regulatory framework as well as the voluntary codes.

Regulatory requirements

NSB Act No. 30 of 1971 and amendments therein Banking Act No. 30 of 1988 and amendments thereto All Directions issued to Licensed Specialised Banks by the

Central Bank of Sri Lanka (CBSL) particularly the Banking Act Direction No. 12 of 2007 on Corporate Governance

Inland Revenue Act No. 24 of 2017 Shop and Office Act No. 19 of 1954 and amendments

thereto Code of Best Practice in Corporate Governance for

Public Enterprises in Sri Lanka

Voluntary codes relevant to the Bank

Code of Best Practice on Corporate Governance issued by CA Sri Lanka for the Governance Code

Corporate governance framework of NSB NSB is committed to high standard of governance, ethics and integrity. The Bank operates within a clearly defined Board approved governance framework, which provides the guidance to implement robust governance practices and clear direction for decision making throughout the Bank. The Board is the apex governance body of the Bank and has ultimate accountability and responsibility for the performance and affairs and ensures that the Bank adheres to high standards of ethical behaviour. Our Board of Directors provide leadership and strategic direction to safeguard shareholder value creation within a framework of prudent and effective controls. This enables risk to be assessed and managed to ensure long-term sustainable development and growth. The Board is assisted by Board Subcommittees, Management committees and Corporate

Corporate Governance




Management. Management Committees and the Corporate Management are responsible for executing the strategies approved by the Board. Strategic Business Lines and support functions are responsible for carrying out the operations within the pre-defined risk appetite level of the Bank. The governance structure of the Bank is given on page 150

Governance framework at NSB is based on the following principles: Assuming responsibility and accountability in respect of

the Management of affairs of NSB at all levels. Ensuring the oversight of specific responsibilities assigned

to the Board through Board-appointed Subcommittees. Determining the best structures of management for the

Bank to achieve its business objectives. Striking a balance between business and the true spirit

of “National Savings” and delegating Key Management Personnel appropriately.

Evaluating business activities and prudent risk management policies of the Bank to create a safe and sound environment.

Infusing and accommodating new ideas and maintaining cordial relationships at Board and Senior Management levels.

Having an active role in discussing with relevant regulatory bodies on the implementation and complying with governance regulations.

Overseeing internal control systems including internal audit, compliance and risk management functions independent from the business lines.

Adhering to all requirements of the NSB Act, laws and directions of regulators.

Keeping social responsibility in mind when carrying out its core activities.

Policy framework The policy framework of the Bank is key to sound Corporate Governance. Compliance with external regulations is facilitated through a comprehensive policy framework. Collectively, they define how we do business and reflect our approach to compliance, managing stakeholders’ expectations and risk. Policy documents are typically modelled on international best practice, ensuring compliance with regulatory requirements as appropriate to the Bank’s size, systemic importance and the specific operational context.

Compliance Directors are conscious of their duty to comply with the laws, regulations, regulatory guidelines, internal controls and approved policies on all areas of business of the Bank. Bank is compliant with all relevant legal and statutory requirements. The Bank has implemented controls to provide reasonable assurance of its compliance, including establishment of a compliance function.

This function is spearheaded by a dedicated Compliance Officer who reports to the Board Integrated Risk Management Committee (BIRMC). The Compliance Officer submits a report on mandatory banking and statutory requirements on a quarterly basis to the BIRMC.




CMC Corporate Management Committee ALCO Assets Liability Management Committee CC Credit Committee IC Investment Committee PRC Performance Review Committee BOSC Branch Operations Steering Committee

ITSC IT Steering CommitteeMKTC Marketing CommitteeORMC Operational Risk Management CommitteePDC Product Development CommitteeHRC Human Resources CommitteeCPC-Major Corporate Procurement Committee – Major

CPC-Minor Corporate Procurement Committee – MinorEC Equity CommitteeTNIC Tender and New Investment CommitteeEPC Executive Procurement Committee

Regulators

Governance Structure of National Savings Bank

Auditor Auditor General

ShareholderThe Government of Sri Lanka


Compliance

Risk Management

General Manager/CEO

Appointment Flow Responsibility Flow Administrative Flow Dialogue

Board of Directors

Main Board

Board Audit Committee

Board Human Resources and Remuneration

Committee

Board Integrated Risk Management

Committee

Board Nomination Committee

Mandatory Committees

Board Credit Committee

Board Information

Technology Strategy Committee

Non-Mandatory Committees

Management CommitteesP

RC

OR

MC

ITSC

HR

C

EPC

BO

SC

PD

C

CPC

Min

or

MKT

C

CPC

Maj

or

CMC

CC

ALC

O

EC TNIC

IC

Internal Audit

GRI 102-18




Our Board of DirectorsThe Board of Directors of NSB serves as the apex decision-making authority of the Bank and is responsible for determining the strategic direction based on the agreed risk appetite level and the policy framework to achieve those strategies. The Board has delegated the Corporate Management to carry out the day-to-day operations of the Bank without abdicating the Board’s responsibility and implementing and monitoring the internal controls. These engagements take place with mutual respect and candour. The Board Charter details the roles and responsibilities of the Board. The Board is committed to act in best interests of the Bank while adopting a pragmatic approach to the Bank’s core business, prudently evaluating the inputs of its business model, assessing the impact of the operating environment on these inputs as well as the potential trade-off. As a financial intermediary with a Government mandate, it is critical that the Bank remains relevant and innovative to achieve its vision “to be the most reliable and sought-after choice for your savings”. Hence, the Board is committed to ensure the Bank remains agile to cater rapidly changing customer and stakeholder needs.

The present Board comprises seven Directors who are experienced professionals in their chosen fields of expertise and skills to carry out deliberations on matters set before the Board. Six Directors of the present Board are Non-Independent and Non-Executive while one Director is independent and Non-Executive.

Profiles of the present Directors including their qualifications, are given on pages 131 to 133 and the details of their membership in Board Subcommittees are given on page 154.

Board processThe Board meets at least once in six weeks as per the NSB Act based on an agreed meeting schedule. Additional meetings are convened based on the requirements to do so. Directors attend regularly to the meetings and actively participate in the deliberations. Details of attendance at Board meetings during the year 2018 are given on page 152 The Chairman is responsible for determining the agenda

of meetings with assistance of the Secretary to the Board in consultation with the General Manager/CEO. The agenda is circulated to the Board members along with the relevant Board papers prior to one week of the Board meetings by the Secretary to the Board. This process allows the Board for timely preparation and make deliberations and informed decision. On exceptional situations, urgent Board papers are submitted at short notice or tabled during the meetings. Adequately detailed minutes of the meetings and the decisions made therein are maintained to access by Directors.

Conflict of interestThe members of the Board are committed to act in the best interest of the Bank, in good faith and avoid undue conflicts of interest whether financially or otherwise. Any banking facilities provided to the Directors are in compliance with the authorisation given by the CBSL. Directors annually declare their interest and necessary procedures are in place to ensure that there is no conflict of interest.

Board meetingsThe Board meetings are held at least once in every six weeks according to the provision of NSB Act and special meetings are held when the need arises. The Board of Directors held 17 scheduled meetings during the year inclusive of special meetings. The Board directed the Management for the preparation of Strategic Business Plan for three years, which is rolled over annually. During the year under review, the Board continued to focus on capital management with the implementation of the CBSL Direction No. 1 of 2016 that includes the increased Basel III Capital Adequacy Ratio, which will be fully-implemented with effect from 1 January 2019. Further, the Board quarterly reviewed the performance and implementation of Strategic Business Plan and deliberated on matters that require further attention.




Board subcommitteesWith the objective of inculcating a sound governance framework in the Bank, the Board has delegated its authority to six Board Subcommittees. These committees are established to deal with specific subject matters. The six Board Subcommittees include four mandatory committees namely, Board Audit Committee (BAC), Board Integrated Risk Management Committee (BIRMC), Board Human Resources and Remuneration Committee (BHRRC), Board Nomination Committee (BNC) and two voluntary committees namely; Board Credit Committee (BCC) and Board Information Technology Strategy Committee (BITSC) are

given the authority to make recommendations to the Board on matters under their purview.

These committees are established as per the Board-approved Terms of Reference which are based on regulatory requirements as well as industry best practices. The committees hold regular meetings and the proceedings are reported to the Board. The Board Subcommittee Reports which details on responsibilities, activities in 2018, the movements of directors in 2018, attendance and number of meetings held during the year 2018 are given on pages 179 to 193 The Secretary to the Board is also the Secretary to all Board Subcommittees. Minutes of the meetings shall be submitted to the Board of Directors for the information, review and comment, if any.

The details of meetings of the Board are given below:

Composition of the Board and attendance for the year 2018

Name of the Director Age (Years) Membership status Gender DOA Meeting attendance

Below 60 years

Above 60 years

NED/ED ID/NID Male Female Eligible toattend

Attended

Mr Aswin De Silva – Chairman (up to 12 November 2018) x NED NID x 9 February 2015 15 15Mr R M P Rathnayake – Chairman (up to 19 February 2019) x NED NID x 19 November 2018 2 2Mr D L P R Abeyaratne – Ex Officio Director(up to 11 July 2018) x NED NID x 9 February 2012 9 6Mr Suranga Naullage – Director(up to 31 December 2018) x NED NID x 9 February 2015 17 16Mr Ajith Pathirana – Director (up to 19 July 2018) x NED NID x 20 March 2015 10 9Mr A K Seneviratne – Ex Officio Director(up to 28 February 2019) x NED NID x 27 May 2015 17 14Mr Chandima Hemachandra – Director (up to 19 July 2018) x NED NID x 2 November 2015 10 10Mr Anil Rajakaruna – Senior Director(up to 31 December 2018) x NED NID x 2 November 2015 17 17Ms Shehara Jayawardana – Director (up to 12 November 2018) x NED NID x 19 July 2018 4 3Dr D Shanmugasundaram – Director x NED NID x 19 July 2018 6 6Mr U G R Ariyaratne – Ex Officio Director x NED ID x 31 August 2018 5 5

NED: Non-Executive Director ID: Independent Director DOA: Date of appointment ED: Executive Director NID: Non-Independent Director

Composition of the Present Board

Name of the Director Age (Years) Membership status Gender DOABelow

60 yearsAbove

60 yearsNED/ED ID/NID Male Female

Mr H N J Chandrasekera – Chairman x NED NID x 31 January 2019

Mr Anil Rajakaruna – Senior Director (up to 31 December 2018 and reappointed on 22 February 2019) x NED NID x 22 February 2019Dr D Shanmugasundaram – Director x NED NID x 19 July 2018Mr U G R Ariyaratne – Ex Officio Director x NED ID x 31 August 2018Mr Ajith Pathirana – Director (up to 19 July 2018 and reappointed on 22 February 2019) x NED NID x 22 February 2019Mr Nazri Nizar – Director x NED NID x 22 February 2019Mr P Algama – Ex Officio Director x NED NID x 28 February 2019




Composition and attendance of Board Subcommittees for the year 2018

Name and retirement date Directorshipstatus

BAC BHRRC BNC BIRMC BCC BITSC

Total minimum number of meetings to be held during the year as per statutory requirements

4 4 2 4 N/A N/A

Total number of meetings held during the year

7 11 3 6 7 3

Mr Aswin De SilvaChairman(up to 12 November 2018)

NED/NID

N/A 10, (Chairman

w.e.f.12 March

2015 –12 November

2018)

N/A N/A 7, (Chairman

w.e.f.03 February

2017 –12 November

2018)

3, (Chairman

w.e.f.03 February

2017 –12 November

2018)

Mr R M P Rathnayake Chairman(up to 19 February 2019)

NED/NID

N/A 1, (Chairman

w.e.f.26 November

2018)

N/A N/A Chairmanw.e.f.

26 November2018

Chairmanw.e.f.

26 November2018

Mr D L P R AbeyaratneEx officio Director(up to 11 July 2018)

NED/NID

4, (Chairman

w.e.f.30 November

2015 –11 July 2018)

4 2, (Chairman

w.e.f.03 February

2017 –11 July 2018)

N/A N/A 2

Mr A K SeneviratneEx officio Director(up to 28 February 2019)

NED/NID

4 N/A 3 6, (Chairman

w.e.f. 30 November

2015)

N/A N/A

Mr Anil RajakarunaSenior Director(up to 31 December 2018)

NED/NID

7 N/A 1, (Chairman

w.e.f.07 August

2018)

6 N/A 1

Ms Shehara JayawardaneDirector (up to 12 November 2018)

NED/NID

3, (Chairperson

w.e.f.07 August

2018 –12 November

2018)

N/A N/A N/A N/A 0

Dr D ShanmugasundaramDirector

NED/NID

3 4 N/A N/A N/A N/A

Mr Ajith PathiranaDirector (up to 19 July 2018)

NED/NID

N/A 4 N/A N/A 4 N/A

Mr U G R AriyaratneEx officio Director

NED/ID

N/A 3 0 N/A 1 N/A

Mr Suranga Naullage Director (up to 31 December 2018)

NED/NID

N/A N/A N/A 6 2 N/A

Mr Chandima Hemachandra Director (up to 19 July 2018)

NED/NID

N/A N/A 2 N/A 3 2

N/A = Not Applicable 0 = Required to be present but not attended

NED: Non-Executive Director ID: Independent Director NID: Non-Independent Director




Current Composition of the Board Subcommittees

Board Audit Committee (BAC)Mr P Algama – ChairmanMr Anil Rajakaruna – MemberMr Nazri Nizar – Member

Board Integrated Risk Management Committee (BIRMC)Mr P Algama – ChairmanMr U G R Ariyaratne – MemberDr D Shanmugasundaram – Member

Board Human Resources and Remunerations Committee (BHRRC)Mr Jayaraja Chandrasekera – ChairmanMr Anil Rajakaruna – MemberMr Ajith Pathirana – Member

Management committeesThe Bank, in addition to the Board Subcommittees has appointed some Management committees based on Board-approved Committee Charters. The General Manager/CEO acts as the Chairman of all Management committees according to the Terms of Reference. The committees deliberate on critical matters relating to the operations of the Bank as described in the table below:

Management committee Objective and responsibilities Composition

Corporate Management Committee (CMC)

Oversee on matters relating to policy and strategy formulation, implementation of the policies and strategies at the operational level.

All officers serving the Bank in the capacity of Deputy General Manager and above.

Asset and Liability Management Committee (ALCO)

Maintaining the market and liquidity risk within the pre-determined risk appetite level in order to optimise the return

General Manager/CEO, Senior DGM, KMPs from the Divisions of Finance and Planning, Research and Development, International Operations, Credit, Treasury and Risk Management.

Investment Committee (IC) Periodic review of Investment Policy of the Bank and oversee on the investment activities of the Bank within overall risk appetite level of the Bank.

General Manager/CEO, Senior DGM, KMPs from the Divisions of Finance and Planning, Research and Development, International Operations, Credit, Treasury, Legal and Risk Management.

Credit Committee (CC) Periodic review of the Credit Policies of the Bank, implementation of the policies and engage in maintaining a healthy credit portfolio to optimise the returns within the risk appetite of the Bank.

General Manager/CEO, Senior DGM, KMPs from the Divisions of Finance and Planning, Research and Development, International Operations, Credit, Treasury, Legal and Risk Management.

Performance Review Committee (PRC)

Review of financial performance, progress of ongoing activities, withdrawal activities and any other support functions of the Bank that facilitates the performance.

General Manager/CEO, Senior DGM, all DGMs, all Consultant and Heads of Divisions, all AGMs, Compliance Officer and any other member appointed by the Committee.

Board Nominations Committee (BNC)Mr Anil Rajakaruna – ChairmanMr U G R Ariyaratne – MemberDr D Shanmugasundaram – Member

Board Credit Committee (BCC)Mr Jayaraja Chandrasekera – ChairmanMr Anil Rajakaruna – MemberMr Ajith Pathirana – Member

Board IT Strategy Committee (BITSC)Mr Jayaraja Chandrasekera – ChairmanMr U G R Ariyaratne – MemberMr Nazri Nizar – Member

Board Related Party Transaction Review CommitteeMr P Algama – ChairmanMr Anil Rajakaruna – MemberMr Ajith Pathirana – Member




Management committee Objective and responsibilities Composition

Branch Operations Steering Committee (BOSC)

Oversee the reinforcement of the branch operations within the delegated financial authority.

General Manager/CEO, Senior DGM, KMPs from the Divisions of Finance and Planning, Research and Development, Legal and Premises.

Operational Risk Management Committee (ORMC)

Manage operational risk of the Bank while overseeing on the implementation of the operational risk management technique and maintain the integrity of internal controls through taking relevant measures.

General Manager/CEO, Senior DGM, KMPs from the Divisions of Research and Development, Operations, Human Resource Development, Information Technology, Support Services, Premises, Legal, Risk Management, Compliance and Information Security.

Product Development Committee (PDC)

Oversee on long-term value creation through innovative products development to face the increasing competition.

General Manager/CEO, Senior DGM, KMPs from the Divisions of Research and Development, Operations, International, Information Technology, Retail Credit, Marketing, and Planning.

Human Resource Committee (HRC)

Development of human resources in line with the Bank’s strategic objectives.

General Manager/CEO, Senior DGM, KMPs from the Divisions of Finance and Planning, Human Resource Development, Credit and Legal.

Marketing Committee(MKTC)

Provide with marketing advice, expertise and assistance to the Board and the Corporate Management, review and direct all aspects of marketing activities of the Bank

General Manager/CEO, Senior DGM, KMPs from the Divisions of Finance and Planning, Operations and Marketing.

Annual corporate governance reportThe annual corporate governance compliance report of the Bank to be published as required by the Banking Act Direction No. 12 of 2007 is given on pages 157 to 173 and the compliance report on Code of Best Practices on Corporate Governance of CA Sri Lanka is given on pages 174 to 178.

During the year under review, the Bank is compliant with all the applicable laws, rules, regulations and codes on good corporate governance.

Roles and responsibilities of the Board The powers and responsibilities of the Board are given in the Board Charter as listed below:

Powers reserved to the Board

To act as the final decision-making authority with regard to any matter related to the Bank subject to restrictions made in the Board Charter or any other laws/regulations in force.

To arrive at suitable decisions on financial matters subject to provisions of the approved Procurement Manual of the Bank and other applicable laws/regulations in force.

To formulate policies and guidelines to govern all activities of the Bank in order to ensure that most favourable business initiatives are taken at all levels.

To inquire into any matter pertaining to performance, management or administration of the Bank by way of calling for reports, appointment of a committee or any other suitable method as decided by the Board.

Responsibilities of the Board

Engage in any macro level matter which requires direction/guidance from the Board of Directors.

Maintaining regular monitoring and supervision over overall functions of the Bank.

Taking appropriate actions based on recommendations made by any Board Subcommittee, any Director, General Manager/CEO or any other committee exercising powers delegated by the Board.

Monitoring and evaluating the performance of the Bank and also performance of KMPs including General Manager/CEO.

Appointment of General Manager/CEO and, placements and promotions in line with the Terms of Reference of BHRRC and BNC.




Board’s role in risk management The Board factors risk management as an integral part of the Bank’s business strategy. Prudent oversight is rooted within the Board on risk management and the Board has established and delegated its responsibility to the BIRMC in discharging its duties in relation to the risk management function of the Bank. Accordingly, the Bank has formulated a strong Risk Management Framework, risk appetite limits and tolerance limits and mechanism to monitor the risk profile of the Bank. The Board monitors the risk profile of the Bank based on the reports submitted through BIRMC on a regular basis.

Roles of the Chairman and CEO In line with the CBSL Directions and best practices of Corporate Governance, the role of Chairman and CEO are separate. The Chairman is a Non-Executive, Non-Independent Director while the General Manager/CEO is a KMP and not a member of the Board. The Board Charter clearly defines the roles and responsibilities of the Chairman and CEO.

The Chairman is responsible for providing the leadership to the Board, facilitating effective functioning of the Board, preserving order, and maintaining and promoting good corporate governance within the Bank as well as the Group. He ensures that the Board receives adequate information to make informed decisions in discharging its duties. He is also responsible for effective participation of members at the Board meetings and maintains open lines of communication with Key Management Personnel.

The General Manager/CEO is entrusted with execution of the Management function as directed by the Board and implementation of strategies as set out in the Strategic Business Plan. This includes long term as well as short to medium term strategies. The General Manager/CEO provides leadership to the Management team in carrying out day-to-day operations of the Bank in implementation of strategies. The General Manager/CEO ensures that good corporate governance and highest standards are applied and maintained when carrying out the affairs of the Bank.

Role of the Secretary to the Board of Directors The Secretary to the Board has a key role to play in ensuring that the Board procedures are both followed and regularly reviewed to ensure good corporate governance within the Bank. The responsibilities of the Secretary to the Board is summarised below:

Maintaining minutes of all meetings of the Board and its subcommittees.

Ensure regulatory and statutory compliance by the Board of Directors.

Ensure effective functioning of the Board. Provide professional advice to the Directors on relevant

laws and regulations and also to ensure compliance with principles of corporate governance and other related regulatory framework.

Ensure that the Board is well informed of the decisions made at the Board subcommittees and their outcomes.

The appointment and the removal of the Secretary to the Board is a matter involving the whole Board under the advice of BNC as it is a Key Management Personnel position.

Appointment and Re-election of Directors Being a State-owned Bank, the appointment of Directors to the National Savings Bank is done as per the NSB Act No. 30 of 1971 and its amendments therein. The maximum period a Director can serve is restricted to nine years as per the provisions of the Banking Act Direction No. 12 of 2007 on Corporate Governance.

The re-election of Directors is also done as per the NSB Act No. 30 of 1971 and its amendments therein. The details of the Board of Directors and the changes that took place in the year 2018 are given on page 152.

Training of DirectorsThe Board of Directors of the Bank are provided with training through a Board Pack Solution which includes relevant statutes, circulars and other relevant documents on appointment. The Secretary to the Board will notify/convey the Board on any developments or changes to the structures. Directors participate the training/know how programmes organised by the regulator or any other authority.

Directors’ remuneration and level and make up of remuneration The remuneration of the Directors is determined by the relevant Minister. No Director is involved in determining his/her own remuneration. The Board Human Resource and Remuneration Committee (BHRRC) makes recommendations to the Board regarding the remuneration of the General Manager/CEO and the Key Management Personnel on the basis of collective agreement, which are reviewed once in three years. The Bank has put in place a Board approved Remuneration Policy for Key Management Personnel. Based on the recommendations by the BHRRC, the Board makes recommendations to the respective Minister responsible for state banks who grants final approval in accordance with the provisions of NSB Act and amendments therein. The BHRRC comprise three Non-Executive Directors.




Annual Corporate Governance Report to be published in terms of Banking Act Direction No. 12 of 2007 and subsequent amendments therein

The Bank’s adherence to the above Direction is set out as follows:

3 (1) The Responsibilities of the Board

3 (1) (i) The Board shall strengthen the safety and soundness of the Bank, by ensuring the following:

3 (1) (i) (a) Approve and oversee the Bank’s strategic objectives and corporate values and ensure that these are communicated throughout the Bank.

Complied with.

The Bank’s strategic objectives and corporate values are determined by the Board. These are incorporated in the Board-approved Strategic Business Plan for the period of 2018-2020 and communicated to all levels of employees.

3 (1) (i) (b) Approve the overall business strategy of the Bank, the overall risk policy and risk management procedures and mechanisms with measurable goals, for at least the next three years.

Complied with.

The Board-approved three-year strategic Business Plan (2018-2020) is implemented, which covers business strategy, directions and measurable goals. Strategic Business Plan is a rolling plan that is updated and reviewed annually. Strategic Business Plan (2019-2021) is approved by the Board in 2018.

The Board has approved the risk management framework, mechanisms, policies, risk appetite and overall risk strategy of the Bank.

3 (1) (i) (c) Identify the principal risks and ensure implementation of appropriate systems to manage the risks prudently.

Complied with.

The BIRMC is entrusted by the Board for recommending the Bank’s risk policy, identifying principal risks, setting governance structures and implementing systems to measure, monitor and manage the principal risks.

The following reports provide an insight in this regard:

Risk Management Report on pages 194 to 226. Board Integrated Risk Management Committee Report

on pages 187 to 189.

Section Principles Level of compliance in 2018

Board and Board subcommittee evaluation

The Board and the Board Subcommittees annually conduct their own appraisals to ensure that the Board and the Board Sub Committees are discharging their duties according to the Board Charter and Board Sub Committee Charters which include the responsibilities outlined in the Banking Act Direction No. 12 of 2007 and other applicable rules and regulations as well as best practices on corporate governance. In the process of evaluation, each Director fills a Board Performance Evaluation Form which are submitted to the Board Nomination Committee by the Secretary to the Board.

Appraisal of CEO The appraisal of the performance of General Manager/CEO is done on an annual basis by the BHRRC based on agreed criteria and inform the Board accordingly.





3 (1) (i) (d) Approve implementation of a policy of communication with all stakeholders, including depositors, borrowers, creditors, shareholders.

Complied with.

The Bank has a Board-approved Communication Policy in place covering all stakeholders.

3 (1) (i) (e) Review the adequacy and the integrity of the Bank’s internal control systems and Management information systems.

Complied with.

The BAC is assisting the Board with regard to the adequacy and integrity of the Bank’s internal control system and Management information system. The Internal Audit Division and the Government Audit reviews on the same and those are reviewed by BAC and also the Management responses on the same.

3 (1) (i) (f) Identify and designate Key Management Personnel, as defined in the International Accounting Standards.

Complied with.

Appointment of all designated KMPs are done as recommended by the BNC.

3 (1) (i) (g) Define the areas of authority and key responsibilities for Directors themselves and for Key Management Personnel (KMP).

Complied with.

Areas of authority of the Board of Directors are governed by Section 7 of NSB Act. The Board Charter prepared in accordance with the NSB Act details the areas of authority and key responsibilities of the Board of Directors. Board Human Resources and Remuneration Committee has defined the areas of authority and key responsibilities for the Key Management Personnel.

3 (1) (i) (h) Ensure that there is appropriate oversight of the affairs of the Bank by Key Management Personnel (KMP) that is consistent with Board policy.

Complied with.

The Board subcommittees submit reports to the Board on financial reporting, internal control, risk management and other relevant matters delegated to those committees. Further, KMPs make regular presentation on the matters under their purview and are called by the Board to explain the matters under their purview.

3 (1) (i) (i) Periodically assess the effectiveness of the Board of Directors’ own governance practices, including: the selection, nomination and election of Directors and Key Management Personnel; the Management of conflicts of interests; and the determination of weaknesses and implementation of changes, where necessary.

Complied with.

The Directors are appointed by the Minister in terms of Section 8 of NSB Act No. 30 of 1971 as amended by Act No. 28 of 1995. A self-evaluation of the performance of the Board is carried out annually assessing its own governance practices.

3 (1) (i) (j) Ensure that the Bank has an appropriate succession plan for Key Management Personnel.

Complied with.

A Board-approved succession plan for the KMPs is in place to ensure readiness and reviewed by the BNC in year 2018.

3 (1) (i) (k) Meet regularly, on a need basis, with the Key Management Personnel to review policies, establish communication lines and monitor progress towards corporate objectives.

Complied with.

KMPs are regularly involved in discussions at the meeting of Board and its subcommittees on progress towards performance, strategy, policy and other matters pertaining to their area of responsibility. Additionally, the Key Management Personnel make presentations on key items in the agenda under their purview and are called by the Board and its subcommittees in relation to the material matters with regard to policies and corporate objectives.

3 (1) (i) (l) Understand the regulatory environment and ensure that the Bank maintains an effective relationship with regulators.

Complied with.

The KMPs brief on the regulatory developments to the Board of Directors. Additionally, the Deputy General Manager (Audit), Compliance Officer and Chief Risk Officer brief the members of BAC and BIRMC on regulatory developments.





3 (1) (i) (m) Exercise due diligence in the hiring and oversight of External Auditors.

Complied with.

The Auditor General is the External Auditor of the Bank in terms of the provisions of Article 154 of the Constitution of the Democratic Socialist Republic of Sri Lanka and Section 37 in NSB Act as it is a State-owned bank. Further, the BAC is delegated with to review and monitor the independence, objectivity and the effectiveness of the audit process and make recommendations to Auditor General through Superintendent of Audit of any such external auditor appointed by the Auditor General to assist the Auditor General.

3 (1) (ii) The Board shall appoint the Chairman and the Chief Executive Officer and define and approve the functions and responsibilities of the Chairman and the Chief Executive Officer in line with Direction 3 (5) of these Directions.

Complied with.

Under the provisions of Section 11(1) of the NSB Act No. 30 of 1971 as amended by Act No.28 of 1995, the Chairman is appointed by the Minister. Section 26 (1) of the NSB Act states that the Board shall appoint a fit and proper person to be the General Manager of the Bank who shall be the Chief Executive Officer of the Bank. Chairman and CEO’s functions and responsibilities have been defined and approved by the Board. The responsibilities of Chairman and the CEO are separate and are defined and approved in line with the Section 3 (5) of this Direction which is given on page 156.

3 (1) (iii) The Board shall meet regularly, and Board meetings shall be held at least twelve times a year at approximately monthly intervals. Such regular Board meetings shall normally involve active participation in person of a majority of Directors entitled to be present. Obtaining the Board’s consent through the circulation of written resolutions/papers shall be avoided as far as possible.

Complied with.

Regular Board meetings are held each month with the active participation of Directors and the attendance at Board meetings is given on page 152 along with the number of meetings. The Bank has taken every measure to minimise obtaining the approval through circulation.

3 (1) (iv) The Board shall ensure that arrangements are in place to enable all Directors to include matters and proposals in the agenda for regular Board meetings where such matters and proposals relate to the promotion of business and the management of risks of the Bank.

Complied with.

The Board Calendar with tentative dates for Board and Subcommittee meetings for the following year is sent to all Members approximately one month before the end of the current year. The Chairman sets the Board agenda assisted by the Board Secretary. Directors may submit proposals for inclusion in the agenda on discussion with the Chairman

3 (1) (v) The Board procedures shall ensure that notice of at least 7 days is given of a regular Board meeting to provide all Directors an opportunity to attend. For all other Board meetings, reasonable notice may be given.

Complied with.

Notice of meetings along with the agenda and the Board Papers to be discussed are circulated seven days prior to the meeting to provide the Directors with additional time to attend on the matters and submit any urgent proposals.

3 (1) (vi) The Board procedures shall ensure that a Director, who has not attended at least two-thirds of the meetings in the period of 12 months immediately preceding or has not attended the immediately preceding three consecutive meetings held, shall cease to be a Director.

Complied with.

The Directors are appraised of their attendance in accordance with the Banking Act Direction No. 12 of 2007. Details of Directors’ attendance are given on page 152. No Director has been absent from two-thirds of the meetings in the immediately preceding 12 months or three consecutive meetings.





3 (1) (vii) The Board shall appoint a Company Secretary who satisfies the provisions of Section 43 of the Banking Act No. 30 of 1988.

Complied with.

The Secretary to the Board of National Savings Bank is an Attorney-at-Law that complies with the provisions of Section 43 of the Banking Act No. 30 of 1988. The Board Secretary is primarily responsible for handling secretariat work to the Board and the other functions specified in the statutes and other regulations.

3 (1) (viii) All Directors shall have access to advice and services of the Company Secretary with a view to ensuring that Board procedures and all applicable rules and regulations are followed.

Complied with.

All the Directors have the ability to obtain advices and services of the Secretary to the Board who is responsible for ensuring that the Board procedures are followed with and the applicable rules and regulations are complied with.

3 (1) (ix) The Company Secretary shall maintain the minutes of Board meetings and such minutes shall be open for inspection at any reasonable time, on reasonable notice by any Director.

Complied with.

The Secretary, National Savings Bank/Secretary to the Board maintains the minutes of the Board meetings and circulates them to the Board. The minutes are reviewed and approved at the next Board meeting. Additionally, the Directors have the access to the past Board papers and minutes through a secure electronic link.

3 (1) (x) Minutes of Board meetings shall be recorded in sufficient detail so that it is possible to gather from the minutes, as to whether the Board acted with due care and prudence in performing its duties.

The minutes shall also serve as a reference for regulatory and supervisory authorities to assess the depth of deliberations at the Board meetings. Therefore, the minutes of a Board meeting shall clearly contain or refer to the following:(a) a summary of data and information used by

the Board in its deliberations; (b) the matters considered by the Board; (c) the fact-finding discussions and the issues of

contention or dissent which may illustrate whether the Board was carrying out its duties with due care and prudence;

(d) the testimonies and confirmations of relevant executives which indicate compliance with the Board’s strategies and policies and adherence to relevant laws and regulations;

(e) the Board’s knowledge and understanding of the risks to which the Bank is exposed and an overview of the risk management measures adopted; and

(f) the decisions and Board resolutions.

Complied with.

Minutes of the meetings are kept covering the given criteria.





3 (1) (xi) There shall be a procedure agreed by the Board to enable Directors, upon reasonable request, to seek independent professional advice in appropriate circumstances, at the Bank’s expense.

The Board shall resolve to provide separate independent professional advice to Directors to assist the relevant Director or Directors to discharge his/her/their duties to the Bank.

Complied with.

Board Charter is in place, which enables the Directors upon reasonable request to seek independent professional advice in appropriate circumstances, at the Bank’s expense.

3 (1) (xii) Directors shall avoid conflicts of interests, or the appearance of conflicts of interest, in their activities with, and commitments to, other organisations or related parties.

Complied with.

The Directors make declarations of their interests at appointment, annually and whenever there is a change. Directors are required to abstain from participating in the discussions, voicing their opinion or approving in situations where there is a conflict of interest and such Director is not counted in the quorum in such instances.

3 (1) (xiii) The Board shall have a formal schedule of matters specifically reserved to it for decision to ensure that the direction and control of the Bank is firmly under its authority.

Complied with.

The Board Charter details the powers reserved for the Board in discharging duties. Additionally, the Board has put in place systems and controls to facilitate discharging its duties.

3 (1) (xiv) The Board shall, if it considers that the Bank is, or is likely to be, unable to meet its obligations or is about to become insolvent or is about to suspend payments due to depositors and other creditors, forthwith inform the Director of Bank Supervision of CBSL of the situation of the Bank prior to taking any decision or action.

Complied with.

The Bank is solvent, and no such insolvent situation has arisen during the year.

3 (1)(xv) The Board shall ensure that the Bank is capitalised at levels as required by the Monetary Board in terms of the capital adequacy ratio and other prudential grounds.

Complied with.

The Board monitors capital adequacy and other prudential measures to ensure compliance with regulatory requirements and Bank’s defined risk appetite. The Bank complies with the minimum capital requirements.

3 (1) (xvi) The Board shall publish in the Bank’s Annual Report, an Annual Corporate Governance report setting out the compliance with Direction 3 of these Directions.

Complied with.

This report is part of Corporate Governance Report which is given on pages 148 in the Annual Report.

3 (1) (xvii) The Board shall adopt a scheme of self-assessment to be undertaken by each Director annually and maintain records of such assessments.

Complied with.

The Bank has adopted a scheme of self-assessment to be undertaken by every Director annually which is maintained by the Secretary to the Board. Additionally, every Director has carried out an assessment of “fit and propriety” to serve as a Director as per the CBSL Direction.

3 (2) Board’s Composition

3 (2) (i) The number of Directors on the Board shall not be less than 7 and not more than 13.

Complied with.

As per Section 8 (1) of NSB Act the Board comprises seven Directors including the Chairman.





3 (2) (ii) (a) The total period of service of a Director other than a Director who holds the position of Chief Executive Officer shall not exceed nine years.

Complied with.

The period of Directors has been restricted to nine years and no Director at present has served the Bank more than nine years. The details of the appointments and tenor are given on page 152 of this Annual Report.

3 (2) (ii) (b) A Director who has completed nine years as at 1 January 2008, or who completes such term at any time prior to 31 December 2008, may continue for a further maximum period of 3 years commencing 1 January 2009.

Not applicable.

3 (2) (iii) An employee of a bank may be appointed, elected or nominated as a Director of the Bank (hereinafter referred to as an ‘Executive Director’) provided that the number of Executive Directors shall not exceed one-third of the number of Directors of the Board. In such an event, one of the Executive Directors shall be the Chief Executive Officer of the Bank.

Not applicable.

The NSB Act does not include provisions to appoint Executive Directors.

3 (2) (iv) The Board shall have at least three Independent Non-Executive Directors or one third of the total number of Directors, whichever is higher.

Directors are appointed by the Minister according to the Section 8 (1) (a) of the NSB Act. All seven Directors of the Bank are Non- Executive Directors as at 31 December 2018. However, the Board of Directors of the Bank includes one Independent Non-Executive Director and six Non-Independent and Non-Executive Directors.

Please refer to Directors details on page 233 of the Annual Report of Board of Directors.

3 (2) (v) In the event an alternate Director is appointed to represent an Independent Director, the person so appointed shall also meet the criteria that apply to the Independent Director.

Not Applicable.

3 (2) (vi) Non-Executive Directors shall be persons with credible track records and/or have necessary skills and experience to bring an independent judgement to bear on issues of strategy, performance and resources.

Complied with.

3 (2) (vii) A meeting of the Board shall not be duly constituted, although the number of Directors required to constitute the quorum at such meeting is present, unless more than one-half of the number of Directors present at such meeting are Non-Executive Directors.

Complied with.

As per the NSB Act the quorum of the Board is 4 which is more than one-half of the Directors. All seven Directors of the Bank are Non-Executive Directors.

3 (2) (viii) The Independent Non-Executive Directors shall be expressly identified as such in all corporate communications that disclose the names of Directors of the Bank.

Complied with.

Please refer page 152





3 (2) (ix) There shall be a formal, considered and transparent procedure for the appointment of new Directors to the Board. There shall also be procedures in place for the orderly succession of appointments to the Board.

Complied with.

Appointments of Directors are carried out by the Minister as per the NSB Act under Section 8 (1) (a).

3 (2) (x) All Directors appointed to fill a casual vacancy shall be subject to election by shareholders at the first general meeting after their appointment.

Not Applicable since the relevant subject Minister appoints them.

3 (2) (xi) If a Director resigns or is removed from office, the Board shall: announce the Director’s resignation or removal and the reasons for such removal or resignation; and issue a statement confirming whether or not there are any matters that need to be brought to the attention of shareholders.

Not Applicable.

The Government of Sri Lanka, the sole shareholder of the Bank makes the appointments as well as removal of Directors through the Minister under whose purview the Bank falls in.

3 (2) (xii) A Director or an employee of a bank shall not be appointed, elected or nominated as a Director of another bank except where such bank is a subsidiary company or an associate company of the first mentioned bank.

Not Applicable.

Deputy General Manager (Finance and Planning), an employee of the Bank, has been appointed as a Director of Regional Development Bank (RDB) representing the shareholding of the NSB in line with the provisions of the Pradeshiya Sanwardana Bank Act No. 41 of 2008.

3 (3) Criteria to assess the fitness and propriety of Directors

3 (3) (i) (a), & (b)

The age of a person who serves as a Director shall not exceed 70 years.

Complied with.

There are no Directors who are over 70 years of age.

3 (3) (ii) A person shall not hold office as a director of more than 20 companies/entities/institutions inclusive of subsidiaries or associate companies of the Bank.

Complied with.

No Director holds directorships of more than 20 companies/entities/institutions inclusive of subsidiaries or associate companies of the Bank.

3 (4) Management functions delegated by the Board

3 (4) (i) The Directors shall carefully study and clearly understand the delegation arrangements in place.

Complied with.

The Board periodically reviews and approves the delegation arrangements of the Bank and ensures that the extent of delegation addresses the needs of the Bank whilst enabling the Board to discharge its functions effectively.

3 (4) (ii) The Board shall not delegate any matters to a Board Committee, Chief Executive Officer, Executive Directors or Key Management Personnel, to an extent that such delegation would significantly hinder or reduce the ability of the Board as a whole to discharge its functions.

3 (4) (iii) The Board shall review the delegation processes in place on a periodic basis to ensure that they remain relevant to the needs of the Bank.





3 (5) The Chairman and Chief Executive Officer

3 (5) (i) The roles of Chairman and Chief Executive Officer shall be separated and shall not be performed by the same individual.

Complied with.

The roles of Chairman and the CEO are performed by two separate individuals. A Board Charter is in place defining the responsibilities of the Chairman and the General Manager/ Chief Executive Officer.

3 (5) (ii) The Chairman shall be a Non-Executive Director and preferably an Independent Director as well.

In the case where the Chairman is not an Independent Director, the Board shall designate an Independent Director as the Senior Director with suitably documented terms of reference.

The designation of the Senior Director shall be disclosed in the Bank’s Annual Report.

Complied with.

Chairman is a Non-Executive and Non-Independent Director. Board designated a Senior Director with the approval of Central Bank of Sri Lanka. However, there is no such requirement in the NSB Act to appoint a Senior Director. The details of the Senior Director is given on page 131 of this Annual Report.

3 (5) (iii) The Board shall disclose in its corporate governance report, the identity of the Chairman and the Chief Executive Officer and the nature of any relationship

Complied with.

The profiles of the members of the Board and General Manager/CEO are available on pages 131 to 133 of this Annual Report.

There is no material, financial, business or family relationships between the Chairman, General Manager and other members of the Board.

3 (5) (iv) The Chairman shall: provide leadership to the Board; ensure that the Board works effectively and discharges its responsibilities; and ensure that all key and appropriate issues are discussed by the Board in a timely manner.

Complied with.

The Chairman provides leadership to the Board and ensures that the Board functions effectively in discharging its responsibilities. The Board in a timely manner discusses all key issues.

3 (5) (v) The Chairman shall be primarily responsible for drawing up and approving the agenda for each Board meeting,

Complied with.

The Secretary to the Board draws up the agenda for the meetings in consultation with the Chairman.

3 (5) (vi) The Chairman shall ensure that all Directors are properly briefed on issues arising at Board meetings and also ensure that Directors receive adequate information in a timely manner.

Complied with.

Board meetings are scheduled well in advance and the relevant papers are generally circulated one week prior to the meeting through electronic means to ensure that the Directors are having sufficient time to review the papers and call for additional information and clarification, and after a meeting to follow up on issues consequent to the meeting.

3 (5) (vii) The Chairman shall encourage all Directors to make a full and active contribution to the Board’s affairs and take the lead to ensure that the Board acts in the best interests of the Bank.

Complied with.

Evaluation of the role of the Chairman and the overall assessment of the Board’s performance are incorporated in the Director’s Self-evaluation Process.





3 (5) (viii) The Chairman shall facilitate the effective contribution of Non-Executive Directors in particular and ensure constructive relations between Executive and Non-Executive Directors.

Complied with.

The entire Board consists of Non-Executive Directors.

3 (5) (ix) The Chairman shall not engage in activities involving direct supervision of Key Management Personnel or any other executive duties whatsoever.

Complied with.

Chairman acts in Non-Executive capacity and he is not involved in executive functions to supervise KMPs.

3 (5) (x) The Chairman shall ensure that appropriate steps are taken to maintain effective communication with shareholders and that the views of shareholders are communicated to the Board.

Complied with.

The shareholder is being represented at the Board by the nominee of Secretary to Ministry of Treasury who is appointed as a Director by the provisions of the NSB Act.

3 (5) (xi) The Chief Executive Officer shall function as the apex executive-in-charge of the day-to-day management of the Bank’s operations and business.

Complied with.

3 (6) Board appointed Committees

3 (6) (i) Each bank shall have at least four board committees as set out in Directions 3 (6) (ii), 3 (6) (iii), 3 (6) (iv) and 3 (6) (v) of these Directions. Each committee shall report directly to the Board. All committees shall appoint a secretary.

Complied with.

Six Board committees are in place. Board Secretary acts as Secretary to all six committees. Board Audit Committee, Board Integrated Risk Management Committee, Board Human Resources and Remuneration Committee, Board Nominations Committee, Board Credit Committee and Board Information Technology Strategy Committee directly submit reports through the Chairmen of the respective Board committees to the Board.

3 (6) (ii) The following rules shall apply in relation to the Audit Committee:

3 (6) (ii) (a) The Chairman of the Committee shall be an Independent Non-Executive Director who possesses qualifications and experience in accountancy and/or audit.

Not Applicable

The Chairman of the Board Audit Committee is Non-Executive and Non-Independent.

All the members of the Board appointed as per the NSB Act.

3 (6) (ii) (b) All members of the Committee shall be Non-Executive Directors.

Complied with.

3 (6) (ii) (c) The Committee shall make recommendations on matters in connection with:

(i) the appointment of the External Auditor for audit services to be provided in compliance with the relevant statutes;

The Auditor General is appointed as per the NSB Act as the External Auditor of the Bank. And therefore, all the matters stated is taken into consideration. Therefore, complied with.

(ii) the implementation of the Central Bank Guidelines issued to Auditors from time to time;

(iii) the application of the relevant accounting standards; and





(iv) the service period, audit fee and any resignation or dismissal of the Auditor; provided that the engagement of the Audit partner shall not exceed five years, and that the particular Audit partner is not re-engaged for the audit before the expiry of three years from the date of the completion of the previous term.

Not Applicable since the Auditor General is the External Auditor of the Bank by Statute, the Committee has no role to play in the engagement of the External Auditor.

3 (6) (ii) (d) The Committee shall review and monitor the External Auditor’s independence and objectivity and the effectiveness of the audit processes in accordance with applicable standards and best practices.

Complied with.

Since the Auditor General is the External Auditor the independence and objectivity are maintained. Effectiveness of the audit process is discussed with the Superintendent of the Government Audit at Board Audit Committee meetings.

3 (6) (ii) (e) The Committee shall develop and implement a policy on the engagement of an External Auditor to provide non-audit services.

Not Applicable since the Auditor General is the External Auditor of the Bank.

However, as per the BAC Charter, the Committee ensures that in the event the Auditor General appoints another External Auditor for assistance, it does not impair the firm’s independence, objectivity or effectiveness.

3 (6) (ii) (f) The Committee shall, before the audit commences, discuss and finalise with the External Auditors the nature and scope of the audit.

Not Applicable.

The scope and the extent of audit have been determined by the Auditor General as the External Auditor.

3 (6) (ii) (g) The Committee shall review the financial information of the Bank, in order to monitor the integrity of the Financial Statements of the Bank, its Annual Report, accounts and quarterly reports prepared for disclosure, and the significant financial reporting judgements contained therein.

Complied with.

The Board Audit Committee has reviewed the quarterly Financial Statements and Annual Report of the Bank prepared for the disclosure purposes as and when ready for the publication. The Internal Audit Division submits a separate review report on the Financial Statements on each instance including the deviation in major judgemental areas, change in accounting policies etc. in the review report to the attention of Board Audit Committee.

3 (6) (ii) (h) The Committee shall discuss issues, problems and reservations arising from the interim and final audits, and any matters the Auditor may wish to discuss including those matters.

Complied with.

The BAC discusses issues, problems and reservations arising from the interim and final audits. The representatives of the Auditor General were present at the Committee meetings.

3 (6) (ii) (i) The Committee shall review the External Auditor’s management letter and the Management’s response thereto.

Complied with.

The Board Audit Committee reviews the External Auditor’s Report issued under the Sections 14 (2) (c) and 13 (7) (a) of the Finance Act annually and the Management response thereon.





3 (6) (ii) (j) The Committee shall take the following steps with regard to the internal audit function of the Bank:

i Review the adequacy of the scope, functions and resources of the internal audit department, and satisfy itself that the department has the necessary authority to carry out its work;

Complied with.

The Annual Audit Plan prepared by the Internal Audit Division is submitted to the BAC for approval. This includes the scope, functions and resource requirements relating to the plan.

ii Review the internal audit programme and results of the internal audit process and, where necessary, ensure that appropriate actions are taken on the recommendations of the internal audit department;

Complied with.

The Committee reviews the internal audit plan and results of the internal audit procedures and ensures that appropriate actions are taken for improvements.

iii Review any appraisal or assessment of the performance of the Head and senior staff members of the Internal Audit Department;

Complied with.

iv Recommend any appointment or termination of the Head, senior staff members and outsourced service providers to the internal audit function;

Complied with.

No such situation has arisen during the year.

v. Ensure that the Committee is appraised of resignations of senior staff members of the Internal Audit Department; including the chief Internal Auditor and any outsourced service providers, and to provide an opportunity to the resigning senior staff members and outsourced service providers to submit reasons for resigning;

Complied with.

No such situation has arisen during the year.

vi. Ensure that the Internal Audit function is independent of the activities it audits and that it is performed with impartiality, proficiency and due professional care.

Complied with.

According to the Governance Structure of the Bank, the Deputy General Manager (Audit) reports directly to the Board through BAC and is independent of any operations of the Bank.

3 (6) (ii) (k) The Committee shall consider the major findings of internal investigations and Management’s responses thereto;

Complied with.

The Board Audit Committee has reviewed major findings and Management responses thereto. Please refer Committee Report on page 179.

3 (6) (ii) (l) The Chief Finance Officer, the Chief Internal Auditor and a representative of the External Auditors may normally attend meetings. The Committee has had at least two meetings with the External Auditors without the Executive Directors being present.

Complied with.

Seven meetings were held in the year of 2018 and a representative from Auditor General’s Department was presented for five meetings. Deputy General Manager (Finance & Planning) and Deputy General Manager (Audit) normally attends meetings. All Directors are Non-Executive.





3 (6) (ii) (m) The Committee shall have:i. explicit authority to investigate into any

matter within its terms of reference;ii. the resources which it need to do so;iii. full access to information; andiv. Authority to obtain external professional

advice and to invite outsiders with relevant experience to attend, if necessary.

Complied with.

As per the Board Audit Charter of the Bank, the Committee has been empowered to investigate any matter, resources to carry out its functions, access to information and authority to obtain professional advice. Refer Committee Report on page 179.

3 (6) (ii) (n) The Committee shall meet regularly, with due notice of issues to be discussed and shall record its conclusions in discharging its duties and responsibilities.

Complied with.

The Committee has met seven times during the year and minutes have been maintained. Members of the BAC are given due notice of issues to be discussed and the conclusions in discharging its duties and responsibilities.

3 (6) (ii) (o) The Board shall disclose in an informative way: Complied with.

Please refer,

i details of the activities of the Audit Committee;

Scope of Board Audit Committee is given in page 179.

ii the number of Audit Committee meetings held in the year; and

Number of meetings held during the year are given in page 179.

iii details of attendance of each individual Director at such meetings.

Details of attendance of Directors are given in page 179.

3 (6) (ii) (p) The Secretary of the committee is the Company Secretary or the Head of the Internal Audit function and shall record and keep detailed minutes of the Committee meetings

Complied with.

The Board Secretary is the Secretary and detailed minutes are maintained.

3 (6) (ii) (q) The Committee shall review arrangements by which employees of the Bank may, in confidence, raise concerns about possible improprieties in financial reporting, internal control or other matters. Accordingly, the Committee shall ensure that proper arrangements are in place for the fair and independent investigation of such matters and for appropriate follow-up action and to act as the key representative body for overseeing the Bank’s relations with the External Auditor.

Complied with.

A Whistle-blower Policy is in place which covers these aspects and significant findings were reported to the Board Audit Committee for appropriate follow-up action.

The Board Audit Committee is the key representative body for overseeing the Banks’ relations with the External Auditor.

3 (6) (iii) The following rules shall apply in relation to the Human Resources and Remuneration Committee:

3 (6) (iii) (a) The Committee shall determine the remuneration policy (salaries, allowances and other financial payments) relating to Directors, Chief Executive Officer (CEO) and Key Management Personnel of the Bank.

Complied with.

Remuneration of the Directors is decided by the Ministry of Finance. The remuneration of the General Manager/CEO and KMPs is determined by the BHRRC based on the collective agreement and approved by the Board of the Bank.





3 (6) (iii) (b) The Committee shall set goals and targets for the Directors, CEO and the Key Management Personnel.

Complied with.

Not Applicable to Directors as all of them are Non-Executive and appointed by the Minister as per NSB Act.

Goals and targets for General Manger/CEO and KMPs are set based on the Strategic Business Plan and linked to Key Performance Indicators.

3 (6) (iii) (c) The Committee shall evaluate the performance of the CEO and Key Management Personnel against the set targets and goals periodically and determine the basis for revising remuneration, benefits and other payments of performance-based incentives.

Complied with.

The Committee evaluated the performance of General Manager/CEO and KMPs against the set targets and goals.

3 (6) (iii) (d) The CEO shall be present at all meetings of the Committee, except when matters relating to the CEO are being discussed.

Complied with.

3 (6) (iv) The following rules shall apply in relation to the Nomination Committee:

3 (6) (iv) (a) The Committee shall implement a procedure to select/appoint new Directors, CEO and Key Management Personnel.

Not Applicable.

The Directors are appointed by the Minister as per the NSB Act.

Section 11 – The Minster shall nominate one of the Directors of the Board to be its Chairman.

Section 26 – The Board shall appoint a fit and proper person to be the General Manager of the Bank who shall be the Chief Executive Officer of the Bank.

Appointment of KMPs is compiled with. Board of Directors appoints KMPs with the recommendation of Board Nomination Committee.

3 (6) (iv) (b) The Committee shall consider and recommend (or not recommend) the re-election of current Directors.

Not Applicable.

Directors are appointed by the Minister as per the NSB Act.

3 (6) (iv) (c) The Committee shall set the criteria for eligibility to be considered for appointment or promotion to the post of CEO and the key management positions.

Complied with.

The General Manager is appointed based on the accepted procedure with the approval of Board of Directors as per the NSB Act. The Board-approved promotion scheme is available which stipulates the attributes required to be eligible to or promoted to other Key Management Positions.

3 (6) (iv) (d) The Committee shall ensure that Directors, CEO and Key Management Personnel are fit and proper persons to hold office as specified in the criteria given in Direction 3 (3) and as set out in the statutes.

Complied with.

Signed affidavit and declarations of Directors and General Manager/CEO are obtained by the Board Secretary and the same are obtained from the KMPs by the Human Resource Development Division and forwarded to the Central Bank of Sri Lanka for assessing the fitness and propriety.





3 (6) (iv) (e) The Committee shall consider and recommend from time to time, the requirements of additional/new expertise and the succession arrangements for retiring Directors and Key Management Personnel.

Complied with.

Appointment of the Chairman, Directors and the CEO are stipulated in the NSB Act. Appointments of KMPs are made by the Board of Directors based on the recommendations of BNC.

3 (6) (iv) (f) The Committee shall be chaired by an Independent Director. The CEO may be present at meetings by invitation.

Not applicable.

The Committee is chaired by the Senior Director.

3 (6) (v) The Board-Integrated Risk Management Committee:

3 (6) (v) (a) The Committee shall consist of at least three Non-Executive Directors, Chief Executive Officer and Key Management Personnel supervising broad risk categories

Complied with.

The Committee comprises of three Non-Executive Directors, General Manager/CEO and the Chief Risk Officer who is responsible for supervising broad risk categories.

3 (6) (v) (b) The Committee shall assess all risks, i.e., credit, market, liquidity, operational and strategic risks to the Bank on a monthly basis through appropriate risk indicators and Management information. In the case of subsidiary companies and associate companies, risk management shall done, both on a bank basis and group basis

Complied with.

The Board has approved the Policies on Credit Risk Management, Market and Liquidity Risk Management and Operational Risk Management on recommendation of the BIRMC. Risk Management Division (RMD) submits monthly risk reports to the Board and quarterly risk reports based on the Board-approved risk appetite through BIRMC.

3 (6) (v) (c) The Committee shall review specific quantitative and qualitative risk limits for all management level committees such as the Credit Committee and the Asset Liability Committee and report any risk indicators periodically.

Complied with.

3 (6) (v) (d) The Committee shall take prompt corrective action to mitigate the effects of specific risks.

Complied with.

The Committee takes prompt corrective actions to mitigate the effects of specific risks in situations where such risk are beyond prudent levels decided by the Board on recommendation of the Committee based on the regulatory and policy level requirements.

3 (6) (v) (e) The Committee shall meet at least quarterly to assess all aspects of risk management including updated Business Continuity Plans (BCP).

Complied with.

During the year the, Committee had six meetings. Details of meetings and attendance are given on page 187.

3 (6) (v) (f) The Committee shall take appropriate actions against the officers responsible for failure to identify specific risks and take prompt corrective actions as recommended by the Committee, and/or as directed by the Director of Bank Supervision.

Complied with.

No necessities have arisen during the year.

3 (6) (v) (g) The Committee shall submit a risk assessment report within a week of each meeting to the Board seeking the Board’s views, concurrence and/or specific directions.

Complied with.

The detailed minutes of the meetings are submitted to the next immediate Board meeting along with the recommendations and the Risk Management Reports.





3 (6) (v) (h) The Committee shall establish a compliance function to assess the Bank’s compliance with laws, regulations, regulatory guidelines, internal controls and approved policies on all areas of business operations. A dedicated compliance officer selected from Key Management Personnel shall carry out the compliance function and report to the Committee periodically.

Complied with.

The Compliance function has been established to assess the Bank’s compliance with laws, regulations, regulatory guidelines, internal controls and approved policies on areas of business operations. This function is headed by a dedicated Compliance Officer (CO). CO submits reports periodically to the BIRMC/BAC/Board.

3 (7) Related Party Transactions

3 (7) (i) The Board shall take the necessary steps to avoid any conflicts of interest that may arise from any transaction of the Bank with any person,

Complied with.

The Board-approved Related Party Transactions Policy is in place covering related parties, their transactions and restrictions on offering more favourable treatment to related parties in order to avoid any conflict of interest by the Board of Directors.

Directors are requested to declare their related party transactions individually. These transactions are monitored through an automated system.

3 (7) (ii) The type of transaction with related parties that shall be covered by this Direction.

Information in this regard is disclosed in Note 47 on “Related Party Disclosures”.

3 (7) (iii) The Board shall ensure that the Bank does not engage in transactions with related parties as defined in Direction 3 (7) (i) above, in a manner that would grant such parties “more favourable treatment” than that accorded to other constituents of the Bank carrying on the same business.

Complied with.

Annual declarations are obtained from the Directors where such transactions would be identified. System is also developed to capture any transaction with “more favourable Treatment” than that accorded to other constituents of the Bank carrying on the same business and reported to the Board periodically.

Transactions (if any) carried out with Related Parties in the normal course of business and disclosed in Note 47 to the Financial Statements “Related Party Disclosures” on page 337.

3 (7) (iv) A bank shall not grant any accommodation to any of its Directors or to a close relation of such Director unless such accommodation is sanctioned at a meeting of its Board of Directors, with not less than two-thirds of the number of Directors other than the Director concerned, voting in favour of such accommodation.

Complied with.

No such instances were recorded

3 (7) (v) (a) Where any accommodation has been granted by a bank to a person or a close relation of a person or to any concern in which the person has a substantial interest, and such person is subsequently appointed as a Director of the Bank, steps shall be taken by the Bank to obtain the necessary security as may be approved for that purpose by the Monetary Board, within one year from the date of appointment of the person as a Director.

Complied with.

No such instances were recorded





3 (7) (vi) A bank shall not grant any accommodation or “more favourable treatment” other than on the basis of a scheme applicable to the employees of such bank.

Complied with.

No such instances were recorded.

3 (7) (vii) No accommodation granted by a bank under Direction 3 (7) (v) and 3 (7) (vi) above, nor any part of such accommodation, nor any interest due thereon shall be remitted without the prior approval of the Monetary Board and any remission without such approval shall be void and of no effect.

Complied with.

No such instances were recorded.

3 (8) Disclosures

3 (8) (i) The Board shall ensure that:

3 (8) (i) (a) Annual Audited Financial Statements and quarterly Financial Statements are prepared and published in accordance with the formats prescribed by the supervisory and regulatory authorities and applicable accounting standards, and that:

Complied with.

3 (8) (i) (b) Such statements are published in the newspapers in an abridged form, in Sinhala, Tamil and English.

Complied with.

3 (8) (ii) The Board shall ensure that the following minimum disclosures are made in the Annual Report:

3 (8) (ii) (a) A statement to the effect that the Annual Audited Financial Statements have been prepared in line with applicable accounting standards and regulatory requirements, inclusive of specific disclosures.

Complied with.

Refer page 229 to 235 on Annual Report of Board of Directors and Statement of Directors’ Responsibility for Financial Reporting on pages 236 to 237.

3 (8) (ii) (b) A report by the Board on the Bank’s internal control mechanism that confirms that the financial reporting system has been designed to provide reasonable assurance regarding the reliability of financial reporting, and that the preparation of Financial Statements for external purposes has been done in accordance with relevant accounting principles and regulatory requirements.

Complied with.

Refer Directors’ Statement on Internal Control over Financial Reporting on page 238 to 239 and Statement of Directors' Responsibility for Financial Reporting on pages 236 to 237.

3 (8) (ii) (c) The External Auditor’s certification on the effectiveness of the internal control mechanism referred to in Direction 3 (8) (ii) (b) above, in respect of any statements prepared or published after 31 December 2008.

Complied with.

Refer Independent Assurance Report on Internal Controls on page 240.





3 (8) (ii) (d) Details of Directors: Complied with.

i. including names, fitness and propriety; Details of the Directors are given on page 152.

ii. transactions with the Bank, and; Refer Note 47 (d) to the Financial Statements on page 340.

iii. the total of fees/remuneration paid by the Bank. Refer Note 47 (d) to the Financial Statements on page 340.

3 (8) (ii) (e) Total net accommodation as defined in 3 (7) (iii) granted to each category of related parties. The net accommodation granted to each category of related parties shall also be disclosed as a percentage of the Bank’s regulatory capital.

Complied with.

The net accommodations granted as a percentage of Bank’s regulatory capital are given in Note 47 (e) to the Financial Statements on page 340.

3 (8) (ii) (f) The aggregate values of remuneration paid by the Bank to its Key Management Personnel and the aggregate values of the transactions of the Bank with its Key Management Personnel, set out by broad categories such as remuneration.

Complied with.

Details are given in Note 47 (d) to the Financial Statements on page 340.

3 (8) (ii) (g) The External Auditor’s certification of the compliance with these Directions in the annual corporate governance reports

Complied with.

External Auditor’s certification was obtained and set out on page 173 of this Annual Report.

3 (8) (ii)(h) A report setting out details of the compliance with prudential requirements, regulations, laws, internal controls and measures taken to rectify any material non-compliance.

Complied with.

Please refer Statement on Directors’ Responsibility for financial reporting on page 236 to 237.

3 (8) (ii) (i) A statement of the regulatory and supervisory concerns on lapses in the Bank’s risk management, or non-compliance with these Directions that have been pointed out by the Director of Bank Supervision of CBSL if so directed by the Monetary Board to be disclosed to the public, together with the measures taken by the Bank to address such concerns.

Not Applicable.

Monetary Board has not directed any disclosures to be made public during the year.

3 (9) Transitional and other general provisions Complied with.

The Bank has complied with the applicable transitional provisions.

Compliance requirement of the Corporate Governance Direction No. 12 of 2007The Auditor General has performed procedures in accordance with the principles set out in Sri Lanka Standards on Related Services 4,400 – Engagements to Perform Agreed – Upon Procedures Regarding Financial Information issued by The Institute of Charted Accountants of Sri Lanka to meet the compliance requirement of the Direction No. 12 of 2007 on Corporate Governance issued by the Central Bank of Sri Lanka. His findings given on his report dated 13 May 2019 were not materially different to the matters disclosed above and did not identify any significant inconsistencies to those reported above by the Board.

M A P Muhandiram Jayaraja ChandrasekaraSecretary to the Board Chairman

13 May 2019Colombo




A Directors

A.1 The BoardThe Board of National Savings Bank comprises seven Non-Executive Directors including the Chairman which is laid down in the National Savings Bank Act No. 30 of 1971 and the amendments therein. Five Directors of the Bank are appointed by the Minister as per the NSB Act and the two Ex-officio Directors; one shall be the Secretary to the Treasury or his nominee and the other shall be the Postmaster General or his nominee. The Board headed by the Chairman is the apex decision-making body of the Bank.

Complied

A.1.1 Regular meetingsThe Board has met regularly during the year by adhering to the statute. During the year, the Board has convened 17 meetings during the year. Complying with the respective charters, the Subcommittees met regularly during the year. The regularity of the Board meetings and the structure and process of submitting information had been agreed to and documented by the Board. Details of Board meetings and Subcommittee meetings are given on pages 152 to 153.

Complied

A.1.2 Roles and Responsibilities of the BoardThe Board Charter details the responsibilities entrusted to the Board which includes setting the strategic direction of the Bank, determining the risk appetite, financial reporting, compliance with laws and regulations, sound corporate governance, sustainable business development in corporate strategy and safeguarding the Bank. The Board appointed 06 Sub-Committees assisted the Board in discharging the responsibilities in the year 2018. The Board is assisted by the Secretary to the Board.

Complied

A.1.3 The Board act in accordance with the laws of the countryThe Board has an approved procedure in place to ensure that the Bank is in compliance with related laws, CBSL Directions and Guidelines and international best practices with regard to the operations. This includes procedures where by the Board can require the Bank to obtain independent professional advice and the expenses thereon are borne by the Bank.

Complied

A.1.4 Access to advice and services of the Secretary and appointment or removal of the Secretary to the BoardAll the Directors have the ability to obtain advices and services of the Secretary to the Board who is responsible for ensuring that the Board procedures are followed with and the applicable rules and regulations are complied with.

The appointment and the removal of the Secretary to the Board is a matter involving the whole Board under the advice of BNC as it is a Key Management Personnel position.

As per the Section 30 of NSB Act, no Director of the Bank shall be liable for any loss or damage suffered by the Bank unless such loss or damage was caused by his misconduct or wilful default.

Complied

A.1.5 Independent judgementThe Board of Directors of the Bank has no vested interest and take independent decisions on matters relating to the Board including strategy, performance, resource allocation, risk management, compliance, and standards of conduct.

Complied

A.1.6 Dedicate adequate time and effort to matters of the Board and the Company CompliedBoard meetings and Board Subcommittee meetings are scheduled well in advance and the relevant papers are generally circulated one week prior to the meeting through electronic means to ensure that the Directors are having sufficient time to review the papers and call for additional information and clarification, and after a meeting to follow up on issues consequent to the meeting. Given that, in exceptional situations there is a provision to circulate the papers closer to the meeting. This is supplemented by giving sufficient time to be familiarise with business operations, risks and controls.

Code reference

Principles Level of compliance

Compliance with the Code of Best Practice on Corporate Governance issued by the Institute of Chartered Accountants of Sri Lanka




A.1.7 Calls for resolutionsAs per the NSB Act, Chairman shall upon written requisition from any two Directors, call a special meeting of the Board where they feel it is in the best interest to the Bank to do so. In case of a special meeting, notice should be given to all Directors prior to four days of the meeting.

Complied

A.1.8 Training of DirectorsThe Board of Directors of the Bank gets adequate training on appointment. Refer page 156 for details.

A.2 Division of responsibilities of Chairman and Chief Executive Officer (CEO)The positions of the Chairman and the Chief Executive Officer have been separated in line with the best practices in order to maintain the balance of power and authority which is clearly defined in the Board Charter. Chairman of the Bank is a Non-Independent, Non-Executive Director while CEO is not a member of the Board.

Complied

A.3 Chairman’s roleThe Chairman provides a leadership role in order to preserve good governance and facilitates the effective functioning of the Board. Chairman is responsible for maintaining open lines of communication with KMPs and contributes on strategic and operational matters. The agenda of the meeting is developed in consultation with General Manager/CEO, Directors and the Secretary to the Board, taking into consideration the matters relating to strategy, performance, resource allocation, risk management, and compliance. Sufficiently detailed information of matters included in agenda is provided to Directors in a timely manner. All Directors are made aware of their duties and responsibilities and Board Sub Committee Structures. All Directors are encouraged to make an effective contribution and obtain information necessary to discuss matters on the agenda and arrive at an informed decision. The views of Directors on issues under considerations are ascertained and recorded in minutes.

Complied

A.4 Financial acumenThe Board possesses the required financial acumen and knowledge to offer guidance on matters relating to finance where some of the Directors being professionally qualified in fields of finance/accounting and/or having Senior Management positions and/or directorships.

Complied

A.5 Board balanceThe Board of the Bank comprises seven Non-Executive Directors appointed by the Minister in charge of State Banks who are appointed as per the NSB Act. The Board of Directors annually submit a signed and dated deceleration of their independence/non-independence.

Complied

A.6 Supply of informationThe Management provides appropriate and timely information to the Board generally, seven days prior to the Board meetings or Subcommittee meetings to discharge their duties and responsibilities effectively. Chairman ensures that the Board is adequately briefed on the matters discussed and the KMPs are requested to be present during the meetings to be present where deemed necessary. Any Director who is unable to attend a meeting is updated on proceedings through formally documented minutes of the meeting, prior to the next meeting which are discussed at the same. The agenda of the meetings and papers required, are generally circulated prior to seven days and the minutes of the previous meeting are generally circulated at least two weeks after the meeting.

Complied

A.7 Appointments to the BoardAs a state-owned bank, all Directors are appointed by the Minister in charge of the state banks according to the NSB Act. Refer section Corporate Governance on page 156 for details

Complied

A.8 Re-electionAs per the NSB Act, the term of a Directors is three years unless otherwise he vacates office early by death, resignation or removal of holding office. Refer Section Corporate Governance on page 156 for the details of Appointment and Re-election of Directors.

Complied

Code reference





A.9 Appraisal of Board performanceThe Board annually assess their own performance to ensure that the Board is discharging their responsibilities satisfactorily. The evaluation process requires each Director to fill a Board Performance Evaluation Form. The responses are gathered and submitted to the Board Nomination Committee which will be submitted to the Board post review of Board Nomination Committee.

The Board Subcommittee also follow the same procedure. Refer the section Corporate Governance on page 157 for details.

Complied

A.10 Disclosure of information in respect of DirectorsThe information specified in the Code with regard to Directors are disclosed in this Annual Report as follows.

Name, qualifications, expertise, material business interest and brief profiles are given on pages 131 to 133

Details of whether a Director is Executive, Non-Executive and/or Independent, Non-Independent are given on pages 152 to 153.

Related party transactions are given on Note 47 (d) to the Financial Statements on page 340.

Membership of Board Subcommittees and attendance at Board and Board Subcommittee are given on pages 152 to 154.

Complied

A.11 Appraisal of Chief Executive Officer (CEO)/General ManagerRefer page 157. Complied

B Directors’ remuneration

B.1 In accordance with the NSB Act and its amendments therein, the Directors’ remuneration is decided by the relevant Minister.

No Director is involved in deciding his/her own remuneration. The Board Human Resource and Remuneration Committee (BHRRC) makes recommendations to the Board regarding the remuneration of the General Manager/CEO and the Key Management Personnel on the basis of collective agreements, which are reviewed once in three years. The Bank has put in place a Board-approved Remuneration Policy for Key Management Personnel. Based on the recommendations by the Committee, the Board makes recommendations to the respective Minister responsible for state banks who grants final approval in accordance with the provisions of NSB Act and amendments therein. The BHRRC comprise three Non-Executive Directors. Refer pages 183 to 184 on details of the Board Human Resource and Remuneration Committee.

Complied

B.2 Level and make up of remunerationAs a state-owned Bank, the level and make up of remuneration is determined by the subject Minister according to the NSB Act.

Complied

B.3 Disclosure of remunerationDirectors' remuneration and level and make up of remuneration on page 156.

Details of Directors’ total remuneration Refer Note 47 (d) to the Financial Statements on page 340.

Members of the BHRRC and their Report – Refer pages 183 to 184.

Complied

C Relations with shareholder

C.1 Constructive use of AGM and conduct of general meetingsAs a state-owned Bank, NSB is conducting regular meetings with the subject Ministry. Complied

C.2 Communication with shareholderThe Government of Sri Lanka is the sole shareholder of the Bank. Therefore, this Annual Report is presented to the Parliament through the Ministry of Finance under whose purview the Bank comes in.

Complied

Code reference





Code reference


C.3 Disclosure of major and material transactionsThere were no “Major transactions” that would have materially affected the Bank’s or the Group’s net assets base, nor any material related party transactions except those disclosed in:

Annual Report of Board of Directors on pages 229 to 235.

Note 47 (d) to the Financial Statements on page 340.

Complied

D Accountability and audit

D.1 Financial and business reporting (Annual Report)This Annual Report presents a balanced and understandable review of the Bank’s financial position, performance, business model, governance structure, risk management, internal controls, and challenges, opportunities and prospects. The Bank has taken all measures to ensure Annual Report including the financial statements as well as interim financial statements which are reviewed by BAC prior to publication are giving a true and fair view and has been prepared in accordance with the relevant laws and regulations. The Annual Report contains following disclosures which are required by the Code:

Management Discussion and Analysis – Refer pages 66 to 124.

Annual Report of the Board of Directors – Refer pages 229 to 235.

Statement of Directors’ Responsibility for Financial Reporting – Refer pages 236 to 237.

Directors’ Statement on Internal Controls – Refer pages 238 to 239.

General Manager/CEO’s and Deputy General Manager’s (Finance and Planning) Statement of Responsibility – Refer pages 243 to 244.

Related Party Transactions – Refer pages 339 to 341.

The net assets value of the Bank is disclosed in Note 48 to the Financial Statements on page 341.

Complied

D.2 Risk management and internal controlThe Board is responsible for determining the risk appetite in achieving its strategic objectives, formulating and implementing appropriate processes of risk management and sound system of internal control to safeguard shareholder’s investments and the assets of the Bank. The BIRMC assist the Board in discharging its duties with regard to risk management while BAC assist in discharging the Board’s duties relating to processed and effectiveness of risk management and internal control. The summary of responsibilities of respective Committees are given under each Subcommittee Report. The Committees are formulated according to the Banking Act No. 12 of 2007 on Corporate Governance, Code of Best Practice on Corporate Governance issued by The Institute of Chartered Accountants of Sri Lanka and the Bank’s policies. The BIRMC is supported by the Risk Management Division and pages 196 to 226 includes a comprehensive report on how the Bank is managing the risk.

Complied

D.3 Audit CommitteeThe BAC comprises three Non-Executive Directors. The Senior Director of the Bank is a Member of the BAC. A summary of the scope of the BAC as per the Terms of Reference are given in the Report of BAC on pages 179 to 182 in the Annual Report. The Terms of Reference is prepared in accordance with the Code. Review of the Internal Controls are done by the Internal Audit Division and reports are regularly reported to the BAC. The external assurance on effectiveness of Internal Controls was obtained from the External Auditor, which is Auditor General and produced on page 240 in this Annual Report.

Complied

D.4 Related Party Transactions Review CommitteeThe Bank has formed a Board-Related Party Transactions Review Committee for monitoring the related party transactions of Directors and KMPs in March 2019.




Code reference


D.5 Code of business conduct and ethicsThe Bank has Code of Business Conduct and Ethics that is internally developed and approved by the Board which applies to all employees of the Bank including KMPs. All officers of the Bank are required to furnish an annual asset liability declaration to the Human Resource Development Division. All the Directors furnish their annual assets and liability declaration to the relevant Ministry.

The Bank has set applicable policies and procedures to identify and deal with any possible infringements. The Bank has put in place a Procurement Guidelines to ensure transparent procurement practices are applied.

Complied

D.6 Corporate governance disclosuresThe Directors are required to disclose the extent to which the Bank adheres to established principles and practices of good corporate governance. The following reports includes the Bank’s compliance with the good governance principles and practices.

The Corporate Governance Report from pages 148 to 173.

Compliance with the Code of Best Practice on Corporate Governance issued by The Institute of Chartered Accountants of Sri Lanka on pages 174 to 178.

Complied

E & F Shareholder and other investors

The Bank is incorporated under an Act of Parliament, the NSB Act and the Government of Sri Lanka is the sole shareholder. The Bank is having regular and structured dialogue with the GOSL based on the mutual understanding of objectives through the subject Ministry as and when required.

Complied

G. Internet of things and cybersecurity

The Bank has a Board approved Information Security Policy (ISP) in place. The Bank has appointed a Chief Information Security Officer (CISO) who independently monitors and informs the Board on implementation and any exceptions if any with regard to cybersecurity risk management through BIRMC. Furthermore, Board Information Technology Strategy Committee appraises the Board on cyber risk management practices applied at the Bank and informs the Board accordingly. The Bank conducts four external and four internal vulnerability assessments each year.

Complied

H. Environment, Society and Governance (ESG)

H.1 ESG Reporting

Sustainability business approach involves a holistic approach to value creation while embracing opportunities and managing risk. In its sustainability approach to the business, the Bank considers economic, social, and environmental values created through its strategy in the short, medium and long term. The sustainability reporting requires the Bank to recognise, measure and disclose and be accountable to internal and external stakeholders. Information required by the Code is given in the following sections of the Annual Report:

Management Discussion and Analysis – Refer pages 66 to 124.

Corporate Governance – Refer pages 148 to 178.

Stakeholders – Refer pages 54 to 59.

Materiality – Refer pages 60 to 64.

This Annual Report has been in accordance with IIRC Framework, and the GRI guidelines.

Complied



Composition of the Committee

Board Audit Committee (BAC) consisted of following members during the year 2018.

Mr D L P R Abeyaratne, NE/NI – Chairman (from 30 November 2015 to 11 July 2018)

Mr A K Seneviratne, NE/NI – Member (from 4 June 2015 to 6 August 2018)

Mr Anil Rajakaruna, NE/NI – Member (from 30 November 2015 to 31 December 2018)

Ms Shehara Jayawardane, NE/NI – Chairperson (from 7 August 2018 to 12 November 2018)

Dr D Shanmugasundaram, NE/NI – Member (from 7 August 2018)

(NE – Non-Executive, NI – Non-Independent, I – Independent)

The details on current composition of the Committee and the profiles of the present members are given on pages 154 and 131 to 133 respectively. The Board of Directors of the National Savings Bank which consists of seven Directors and being constituted under the provisions of Section 8 (1), its sub-section of NSB Act No. 30 of 1971 as amended, members of the Committee possess necessary qualifications, skills and experience to serve BAC.

Regular attendees by invitationDeputy General Manager (Audit) Deputy General Manager (Finance and Planning)

Secretary to the CommitteeThe Board Secretary functions as the Secretary to the Board Audit Committee as per the Board decision dated 11 July 2013.

Meetings

Name Eligible to attend Attended

Mr D L P R Abeyaratne 04 04

Mr A K Seneviratne 04 04

Mr Anil Rajakaruna 07 07

Ms Shehara Jayawardane 03 03

Dr D Shanmugasundaram 03 03

During the financial year ended December 31, 2018 the Committee held seven meetings and minimum quorum of the Committee is two-thirds as per the Charter of the BAC.

The Superintendent of Audit, Auditor General’s Department as the representative of the Auditor General, attended five BAC meetings on invitation as an observer. The Senior Management including General Manager/CEO of the Bank participated the meetings by invitation on a need basis.

The Committee is empowered by the Board of Directors in discharging its responsibilities and fulfilling its oversight responsibilities for:

(a) The integrity of the Bank’s Financial Statements;

(b) The effectiveness of the Bank’s risk management function;

(c) The performance of the Bank’s internal audit function; and

(d) The performance of the Bank’s external audit function.

The Charter also stipulates the functions and responsibilities, and the authority of the Committee. The Charter Checklist was used to assist the Committee to assess its compliance to the Charter in performing Committee’s functions and discharging its responsibilities.

Charter of the Board Audit CommitteeThe Charter of the BAC has been approved by the Board of Directors and renewed regularly, clearly defines the Terms of Reference of the Committee. The Committee Charter was last reviewed in year 2018 by considering the new developments in the banking sector.

The Board Audit Committee (BAC) of the Bank was constituted in accordance with the Banking Act Direction No. 12 of 2007 on “Corporate Governance for Licensed Specialised Banks” issued by the Central Bank of Sri Lanka under Section 3 (6) (ii) and its subsequent amendments, provision of the Public Enterprises Guidelines for Good Governance and “Code of Best Practice on Corporate Governance” issued by The Institute of Chartered Accountants of Sri Lanka.





ReportingThe Committee is directly reporting to the Board of Directors about its activities along with the minutes of the meetings. BAC provides Open Avenue of communication between internal audit, external audit and the Board of Directors. The Committee is of the view that Terms of Reference (TOR) of the Committee were complied within all material aspects.

Activities in 2018Financial reporting The Committee reviewed the Financial Statements of the Bank, in order to monitor the integrity of the Financial Statements and quarterly reports prepared for disclosure, and the significant financial reporting judgement contained therein prior to their release. The Committee shall focus on major judgment areas, any changes in accounting policies and practices, significant adjustments arising from the audit, the going concern assumption and compliance with relevant accounting standards and other legal requirements to evidence the Financial Statements give a true and fair view on financial position and performance of the Bank.

The Committee reviewed the “Report on the review of Financial Statement” for the year ended 2017 which was submitted along with findings by the Internal Audit Division and reviewed the draft Financial Statement submitted on quarterly basis.

Progress of Implementation of SLFRS 9 The Committee monitored on the impact assessment and implementation of SLFRS 9. The Committee reviewed the restated Financial Statements for comparative figures under SLFRS 9 which considered the first day impact arising due to implementation of SLFRS 9 and the Bank restated the Financial Statements as at 31 December 2017.

Implementation of Basel III The Committee during the year reviewed the progress and compliance on the implementation of Banking Act Direction No. 1 of 2016 with regard to the capital and liquidity requirements. The Bank has fully-complied with requirements of the above-mentioned Direction as at December 2018.

Internal Capital Adequacy Assessment Process (ICAAP) As per the Section 10 of the Banking Act Direction No. 1 of 2016 requires an independent review on the integrity, accuracy and reasonableness of the capital assessment process of the Bank. The Committee has reviewed the effectiveness of the internal control mechanism to meet the regulatory requirements on ICAAP.

Identification of risks and control measures

The Directors of the Bank and its subsidiary are responsible for identifying and evaluating risks and its impact on business operations and financial reporting. The Bank adapts risk-based audit approach and the Committee assessed the effectiveness of the Bank’s internal control over financial reporting in line with the Banking Act Direction No. 12 of 2007, Section 3 (8) (ii) (b) and prepared based on the guidelines issued by The Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka).

BAC reviewed and assessed the Bank’s risk management process, including the adequacy of the overall control environment and controls in areas of significant risks. Further, BAC reviewed and assessed the Bank’s system of internal controls for detecting accounting and financial reporting errors and misappropriation of assets, legal violations, and non-compliance with the corporate code of conduct. In this regard, reviews the related findings and recommendations of the External and Internal Auditors, together with Management’s responses.

The Directors’ Statement on Internal Control and the Auditor General’s Report on Internal Control are provided in pages 238 to 240. In this regard, the Committee is of the view that necessary procedures and checks are in place to provide reasonable assurance and the Bank is in compliance with the aforesaid requirements.

Internal audit and inspectionThe BAC ensures that, the internal audit function is independent of the activities it audits. It reviewed the adequacy of the scope, functions and resources of the Internal Audit Division, and also satisfied itself that the Division had the necessary authority to carry out its work.

The Internal Audit Division of the Bank carried out audit of Branches, Divisions and other Units as per the Annual Audit Plan. The frequency of audit was determined by the level of risk assessed. The Audit Plan was approved by the BAC for implementation. The approved audit plan for the year 2018 has been achieved by the end of 2018.




The Internal Audit Division carried out audit checks to ensure compliance with policies and procedures and the effectiveness of the internal control systems and reports its findings in respect of any non-compliance. Audits were carried out to provide an independent and objective report on operational and management activities.

BAC reviewed findings of regular audit examinations and information system audits carried out by the Internal Audit Division. Further, the Committee reviewed the reports on internal investigations carried out during the period from November 2017 to November 2018, Report on Fraudulent Withdrawals of the Bank and reviewed the performance of senior staff members of the Audit and Vigilance Division for the year.

The Internal Audit Manual of the Bank summarises the operations of the internal audit function and delineates the policies, standards and procedures which will generally govern the internal audit function.

The Internal Audit Charter is used in order to assist the Internal Audit Division to discharge its duties effectively and independently. The Charter includes the scope, functions, responsibilities, authorities, reporting procedure, independence and objectivity of the Internal Audit Division.

External auditBy statute, the Auditor General is the External Auditor of the Bank. Meetings with the External Auditor, without Executive Management were held at least twice during the engagement. They were also provided with the opportunities of meeting the Committee independently, to discuss and express their views on any matter of significance.

Effectiveness of the audit process is discussed with the Superintendent of the Government Audit at BAC meetings. The Committee ensured the provision of all information and documents required by the External Auditor for the purpose of audit.

The Committee during the year,

Reviewed the Report of the Auditor General that was submitted to the Parliament on the Financial Statements of the Bank for the year ended 31 December 2017, the Management Letter and the responses made thereon by the Corporate Management of the Bank and followed up the required corrective measures.

Reviewed and discussed the significant reports submitted by the Auditor General’s Department where deemed necessary actions were initiated.

Monitoring of internal controls

Follow-up mechanism for rectification of issues identified during audits have been strengthened

Periodical review of reports on disciplinary matters and investigations

Review of common instances of frauds/irregularities in order to take initiatives to avoid recurrence

Directions to expedite investigations/disciplinary inquires

Ethics and good governanceThe Committee continuously reviewed and emphasised on endurance of good Corporate Governance practices in the Bank.

In this regard, the Fraud Risk Management and Whistle-blowing Policy of the National Savings Bank are key element for safeguarding the Bank’s integrity. It is aimed at enhancing the Bank’s transparency and underpinning its system for combating practices that might damage its activities and reputation and provide a means for early detection of fraud and other problematic situations.

The BAC reviewed on a quarterly basis all the cases of frauds. During the quarterly review, the BAC scrutinised statistical information as well as details of each fraud, action taken thereon and issue directions on the punitive and preventive aspects of frauds, where necessary. The BAC had the right to, at any time; request a briefing regarding any preliminary investigation and findings.

Sri Lanka Accounting StandardsThe Committee reviewed and revised the decisions on adoption of new and revised Sri Lanka Accounting Standards (LKASs)/Sri Lanka Financial Reporting Standards (SLFRSs) applicable to the Bank and made required recommendations therein.

ComplianceThe Committee reviewed the effectiveness of the system for monitoring compliance with laws and regulations and the results of Management's investigation and follow-up (including disciplinary action) of any instances of non-compliance.




Focus for 2019 and beyond

Continue to focus on financial systems, processes, internal controls used by the Bank are responding to the complex requirements of the external and internal environment and operating effectively.

Monitoring and making required developments based on the independent reviews of the Auditor General through assessing the impacts to the Bank.

Committee evaluationThe Committee completed the evaluation process with self-assessment for the year 2018 and concluded that its performance was effective where the results of evaluation were communicated to the Board.

A K SeneviratneChairman Board Audit Committee

14 March 2019Colombo

Board Audit Committee

Strategic objectives Stakeholders Material risks

Promoting organic growth Shareholder Credit risk

Leading by example Regulators and Government Institutions Market risk

Reinforcing risk culture Customers Operational risk

Liquidity risk

Compliance risk

Strategic risk

Reputational risk

Cybersecurity risk

Refer pages 40 to 50 for more details. Refer pages 54 to 59 for more details. Refer page 140 for more details.




The Board-appointed Human Resources and Remuneration Committee (BHRRC)

comprised three Non-Executive Directors as at 31 December 2018. BHRRC consisted

of following members during the year 2018.

Mr R M P Rathnayake – Chairman NE/NI (from 26 November 2018 to 19 February 2019)

Mr Aswin De Silva, NE/NI – Chairman (from 12 March 2015 to 12 November 2018)

Mr D L P R Abeyaratne, NE/NI – Member (from 12 March 2015 to 11 July 2018)

Mr Ajith Pathirana, NE/NI – Member (from 30 November 2015 to 19 July 2018)

Dr D Shanmugasundaram, NE/NI – Member (from 7 August 2018)

Mr U G R Ariyaratne, NE/I – Member (from 31 August 2018)


The details on current composition of the Committee and the profiles of the present members are given on page 154 and 131 to 133 respectively.

Regular attendees by invitationThe General Manager/CEO provides information to the Committee and attends all meetings of the Committee, except when matters relating to the General Manager/CEO are being discussed.

The Assistant General Manager (Human Resource Development) and Senior Management of the Bank participated the meetings by invitation on a need basis.

Secretary to the CommitteeThe Secretary to the Board, functions as the Secretary to the BHRRC.

MeetingsThe Committee meetings are held quarterly however based on the needs, meetings are being fixed accordingly. Eleven (11) meetings were held during the year 2018 and minimum quorum of the Committee is two-thirds as per the Charter of the BHRRC. Attendance of the Committee members during the year are as follows:


Mr Aswin De Silva 10 10

Mr R M P Rathnayake 01 01


Mr Ajith Pathirana 06 04

Mr U G R Ariyaratne 05 03

Dr D Shanmugasundaram 05 04

Charter of the BHRRCThe Board Human Resource and Remuneration Committee (BHRRC) constituted in terms of the provisions of Section 3 (6) (i) and (iii) of Banking Act Direction No. 12 of 2007 issued by the Monetary Board of the Central Bank of Sri Lanka (CBSL) under Section 76 J (1) of the Banking Act No. 30 of 1988, as amended. The Committee reports directly to the Board of Directors and the proceedings of Committee meetings have been regularly reported to the Board of Directors.

The Role and Responsibilities of the Committee as per the Charter includes the followings:

The Committee is responsible for determining the remuneration policy (salaries, allowances and other financial payments) relating to the General Manager/CEO and Key Management Personnel of the Bank other than the remunerations determined by the Collective Agreement.





The Committee set goals and targets for General Manager/CEO and the Key Management Personnel. Further, evaluated the performance of the General Manager/CEO and Key Management Personnel against the set targets and goals periodically and determine the basis for revising remuneration, benefits and other payments of performance-based incentives.

The Committee reviewed all significant Human Resource Policies, initiatives, salary structures besides terms and conditions relating to staff at senior executive level. In this process, necessary information and recommendations were obtained from the General Manager/CEO and the Senior Management of the Bank.

Activities during the year 2018Important activities attended and carried out by the Committee during the year 2018 were as follows:

Review of the Human Resources Policy and the Disciplinary Code of the Bank

Evaluation of Key Performance Indicators (KPI) of Key Management Personnel (KMPs) for 2017 (General Manager/CEO, Senior DGM, all DGMM, all Consultants, and all AGMM except Chief Risk Officer and Compliance Officer).

Reviewed the recruitment, promotion and upgrading of staff based on the requirement of the Bank.

Reviewed changes of designations from non-Banking to Banking stream and vice versa.

Revisited and provided a value addition to staff welfare benefit scheme of the Bank.

Consideration of appeals submitted by staff on HR-related matters.

Reviewed the effect of punishment on staff promotions. Review of Scheme of Recruitment. Recruitment of Trainees.


Continue to assure the Bank is maintaining the relevance of Remuneration Policy.

Continue to focus on development of human resource strategy to inculcate an engaged employee culture.

Meeting the responsibilities of the Charter.

Committee evaluationThe Committee completed the evaluation process with self-assessment for the year 2018 and concluded that its performance was effective where the results of evaluation were communicated to the Board.

R M P RathnaykeChairman Board Human Resources and Remuneration Committee


Board Human Resource and Remuneration Committee


Heightening customer experience Customers Strategic risk

Enhancing employee engagement Employees Operational risk

Leading by example Shareholders Reputational risk

Promoting organic growth Regulators and Government Institutions






The Board-appointed Nomination Committee (BNC) comprised three

Non-Executive Directors as at 31 December 2018.

The following Directors functioned as members of BNC during the year 2018.

Mr Anil Rajakaruna, NE/NI – Chairman (From 7 August 2018 to 31 December 2018)

Mr D L P R Abeyaratne, NE/NI – Chairman (From 3 February 2017 to 11 July 2018)

Mr A K Seneviratne, NE/NI – Member (From 3 February 2017 to 28 February 2019)

Mr Chandima Hemachandra, NE/NI – Member (From 18 January 2018 to 19 July 2018)

Mr U G R Ariyaratne, NE/I – Member (From 31 August 2018) (NE – Non-Executive, NI – Non-Independent, I – Independent)


Regular attendees by invitationThe General Manager/CEO provides information to the Committee and attends meetings of the Committee on invitation.

Secretary to the CommitteeThe Secretary to the Board, functions as the Secretary to the BNC also.

MeetingsDuring the financial year ended 31 December 2018, three Board Nomination Committee meetings were held and minimum quorum of the Committee is two-thirds as per the charter of the BNC.

Attendance of the Committee members during the year are as follows:





Mr Chandima Hemachandra 02 02

Mr U G R Ariyaratne 01 –

Charter of the CommitteeThe Board of Directors has established the Board Nomination Committee (BNC) in compliance with the Banking Act Direction No. 12 of 2007, Corporate Governance for Licensed Specialised Banks in Sri Lanka issued by the Monetary Board of the Central Bank of Sri Lanka under Section 76 J (1) of the Banking Act No. 30 of 1988 as amended, to ensure Board oversight and control over selection of Key Management Personnel.

Role and responsibilities of the Committee:

The Board Nomination Committee is responsible for implementing a procedure to select/appoint General Manager/CEO and Key Management Personnel, setting out criteria such as qualifications, experience and key attributes required for eligibility to be considered for appointment or promotion to the post of General Manager/CEO and the Key Management Positions.

Report of the Board Nomination Committee

Report of the Board Nomination Committee



Further, the Committee shall ensure that the Directors, General Manager/CEO and Key Management Personnel are fit and proper persons to hold office specified in the criteria given in Direction 3 (3) and as set out in the Statutes. The Committee shall also consider and recommend from time to time, the requirements of additional/new expertise and succession arrangements for retiring Key Management Personnel.

Activities during the year 2018Important activities attended and carried out by the Committee during the year were as follows:

Review and approval for proposed Cadre for the Bank – 2018

Review the Succession Plan of the Bank. Interviews for posts of Special Grades in banking and

non-banking streams, and Key Management Personnel (KMPs) (initiate interviews for posts of Assistant General Managers – Special Grade)

Evaluation of Directors’ Self-assessment Scheme


Continuous monitoring of review on matters relating to KMPs and adherence to the compliance on regulatory requirements.

Continuous monitoring of the succession plan and the Bank’s adherence.

Meeting the responsibilities of the Charter.

Committee evaluationThe Committee completed the evaluation process with self-assessment for the year 2018 and concluded that its performance was effective, where the results of the evaluation were communicated to the Board.

Anil RajakarunaChairmanBoard Nomination Committee


Board Nomination Committee


Promoting organic growth Shareholders Strategic risk

Leading by example Regulators and Government Institutions Reputational risk

Reinforcing risk culture Compliance risk





The Board appointed Integrated Risk Management Committee (BIRMC)

comprised three Non-Executive Directors.

The following members functioned as members of BIRMC for the year 2018:

Board members

Mr A K Seneviratne, NE/NI – Chairman (From 30 November 2015 to 28 February 2019)

Mr Suranga Naullage, NE/NI – Member (From 30 November 2015 to 31 December 2018)

Mr Anil Rajakaruna, NE/NI – Member (From 14 August 2017 to 31 December 2018)


Non-Board members

General Manager/CEO

Chief Risk Officer

The details on current composition of the BIRMC and the profiles of the present Board members are given on page 154 and 131 to 133 respectively.

Attendees by invitationThe Committee requested other DGMs, AGMs, Compliance Officer, and Chief Managers to be present at the meetings as and when required.

Secretary to the CommitteeThe Secretary to the Board, functions as the Secretary to the BIRMC.

MeetingsBIRMC meets on a quarterly basis however based on the needs, meetings are being fixed accordingly. During the year 2018, BIRMC convened six meetings and minimum quorum of the Committee is two-thirds as per the Charter of the BIRMC.




Mr Suranga Naullage 06 06


Charter of the CommitteeThe Board of Directors has established the Board Integrated Risk Management Committee (BIRMC) in compliance with the Banking Act Direction No. 12 of 2007, Corporate Governance for Licensed Specialised Banks in Sri Lanka, issued by the Monetary Board of Central Bank of Sri Lanka under the power vested in the Monetary Board, in terms of the Banking Act No. 30 of 1988.

The Terms of Reference set out by the Board of Directors, includes the following:

To assist the Board of Directors in fulfilling its responsibilities relating to risk management and establishing an effective risk management framework.

To implement the Integrated Risk Management Policy and other risk-related policies approved by the Bank and periodic updating of the Bank-wide risk management framework.

Ensure that all credit, market, operational and strategic risks faced by the Bank are identified, measured, monitored, and managed adequately.

To work with Key Management Personnel very closely on all critical risk areas and make suitable recommendation to the Board within the framework of the authority and responsibility assigned to the Committee.





Identify, review, report and recommend on risk of new operational developments and compliance related to those concerns.

Review implementation and compliance with the Basel III Directions issued by CBSL.

During the year 2018, the BIRMC has reviewed the Charter. The Committee reviews policies, reports and proposals on risk and compliance related to the Bank. BIRMC grants approval for proposals within its mandate and recommends proposals/reports to the Board of Directors which required to be scrutinised by the Board.

Respective chapter/segment on risk management presents detailed introduction over risk management functions of the Bank and its significance. BIRMC is supported by Risk Management, Compliance Divisions and other operational divisions in discharging its responsibilities.

Activities during the year 2018The Committee assesses all main risks such as operational, credit, market, liquidity etc., which can adversely affect to the Bank. It maintains close relationship with the Key Management Personnel and the Board to fulfil its statutory, fiduciary and regulatory responsibilities for risk management.

Effectiveness of the risk management process is annually audited by the Internal Audit Division of the Bank.

Important activities attended and carried out by the Committee during the year were as follows:

Review of reports on Risk appetite of the Bank, tolerance limits and other reports highlighting different aspects of risk of the Bank (i.e., credit risk, market risk, operational risk, liquidity risk, HR risk, technical risk, cybersecurity risk etc.)

Review of different risk limits and grant necessary approvals.

Reviews of adequacy of measures and standards maintained by the Bank to meet internationally-recognised norms in the industry, regulations/guidelines of the regulator – Central Bank of Sri Lanka and Internal Capital Adequacy Assessment Process (ICAAP) in line with audit concerns on ICAAP document.

Follow-up progress of rectification process of supervisory concerns raised by the Central Bank of Sri Lanka at their examination.

Reviewed periodic reports on related party transactions, key issues of the Bank such as financial frauds, Fraud Risk Management – Whistle-blowing Policy.

Review of compliance assessments on Bank and its core functions such as pawning, credit, human resource management, maintaining KYC (Know Your Customer) requirement etc.

Continuous monitoring and review over status of Banks compliance with Basel III standards.

Annual review of Compliance Programme and Compliance Manual.


Continue to focus on macro and microenvironmental factors, markets, local and international risk factors.

Continuous oversight on the implementation of risk and compliance strategy of the Bank.

Assessment of the local as well as international trends in the area of risk management.

Continuous oversight on being a cyber resilient bank in the journey towards digitalisation.

Continue to focus on evolving regulatory requirements according to the trends in the market and the Bank’s approach to risk management and compliance.





A K SeneviratneChairman Board Integrated Risk Management Committee


Board Integrated Risk Management Committee


Heightening customer experience Customers Credit risk

Enhancing employee engagement Employees Market risk

Reinforcing risk culture Shareholders Operational risk

Promoting organic growth Regulators and Government Institutions Liquidity risk

Leading by example Business partners Compliance risk

Society and Environment Reputational risk

Strategic risk

Cybersecurity risk

Contingent risk

Model risk





The Board Credit Committee comprised three Non-Executive Directors as at

31 December 2018.

The following Directors functioned as members of Board Credit Committee during the year 2018:

Mr R M P Rathnayake, NE/NI – Chairman (from 26 November 2018 to 19 February 2019)

Mr Aswin De Silva, NE/NI – Chairman (from 3 February 2017 to 12 November 2018)

Mr Chandima Hemachnadra, NE/NI – Member (from 3 February 2017 to 19 July 2018)

Mr Ajith Pathirana, NE/NI – Member (from 14 August 2017 to 19 July 2018)

Mr Suranga Naullage, NE/NI – Member (from 7 August 2018 to 31 December 2018)

Mr U G R Ariyaratne, NE/I – Member (from 31 August 2018) (NE – Non-Executive, NI – Non-Independent, I – Independent)


Regular attendees by invitationGeneral Manager/CEO, DGM (Credit) and DGM (Retail Credit) attended meetings during the year as invitees.

Secretary to the CommitteeThe Secretary to the Board, functions as the Secretary to the BCC.

MeetingsDuring the financial year ended 31 December 2018 seven Board Credit Committee meetings were held. The quorum for a meeting is two members.





Mr Ajith Pathirana 05 04

Mr Suranga Naullage 02 02

Mr U G R Ariyaratne 01 01

Charter of the CommitteeThe Board of Directors has established the Board Credit Committee (BCC) in compliance with the Banking Act Direction No. 12 of 2007, Corporate Governance for Licensed Specialised Banks in Sri Lanka issued by the Monetary Board of the Central Bank of Sri Lanka under Section 76 J (1) of the Banking Act No. 30 of 1988 as amended and National Savings Bank Act No. 30 of 1971 as amended, to conduct periodic reviews on the Credit Policy and Investment Policy of the Bank as and when required, and to engage in approving of credit facilities and investments within the limits delegated to.

Roles and responsibilities of the Committee

Reviews and recommends the Banks strategic objectives with respect to credit and investment including policies, procedures and other related policy level documents.

Assists the Board of Directors through efficient and effective management relating to Credit Policy and Investment Policy of the Bank in order to promote and reinforce a sound, robust and healthy credit risk acceptance and management culture.

Approves and advises on the pricing of Loans and Advances and Investments in accordance with the recommendations by Assets and Liability Management Committee (ALCO).

Ensures implementation of appropriate systems to manage risks and strengthen internal controls and Management Information Systems with respect to credit aspect of the Bank.





Activities during the year 2018The Committee approved the credit and investment proposals and other specific reports which prerequisite the approval of the Board in line with the lending and investment policies and credit risk appetite of the Bank in order to ensure the efficient and effective performance over the credit and investment direction of the Bank.


Maintaining a healthy credit book and investment book while enabling the risk appetite.

Proactive risk management, strengthen internal controls and management information systems with respect to credit aspects of the Bank.

Continuous monitoring on the adherence to Board-approved limits

Committee evaluation The Committee completed the evaluation process with self-assessment for the year 2018 and concluded that its performance was effective, where the results of the evaluation were communicated to the Board.

R M P Rathnayake ChairmanBoard Credit Committee


Board Credit Committee



Promoting organic growth Shareholders Credit risk

Leading by example Regulators and Government Institutions Compliance risk





Composition of the committee

The Board Information Technology Strategy Committee (BITSC) comprised

three Non-Executive Directors as at 31 December 2018.

The following Directors functioned as members of BITSC during the year 2018:

Mr R M P Rathnayake, NE/NI – Chairman (from 26 November 2018 to 19 February 2019)

Mr Aswin De Silva, NE/NI – Chairman (from 3 February 2017 to 12 November 2018)

Mr D L P R Abeyaratne, NE/NI – Member (from 3 February 2017 to 11 July 2018)

Mr Chandima Hemachnadra, NE/NI – Member (from 3 February 2017 to 19 July 2018)

Mr Anil Rajakaruna, NE/NI – Member (from 26 October 2018 to 31 December 2018)

Ms Shehara Jayawardena, NE/NI – Member (from 26 October 2018 to 12 November 2018) (NE – Non-Executive, NI – Non-Independent, I – Independent)


Regular attendees by invitationThe General Manager/CEO provides information to the Committee and attends all meetings of the Committee. as an invitee.

Assistant General Manager (IT) and Chief Information Security Officer also attend the meeting on invitation.

Secretary to the CommitteeThe Secretary to the Board, functions as the Secretary to the BITSC.

MeetingsDuring the financial year ended 31 December 2018 three BITSC meetings were held and minimum quorum of the Committee is two-thirds as per the charter of the BITSC.







Ms Shehara Jayawardena 01 –

Charter of the CommitteeThe Board of Directors of the Bank has established the Board Information Technology Strategy Committee (BITSC) in compliance with the Banking Act Direction No. 12 of 2007, Corporate Governance for Licensed Specialised Banks in Sri Lanka issued by the Monetary Board of the Central Bank of Sri Lanka under section 76 J (1) of the Banking Act No. 30 of 1988 as amended.

The BITSC was established in order to ensure the Banks reliance over Information Technology and oversee the Bank’s strategic objectives in accordance with the Information and Communication Technology (ICT).

Role and responsibilities of the Committee

Establish and review Information Technology Governance Framework to ensure leadership support, organisational structure and Bank’s IT process, value delivery, IT risk management, resource management and performance management.

Ensure adequacy and effectiveness of Business Continuity Management and Disaster Recovery of Information Communication Technology Systems of the Bank.

Ensure adequacy and effectiveness of Information Systems Security according to CBSL directions and international best practices.

Report of the Board Information Technology Strategy Committee

Report of the Board Information Technology Strategy Committee



Activities attended by the Committee during the year 2018

The Committee-approved policies and procedures in order to enhance information technology infrastructure, enabling the banking functions more linked with the emerging technologies to ensure efficient and effective implementation over the strategies of the Bank. Moreover, the Committee foresees the need of customer’s data protection and ensures all necessary policies and procedures have been taken against the information security.


Continuous focus to stay ahead of the cybersecurity-related matters.

Maintenance of IT Governance Framework as a core function of strength.

Continuous scanning of innovations and agility in the market to defense against disintermediation and position on growth.


R M P RathnayakeChairmanBoard Information Technology Strategy Committee


Board Information Technology Strategy Committee



Reinforcing risk culture Employees Cybersecurity risk

Promoting organic growth Shareholders Reputational risk

Leading by example Regulators and Government Institutions Compliance risk

Model risk

Operational risk




NSB is exposed to both financial and non-financial risks arising from its operations. Thus, the Bank’s overall objective is to manage these risks in a manner that balances serving the interests of its customers and investors on one hand and solvency on the other hand.

The scope of risk management is not limited to NSB, but also extends to the fully owned subsidiary, NSB Fund Management Company. This report mainly elaborates risk management in the Bank considering the materiality of the Bank’s operation in the NSB Group. (Bank contributes 98.6% to consolidated assets and 97.7% to consolidated capital)

The Bank manages these risks through its risk management framework which evolves with emerging risks arising from the changing business environment, better approaches and regulatory expectations.

Risk management frameworkNSB’s risk management framework enables the appropriate development and implementation of strategies, policies and procedures to manage its risks. Ownership and responsibility for risk management lies with all individuals engage in business operations. Sound corporate governance principles coupled with the “Three Lines of Defence Model” are entrenched to risk governance framework of the Bank.

The risk management framework is supported by following key documentary components:

Strategic Business Plan (SBP) SBP summarises the Bank’s approach to implement its strategic objectives. The Plan has a rolling three-year duration and reflects material risks arising from its implementation.

Risk Appetite Statement (RAS) RAS articulates the types and degree of risks the Board is prepared to accept (Risk Appetite) and the maximum level of risk that the Bank must operate within (Risk Tolerances).

Risk Management Policy Framework Risk Management Policy Framework documents the risk management approach and describes how the Bank ensures comprehensive management of risks across the Bank in support of achieving its strategic goals.

Risk Management Policy Framework consists of the following:

Integrated Risk Management Policy Credit Risk Management Policy Market and Liquidity Risk Management Policy Operational Risk Management Policy Risk Management Disclosure Policy Stress Testing Policy Internal Capital Adequacy Assessment Process (ICAAP) Policy

Risk Management

Risk Management



Risk management framework is implemented in an integrated manner to cover a broad spectrum of emerging and existing material risk areas such as credit, market, liquidity, operational, compliance, reputation and strategic,

Types and approach to manage material risks

Risk Management Framework

Risk appetite documentStrategic business plan

Risk Management Approach

Governance Culture Policies and procedures Infrastructure

Main Risk Areas

Credit Market Liquidity Operational Compliance Reputational Strategic

Emerging Risk Areas

Cybersecurity Regulatory Model Contingent

Figure 1

with controls and governance established for each area as appropriate. A comprehensive risk management framework is applied throughout the Bank with policies, procedures, and infrastructure reinforced by the risk management culture.

Risk Management



Governance NSB is committed to ensure that its risk management practices reflects a high standard of governance. This enables the Board and the Senior Management to effectively and prudently undertake risk-taking activities. The Board of Directors operates as the highest level in the governance framework.

Risk management governance structure

Boa

rd o

vers

ight

Ris

k-ad

just

ed p

erfo

rman

ce

Risk reporting and control

GM/CEO monitor and manage

the risk-adjusted performance

Assurance

Internal Audit

Ass

uran

ce

Board Integrated Risk Management Committee (BIRMC)

Formulate Risk Appetite Statement (RAS)

Review the overall risk profile of the Bank

Approve the risk management framework

Approve minimal controls required for material risks

Board Audit Committee (BAC)

Consider the adequacy and effectiveness of Bank’s control

framework

Review the report on control issues of the Bank

Ensure integrity of financial reporting

Board of DirectorsApprove overall risk appetite

Assess the adequacy and effectiveness of the control framework

Assess the Management assurance process

Management Committees

Figure 2

The BIRMC oversees the risk management framework and helps to formulate the Bank’s risk appetite for the consideration of the Board. Risk governance flows throughout the business functions of the Bank via Risk Appetite Statement, policies, delegated authority, and committee structures.

Risk Management



Board The Board, through the risk oversight role ensures that Senior Management of the Bank has established an integrated framework to manage various risk exposures and to ensure internal policies are appropriately established and complied with.

The Board approves the Bank’s overall risk appetite and oversees its implementation while reviewing the same to ensure that it continues to be relevant and reflects all types of risks, markets and macroeconomic conditions.

Further, the Board ensures that sound internal control and assurance framework exists within the Bank and is responsible for taking necessary steps to foster a culture of risk awareness and risk adjusted decision making.

BIRMC BIRMC assists the Board in fulfilling its risk-related responsibilities to recommend an effective risk management framework to the Board. Key purposes of BIRMC are to establish risk appetite and recommend the ICAAP.

BIRMC monitors the Bank’s compliance with risk management framework. It reviews adequacy of all management level committees, significant correspondence with the regulator and the risk profile of the Bank.

BAC The policies and practices used by the Bank to manage risks are debated by the BAC. It monitors the effectiveness and efficiency of internal control processes and internal audit function.

BAC ensures integrity of information, usage of appropriate accounting policies and monitors legal or regulatory compliance issues. It recommends interim and year-end financial statements to the Board for approval before publication. External Auditors report their findings to the BAC.

Management Committees Management level committees, directly involved in managing the principal risks, include Credit Committee (CC), Asset and Liability Management Committee (ALCO), Investment Committee (IC), and Operational Risk Management Committee (ORMC).

Other management committees such as IT Steering Committee (ITSC), Corporate Management Committee (CMC), Performance Review Committee (PRC), Marketing Committee (MKTC), Product Development Committee (PDC) , Human Resource Committee (HRC), Action Plan Review Committee (APRC), IT Review and IT Security Committee (ITR and ITSec), Branch Operations Steering Committee (BOSC), Corporate Procurement Committee (CPC) manage material risks to the Bank from people, processes, systems, and external risk drivers.

The Bank is using Three Lines of Accountability model, which places accountability for risk ownership. This model recognises that the business is best positioned to make optimal long-term risk-reward decisions that consider the full end-to-end value chain. Risk and compliance provides the guidance, advice and assurance for the business owners to manage the risks, while audit provides independent assurance to the Board.

Regulators and External Auditors provide valuable inputs to strengthen internal controls and risk management framework, which is an additional assurance to the stakeholders of the Bank.

Risk Management



Three Lines of Defence in risk management

First Line of Defence Second Line of Defence Third Line of Defence

Business UnitsBranches/operational divisions are accountable for identifying/addressing the risks in their respective business areas to operate within a sound control environment.

All staff members attached to branches/operational divisions are aware/responsible for the risks taken and to abide by the internal controls/risk management practices.

Risk Management and Compliance

Risk Management Division (RMD) is the risk oversight division engages in formulating risk management policy framework, risk aggregation, escalation and risk reporting.

Compliance Division focuses on overseeing compliance with laws, rules and regulations applicable to the business operations of the Bank.

(RMD and Compliance Divisions independently report to BIRMC/Board).

Internal Audit

Internal Audit Division (IAD) ensures the adequacy of internal controls, risk management function and compliance function by conducting independent regular audits on the implementation of risk management practices, compliance function and internal controls.

(IAD reports the audit findings to the Board through BAC)

Figure 3

Risk culture Culture is the collection of values, skills and habits that equip employees to understand the risks and make sound judgements in the absence of definitive rules, regulations or market signals. The employees at all levels understand the risk in respective business operation. The Bank’s risk culture is a key driver to ensure risk and return trade-off and managing of the risks and capital levels.

Risk policies and procedures Integrated Risk Management Policy Framework and the operational level policies and procedures provide guidance to the business on management of each material risk.

Integrated Risk Management Policy Framework summarises the principles and practices to be used in identifying and assessing its material risks, quantifying the risk appetite and tolerances for material risks and to clearly understand the types of risk outcomes to which the Bank is intolerant.

Infrastructure Risk management framework is supported by necessary systems, processes and skills required for the management of material risk types.

The key risk management processes in place include:

Process to assess the risks based on management information.

Credit risk management solutions with bank specific credit rating and scoring models.

Models to assess the risk adjusted returns at transaction level and portfolio level.

Market Risk Assessment Models Key Operational Risk Indicators (KORIs) Loss event data collection process Risk and Control Self-Assessment (RCSA) process ICAAP is used in combination with other risk management

practices (including stress testing) to understand, manage and quantify the risks, the outcomes of which are used to inform risk decisions, strategic planning and capital planning.

Risk Management



NSB has introduced improvements essential to strengthen the risk management framework to evaluate, monitor, and manage material risks assumed in the course of its operations. Risk management policies, procedures, and systems are established in line with the guidelines issued by the CBSL and the international best practices introduced by the Basel Committee.

Risk appetite The Risk Appetite Statement is a key component of the risk management framework. Risk appetite is the level of risk the Bank is willing to take to achieve its objectives. It reflects the key aspects of business and stakeholder expectations.

Risk appetite is an integral element of NSB’s business planning process. Risk Appetite Statement enhances value by aligning business operations and risks. It facilitates the staff at business divisions to understand the level of risk they are prepared to take in pursuit of daily business operations, so that they can take decisions risk consciously.

Top down approach in setting risk appetite at corporate level using qualitative and quantitative parameters that minimise adverse impacts to the Bank’s values and financial position. Quantitative risk appetite at corporate level focuses mainly on capital adequacy, liquidity, profitability and other prudential requirements.

Implementing risk appetite framework

Articulate risk appetite

statement and limits

Monitoring and

reporting

Control and correct

Figure 4

The qualitative statements mainly include risks for which the Bank has zero risk appetite. At business line level, risk appetite limits are by risk types namely credit, equity, interest rate, forex and operational.

Convergence of top down and bottom up approach is used at divisional and product line level to set more prudent risk appetite levels using Limit Structures, Budgeted Levels and KORIs.

NSB’s Risk Appetite Statement is approved by the Board of Directors on an annual basis or more frequently in the event of unexpected changes to the risk environment, with the aim of ensuring that they are consistent with Bank’s business strategy and regulatory environment and stakeholders’ requirements. The Board has the ultimate responsibility to manage the risk within the risk appetite levels and has delegated the responsibility to BIRMC.

Communicating risk appetite

Different forms of risk appetite expression

Board/ BIRMC

Capital adequacy liquidity, profitability

and prudential requirement

GM/CEO

Management CommitteesRisk and reaction

Business UnitsKey risk indicators/Loss event data/ RCSA

Figure 5

RMD monitors actual performance against qualitative and quantitative risk appetite parameters and communicated to different levels in governance structure.

Risk Management



The Bank is within the risk appetite and tolerance limits set for the liquidity. The total capital adequacy ratio (CAR) of the Bank is within the maximum tolerance limit however, was not able to achieve the risk appetite levels mainly due to reduction in profitability during the year 2018 as indicated by the profitability indicators.

The reduction in profit is due to multiple factors including fluctuations in market variables, impact from Inland Revenue Act No. 24 of 2017, Debt Repayment Levy (DRL) and adoption of SLFRS 9.

Strategic level key risk indicators

Indicator

Risk

leve

l Within risk appetite limit

Within the maximum tolerance limit

Below maximum tolerance limit

Profitability

ROA

ROE

Capital adequacy

Capital adequacy ratio – Tier 1

Capital adequacy ratio – Total

Leverage

Liquidity

Liquidity – SLAR

LCR (all currency)

NSFR

Figure 6

Understanding the challenges to achieve strategic objectives due to material existing and emerging risks, the Bank promotes to develop an integrated risk management framework to manage different types of risks to minimise the adverse impact on the key performing areas such as profitability, liquidity and capital adequacy, and to the overall functions of the Bank.

Credit riskCredit risk is the risk of potential financial loss arising from the inability or failure of a borrower or counterparty to meet its financial or contractual obligations to the Bank.

The Bank is exposed to credit risk both from on and off-balance sheet credit exposures. The maximum exposure to credit risk is 95.5% of the Bank's total assets. Credit risk to the Bank comprises counterparty risk, concentration risk, settlement risk, and residual credit risk.

On and off-balance sheet exposure

99.1%On-balance sheet

0.9%Off-balance sheet

2018

95.8%On-balance sheet

4.2%Off-balance sheet

2017

Figure 7

Loans and receivables to banks and other customers, and investment in debt securities are the main sources of credit risk to the Bank.

Risk Management



On-balance sheet exposures

58.8%Retail

41.2%Corporate

2018

55.9%Retail

44.1%Corporate

2017

Figure 8

Retail credit exposures

27.5%House and

property loans

49.3%Personal loans

0.1%Auto

11.0%Pawning

10.7%Loans against deposits

1.4%Other staff loans

2018

31.7%House and

property loans

46.0%Personal loans

0.1%Auto

10.2%Pawning

10.8%Loans against deposits

1.2%Other staff loans

2017

Figure 9

Corporate lending and investment exposures

6.2%Corporate Loans-other

13.4%Loans to Banks

2018

6.8%Other instruments

73.6%Corporate loans-SOEs

and GOSL

6.4%Other instruments

29.4%Corporate Loans-other

13.3%Loans to Banks

2017

50.9%Corporate loans-SOEs

and GOSL

Figure 10

Risk Management



Risk review

Credit risk reviewRisk component Description Monitoring/Management tools Exposure Impact*

Counterparty default risk

Possible impact due to failure of counterparties to meet contractual obligations with the Bank according to the agreed terms

Monitoring of early warning indicators

NPA trends Loan Review Mechanism(LRM)

High Low

Concentration risk

Uneven distribution of counterparties in credit to an industry sector or geographical region

Herfindahl-Hirschman Index (HHI)

Limit monitoring Stress testing

Moderate Moderate

Settlement risk Possible impact due to failure of delivering on the terms of a contract at the time of settlement

Credit rating/scoring Stress testing Limit monitoring

Moderate Low

Residual risk Possible impact from any remaining risks after all other risks are eliminated, hedged or otherwise accounted

Collateralisation Monitoring of valuation/

revaluation Monitoring of Loan to Value

(LTV) ratios

Moderate Low

* Possible impact on earnings and capital in a high stress situation

Table 1

The Bank’s gross NPL ratio is 1.44% in 2018 which is below the industry NPL ratio of 3.4%, however, above the 2017 ratio of the Bank.

NPL vs loan amount Rs. Mn. %

Loan amount NPL

2014 2015 201820172016

500,000

400,000

300,000

200,000

100,000

0

8.75

7.00

5.25

3.50

1.75

0

Figure 11

Counterparty default risk Counterparty default risk is the most significant element of credit risk arises from the risk that parties are unable to meet their payment obligations under agreed terms and conditions.

Credit risk management process encompasses credit risk management techniques and tools formulated according to the regulations and guidelines provided by the regulator and Basel requirements to mitigate the counterparty default risk. Customer due diligence, delegated authority and exposure limits, post disbursement loan monitoring, Internal Credit Scoring/Rating systems and LRM are established to manage and monitor the counterparty default risk.

Risk Management



Age analysis of NPL %

Q1 Q4Q3Q2Q1 Q4Q3Q2Q1 Q4Q3Q2

2015 2016 2017 2018

Q1 Q4Q3Q2

3 months<special mention<6 months 6 months<sub standard <12 months 12 months<doubtful<18 months 18 months<Loss

75

60

45

30

15

0

Figure 12

Concentration risk Concentration risk is the risk of an adverse development in a specific single counterparty, country, industry, or product leading to a disproportionate deterioration in the risk profile of the Bank’s credit exposures to that counterparty, country, industry or product.

To assess the concentration in the credit portfolio, NSB uses the Herfindahl-Hirschman Index (HHI). The Bank

has a moderate risk appetite towards sector concentration considering contribution to achieve the development goals of the Government. High geographical concentration to the Western Region is due to all corporate loans being booked at the Head Office, Credit Division.

Measures such as monitoring portfolio concentration limits and stress testing are used to manage credit concentration risk.

Sector concentration

4.9%Agriculture, forestry,

and fishing

0.1%Tourism

0.4%Transportation

and storage

27.9%Construction

19.4%Infrastructure development

31.4%Consumption

0.4%Lending to overseas entities

8.5%Education

0.8%Professional, scientific, and technical activities

6.2%Financial services

2018*

4.5%Agriculture, forestry,

and fishing

0.1%Tourism

0.3%Transportation

and storage

18.6%Construction

22.6%Infrastructure development

38.2%Consumption

0.0%Lending to overseas entities

8.1%Education

1.5%Professional, scientific, and technical activities

6.1%Financial services

2017

*Increased exposure to ‘construction’ sector is due to reclassification of loan products previously categorised under ‘consumption’ sector

Figure 13

Risk Management



3.1%North

Central

5.3%North Western

2.4%Northern

3.8%Sabaragamuwa

4.9%Southern

1.7%Eastern

5.1%Central

70.2%Western

3.5%Uva

2017

Geographical concentration

3.3%North

Central

5.5%North Western

2.5%Northern

3.9%Sabaragamuwa

5.3%Southern

1.8%Eastern

5.4%Central

3.7%Uva

68.6%Western

2018

Figure 14

Settlement risk Settlement risk is arising from failure of the counterparty to deliver counter value, usually the underlying asset or cash value of the contract, as per the terms of the contract at the time of settlement. Settlement risk is closely associated with default risk along with any timing difference in settlement.

NSB has established comprehensive limit framework to monitor counterparty settlement risk from credit and other trading transactions.

Residual risk Residual risk is identified as remaining amount of risk after control mechanisms mitigate the inherent risks of the Bank. Risk governance framework is incorporated with strong controls and risk mitigation techniques. Residual credit risk is maintained within risk appetite levels using acceptable collateralisation with in predefined LTV ratios and strict recovery procedures.

With the increase in composition in personal loans based on personal guarantee, there is an increase in residual risk in credit, however 26% of the credit portfolio is backed by government guarantee and 17% of credit portfolio is covered by property mortgages.

Credit risk management structure

Capital computation for credit risk

Stress testing/Scenario analysis

Loan review mechanism

Credit Limit Monitoring, and KRI analysis

Retail credit Corporate credit

Portfolio analysis and monitoring Rating validation

Cred

it R

isk

Man

agem

ent

Figure 15

Risk Management



Credit risk management structure is founded on the risk appetite and limit structure, credit risk management policies, delegated authorities, and committee structure.

Credit risk governance emanates at the Board level with the assistance of BIRMC and BCC. At the Senior Management level CC and IC have the oversight responsibility for credit risk management.

Credit Risk Management Unit (CRMU) of the RMD is responsible for providing with a clear and comprehensive understanding of the credit risks to the Board, BIRMC and the Senior Management. The responsibilities of CRMU include:

Renew/update policies Develop and maintain quantitative risk models Risk appetite limit monitoring Credit risk review at transaction and portfolio levels Conduct loan reviews Monitor Key Risk Indicators (KRIs) and early warning

indicators Report to CC, IC and Board through BIRMC

Credit risk management process Effective management of credit risk is a critical component of a comprehensive risk management approach and essential for the long-term success of any bank.

The goal of credit risk management at NSB is to optimise the risk adjusted rate of return by maintaining credit quality and credit risk exposure within risk appetite levels.

The Bank exerts a set of risk management tools and techniques to manage the credit risk inherent at portfolio level as well as at transaction level.

Risk rating and scoring Risk rating and scoring models are used to assess the credit worthiness of the counterparties. Rating and scoring methodology developed based on Basel guidelines and aims to deliver a consistent approach to risk assessment framework by considering both qualitative and quantitative risk parameters. Credit rating of the Bank comprehensively assesses the obliger and facility risk ratings and assign with a rating grade from a scale of nine internal rating grades and external rating of the respective borrowers are considered and compared with internal ratings generated until independent validation of the system is carried out.

All customers are given a single scale score which reflects the creditworthiness of the counterparty to a specific product. Customers are offered with rate differentials based on Risk Based Pricing (RBP).

Collateral management and valuation The Bank considers collateral as a reliable guarantee to mitigate financial risk and security on credit facilities. Type of the collateral comes in various forms and the Bank accepts collateral based on the facility type.

The collateral value should be sufficient to fully cover the principal, interest, legal and other charges. Bank ensures to maintain LTV ratio of immovable property, pawning and cash backed lending within acceptable levels to cover all dues.

The property mortgages accepted as collateral are revalued based on Policy on Valuation and Revaluation of Immovable Property developed in compliance with the CBSL Directions.

CRMU monitors the revaluation due loans as early warning indicator to take immediate action to mitigate risk. In the year 2018, 77.72% of the property mortgage loans were backed by immovable property with LTV ratio of less than 50%.

Loan portfolio-collateral wise

6.4%Cash

12.0%Unsecured

6.6%Gold

16.7%Immovable

property

0.1%Movable property

1.3%Lease receivables

29.1%Personal guarantee

0.1%Corporate guarantee

1.4%Other

26.3%Treasury guarantee

2018

Figure 16

Risk Management



LTV distribution of loans backed by immovable property

As at 31 December 2018 2017

Rs. ’000 Composition(%)

Rs. ’000 Composition (%)

LTV ratio

Less than 50% 53,692,612 77.72 51,515,268 78.45

50-75% 13,748,040 19.90 12,160,610 18.52

More than 75% 1,647,432 2.38 1,988,195 3.03

69,088,084 100.00 65,664,073 100.00

Table 2

Loan review mechanism The Bank uses LRM as an effective tool to mitigate the credit risk by prompt identification and rectification of gaps in credit granting and documentation process. This process ensures quality assurance in the credit process and the credit quality.

The Bank’s LRM process covers credit operation at head office and branch level. CRMU reviews a sample from corporate loans and retail loans above a threshold of Rs. 10 Mn. within three months of sanction and reports to the CC.

Impairment provision With the introduction of Expected Credit Loss (ECL) approach in SLFRS 9, credit losses increased with more volatility for financial instruments. Lifetime expected credit loss or twelve months expected credit loss is calculated either on individual basis or collective basis for financial instruments based on a predetermined threshold limit. The Bank has implemented standardised ECL model for impairment assessment.

The actual impact of adopting SLFRS 9 on 1 January 2018 has increased loan loss provision. Provision cover of the Bank is 63% for the year 2018.

Impairment provision vs NPL Rs. Mn. %

Impairment provision (Rs. Mn.)

Non-performing loans (Rs. Mn.)

Provision cover (%)

2014 2015 201820172016

75

60

45

30

15

0

17,500

14,000

10,500

7,000

3,500

0

Figure 17

Market riskMarket risk is the risk that the value of both on-balance sheet and off-balance sheet financial assets and liabilities will fluctuate resultant to the changing market prices, regardless of whether these price changes are originated by factors typical for individual instruments or their issuer or counterparty or by factors pertaining to all the instruments traded on the market. Hence, the market risk is connected with the unpredictable price changes in four main financial markets i.e. debt security market, stock market, foreign currency market and commodity market.

The Bank is exposed to interest rate risk, equity price risk, foreign exchange risk in both trading book and banking book resultant to the fluctuations in market variables. The Bank has no direct exposure for commodity price risk as there are no investments in commodities. However, changes in world commodity prices such as gold prices and crude oil prices indirectly affect business activities.

Unfavourable movements in interest rates, equity prices, and exchange rates cause decline of market value of financial instruments, actual and effective earnings i.e. future cash flows from financial instruments.

Risk Management



As at 31 December 2018 Market risk measurement Primary market risk factor

Carrying amount

Rs. ’000

Trading portfolio

Rs. ’000

Non-tradingportfolio

Rs. ’000

IRR Fx Equity

Assets subject to market risk

Cash and cash equivalents 3,434,524 – 3,434,524

Placements with banks 17,588,445 – 17,588,445

Derivative financial instruments 4,740,106 4,740,106 –

Financial assets measured at fair value 16,680,382 16,680,382 –

Financial assets at amortised cost – Loans and receivables

423,532,145 – 423,532,145

Financial assets at amortised cost – Debt and other instruments

518,947,969 – 518,947,969

Financial assets measured at fair value through OCI

6,184,430 6,184,430 –

991,108,001 27,604,918 963,503,083

Liabilities subject to market risk

Due to banks 77,119,146 – 77,119,146

Derivative financial instruments 1,533 1,533 –

Financial liabilities at amortised cost – Due to depositors

839,574,411 – 839,574,411

Financial liabilities at amortised cost – Due to other borrowers

14,804,802 – 14,804,802

Debt securities issued 52,389,133 – 52,389,133

Retirement benefit obligations 3,830,795 – 3,830,795

987,719,820 1,533 987,718,287

Market risk exposure

Table 3

The Bank has a mandatory requirement to invest 60% of customer deposits in Government Securities. In the year 2018, the Bank held 60.9% of the deposits and 50.6% of total assets in Government Securities (trading and banking book) exposing the Bank to interest rate risk accompanied by changes in yields/interest rates.

Equity investments is relatively insignificant (1.1%) of the Bank’s total investments where 33% is in trading portfolio and 67% in strategic investments. The Bank’s total equity investments is only 0.6% of total assets as at end 2018.

The Bank’s foreign currency operations include foreign currency trading, accepting deposits, remittances, borrowing, lending, placements and dealing in derivatives.

Risk review Market risk is reviewed in terms of interest rate risk, foreign exchange risk (FX) and equity price risk. This is done for traded and non-traded portfolios. The Bank reviews the market risk profile using different methodologies and models.

Risk Management



Risk component Description Monitoring/management tools Exposure Impact*

Interest rate risk

Repricing risk The risk arises from timing differences between rate changes or cash flows from rate sensitive on and off-balance sheet assets and liabilities

Monitoring repricing gap limits and limits on Rate Sensitive Assets (RSA) and Rate Sensitive Liabilities (RSL)

High High

Yield curve risk Risk of short-term rates changing by more or less than the change in long-term rates

Sensitivity/Stress testing with rate shocks

High High

Basis risk Risk from unequal movements in interest rates on RSAs and RSLs with the same maturity or repricing dates

Sensitivity of rate shocks on RSAs and RSLs

High High

Foreign exchange risk

Possible impact on earnings and capital arising from adverse changes in exchange rates arising out of maturity mismatches in Foreign Currency positions

Limit monitoring FX VaR Stress testing

High Moderate

Equity risk Possible losses arising from changes in equity market prices

Equity VaR Limit monitoring Marking to market trading and

AFS portfolio on daily basis.

Low Low

Commodity risk Possible negative impact on earnings due to changes in prices of commodities (Gold)

Indirect impact on value of collateral against pawning advances

No direct exposure

Market risk review


Table 4

Interest rate risk Interest rate risk is the risk of reduction in earnings and capital which deteriorate the net worth of the Bank due to probable changes in interest rates. The immediate impact of changes in interest rates is on the Net Interest Income (NII). Long-term impact of changing interest rates is on the net worth since the economic value of a Bank’s assets, liabilities and off-balance sheet positions get affected due to changes in market interest rates.

The Bank is exposed to interest rate risk arising from its investments in trading book as well as the mismatches in repricing periods of RSA and RSL in the banking book.

The management of interest rate risk is one of the critical components of market risk management. The NII or Net Interest Margin (NIM) is dependent on the movements of interest rates. Mismatches in the cash flows (fixed assets or liabilities) or repricing dates (floating assets or liabilities), expose the Bank’s NII or NIM to variations. The earnings on assets and the cost on liabilities are closely related to market interest rate volatility.

Management of interest rate risk aims at capturing the risks arising from the maturity and repricing mismatches and is measured both from the earnings and economic value perspectives.

The Bank assesses interest rate risk primarily through an interest rate repricing gap analysis. Interest rate repricing gap analysis measures the difference between the amount of interest-earning assets and interest-bearing liabilities which are repriced within defined maturity buckets.

Risk Management



Risk Management

<1 month

Rs. Mn.

1-3monthsRs. Mn.

3-6 monthsRs. Mn.

6-12monthsRs. Mn.

1-3 years

Rs. Mn.

3-5 years

Rs. Mn.

>5years

Rs. Mn.

RSA 37,127 34,022 33,377 112,026 219,274 207,322 334,168

RSL 225,453 268,398 165,580 288,286 25,333 10,836 –

Period GAP (RSA-RSL) (188,326) (234,376) (132,203) (176,260) 193,941 196,486 334,168

Cumulative gap (188,326) (422,702) (554,905) (731,165) (537,224) (340,738) (6,570)

Actual gap as a percentage of RSL – 2018 -84% -87% -80% -61% 766% 1,813% –

Actual gap as a percentage of RSL – 2017 -88% -88% -52% -37% 281% 1,431% 13,966%

Interest rate sensitivity analysis

Table 5

Interest rate risk in trading book The Bank held 2.6% of its investments in Government Securities in Fair Value Through Profit and Loss (FVTPL) portfolio (Treasury Bonds) and less than 0.5% in Fair Value through Other Comprehensive Income (FVOCI) portfolio (Treasury Bonds) at the end of 2018. Interest rate risk in Government Securities FVTPL portfolio is assessed through mark-to-market valuation and the yield of the portfolio. Further, portfolio duration is monitored on a monthly basis.

Interest rate risk in banking book Interest Rate Risk in the Banking Book (IRRBB) is the risk on earnings or capital arising from movements of interest rates that affect banking book positions.

This risk results from different repricing characteristics of banking book assets and liabilities. Maintaining interest rate risk within prudent level is essential to the solvency.

Equity risk Equity risk refers to the risk that NSB’s investments in equity instruments will depreciate due to stock market dynamics exposing to potential variation in income and reserves. The Bank is exposed to equity price risk from its investments in listed equity instruments both ordinary shares and in unit trusts.

The listed equity portfolio comprises both FVTPL and FVOCI portfolios and the extent of investments in equities are managed by risk limits framework and Investment Policy Statement (IPS).

2018 2017 Unrealised gain/(loss)

Portfolio type Book valueRs. ’000

Market valueRs. ’000

Book valueRs. ’000

Market valueRs. ’000 Rs. ’000

FVTPL 3,367,973 1,878,919 3,521,949 2,357,336 (1,489,054)

FVOCI* 3,107,875 3,750,515 3,107,875 4,440,951 642,640

Total 6,475,848 5,629,434 6,629,824 6,798,287 (846,414)

Equity portfolio position

* Including unquoted investments

Table 6

Sluggish economic conditions, heightened domestic political uncertainty and volatile global financial markets have affected Sri Lankan equity market negatively in 2018. Colombo equities have fallen 4.98% (317 Index points) in 2018 relative to 2.3% gain reported in 2017. The S&P SL 20 index, which features the CSE’s 20 largest and most liquid stocks, has also moved down consistently, making a 14.61% loss (537 Index points) for 2018.

Risk Management



Equity portfolio composition

1.5%Unit trusts

3.4%Unlisted equity

44.6%Listed equity AFS

50.5%Listed equity

trading

2018

1.4%Unit trusts

3.4%Unlisted equity

44.0%Listed equity AFS

51.2%Listed equity

trading

2017

Figure 18

Foreign currency risk FX risk is the risk that an asset or investment and transactions denominated in a foreign currency will lose value as a result of unanticipated and unfavourable fluctuations in exchange rates. During 2018 USD/LKR average spot rate fluctuated in the range of Rs. 153.33-182.71 (Source: Bloomberg). The rupee depreciation was 19.2% for the year.

US dollar denominated bonds totalling to USD 1,000 Mn. issued in 2013 and 2014 form a part of the foreign currency exposures. During the year under review, the Bank

successfully redeemed the obligation on USD 750 Mn. bond issued in 2013. However, the Bank borrowed USD 100 Mn. from a reputed international bank to settle the financial obligation from the bond issue. The facility is floating rated and linked to 6M LIBOR plus 2% margin.

The remaining USD 250 Mn. bond is to be matured in the year 2019; and the foreign currency risk in capital redemption is covered via a SWAP agreement with CBSL. Further, foreign currency exposure has increased during the year due to disbursement of corporate loans in foreign currency.

Maturity Gap <1 MonthsRs. ’000

1-3 monthsRs. ’000



1-3 yearsRs. ’000

3-5 yearsRs. ’000

Over 5 yearsRs. ’000

USD (4,360,211) 9,076,532 (8,984,000) 14,712,404 (11,513,547) 2,571,900 3,233,340

EUR (1,065,702) (127,100) (173,989) 5,649,578 – – –

GBP (472,669) (14,969) (168,332) 1,078,399 – – –

SGD 1,336 – – – – – –

AUD (747,345) (46,643) 355,165 992,454 – – –

JPY 3,018,750 – – – – – –

CHF 607 – – – – – –

Foreign currency maturity gaps

Table 7

FX risk is associated with the unhedged positions in all the foreign currencies. Bank under the Standardised Measurement Approach allocates capital for foreign currency risk considering the Net Foreign Currency Exposure (NFCE). Daily NOP, which is one of the main indicators of foreign currency risk in Treasury operations is monitored on daily basis and limited exceptions are reported (duly approved by relevant authorities) due to accumulation of USD to repay the capital and coupon of USD 750 Mn. bond.

Risk Management



Daily NOP against internal limit – 2018 USD ’000

Sep. Dec.Nov.Oct.Mar. Apr. May Jun. Jul. Aug.Feb.Jan.

Daily NOP Internal limit

5,000

2,500

0

-2,500

-5,000

-7,500

Figure 19

Governance structure The Bank is equipped with prudent and independent market risk governance framework which is an integral part of the risk management. Market risk governance is a principal responsibility of the Board and management committees.

The Bank’s market risk appetite, principles, policies, procedures, controls, and reporting are fully in line with regulations and industry best-practices, to manage the impact of market risk factors on the profitability, capital levels and the risk profile.

ALCO is the apex committee at management level responsible for managing the balance sheet within the performance/risk parameters based on the risk appetite of the Bank. The IC appraises the Board of Directors by recommending actions if considered necessary or desirable to invest or divest investment portfolio or part of it in order to manage the risk in investments.

Market Risk Management Unit (MRMU) of the RMD is responsible for providing with a clear and comprehensive understanding of the market risks to the Board, BIRMC, and the Senior Management. The responsibilities of MRMU include:

Update policies Developing and maintaining quantitative risk models Monitoring treasury operations, exposures, and position

limits against risk appetite and treasury limits Conducting daily reviews and analysis of trading portfolios Monitor material risk exposures at transaction and

portfolio level

Treasury Middle Office (TMO) which is an integral part of MRMU, functions independently from the Treasury Front Office (TFO) and the Treasury Back Office (TBO) to monitor, measure, analyse and report inherent risk and trading risk emanating from treasury operations of the Bank against predefined risk limits on a daily basis.

The observations and exceptions are directly reported to IC, ALCO and to the Board providing an independent opinion.

Market risk management structure

Trading book

Treasury Middle Office

Mar

ket R

isk

Man

agem

ent

Treasury limit monitoring and internal control

Risk measurement, analysis and reporting/dashboard

Stress testing/scenario analysis

Capital computation for market risk

Banking book

Portfolio analysis

Figure 20

Market risk management process The Bank manages and controls market risk exposures while maintaining a balanced market risk profile consistent with the risk appetite. For the purpose a range of models, methodologies and tools are used at portfolio and transaction level.

Risk Management



Limits monitoring A well-designed risk limit framework is one of the key mechanisms for risk control and mitigation. The Bank has set risk appetite and risk limit framework to monitor treasury operations as a function of TMO.

These limits are reviewed on an yearly basis or occurrence of an internal or external event which changes the risk environment. Approval of the Board/BIRMC is obtained for the risk limits.

Risk limits comprise clear authority limits covering entire treasury operations for trading and non-trading portfolios. The risk limits structure is sufficiently granular to facilitate effective control of market risk related activities and provides a continuous overview and understanding of activities undertaken by TFO.

TMO closely monitors impact on the Bank's exposure due to the fluctuations in interest rates, equity prices and FX rates, against the risk limits on a daily basis. Counterparty

settlement risk limits on foreign currency operations, Government Securities trading and settlement limits and equity trading limits are monitored on a daily basis. Exceptions if any are reported to IC, ALCO and the Board.

Value at risk Value at risk (“VaR”) is a technique for estimating potential losses on risk positions as a result of movements in market rates and prices over a specified time horizon and to a given level of confidence. The Bank developed VaR models internally to manage and monitor equity price risk and FX risk.

The TMO calculates the equity VaR and Fx VaR in accordance to Basel III guidelines. i.e. for a 99% confidence level and 10-day holding period considering historical data for a period of 365 days, to monitor against the risk appetite of the Bank and reports to DGM-Treasury/TFO on a daily basis. All exceptions are reported to ALCO, IC and to the Board through BIRMC.

Equity VaR against appetite limits – 2018 Rs. Mn.

Jun. Nov.Oct.Sep.Aug. Dec.Jul.Jan. Mar. Apr. MayFeb.

Equity VaR RAL Trigger RTL

175

140

105

70

35

0

Figure 21

FX VaR – 2018 USD

Nov. Dec.Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct.

50,000

40,000

30,000

20,000

10,000

0

Figure 22

Risk Management



Liquidity riskLiquidity risk arises when the Bank fails to maintain or generate adequate liquid funds to meet its payment obligations in full as they fall due or only do so at materially disadvantageous terms. The efficient management of liquidity is essential in retaining the confidence of the customers, counterparties, regulator, and other stakeholders. Treasury has the primary responsibility for managing liquidity risk within the predetermined risk appetite of the Bank.

The Bank has maintained appropriate liquidity buffers in line with regulatory and prudential requirements, considering the Bank’s risk profile and market conditions.

The control framework for managing liquidity risk is designed to ensure the maintenance of sufficient amount of quality liquidity resources and a funding profile that is appropriate and adequate to meet the liquidity risk appetite. This is achieved through a combination of policy formation, review and governance, analysis, stress testing, limit setting and monitoring which drive the Bank in achieving internal and regulatory liquidity requirements.

Funding diversification by product

20.6%Savings deposits

66.4%Fixed deposits

4.8%USD borrowings

7.6%Repo borrowings

0.6%Subordinated debt

2018

19.6%Savings deposits

57.1%Fixed deposits

16.3%USD borrowings

6.4%Repo borrowings

0.6%Subordinated debt

2017

Figure 23

The Bank has access to a wider spectrum of retail deposits and institutional deposits through its branch network and counts on stable funding as the primary source of funds. Alternatively, the Bank has also approached low cost foreign currency borrowing opportunities.

In 2018, total funding related liabilities were amounting to Rs. 965.6 Bn., of which 86.9% consists of deposits, 7.6% of borrowings under repurchase agreements and 4.8% of foreign currency borrowings.

The access to retail deposits (i.e. Savings and FDs) through island wide network of branches enables reducing the funding concentration risk.

Governance structure At Senior Management level, ALCO oversees the liquidity risk of the Bank. The principle liquidity risk governance document is the Liquidity and Market Risk Management Policy of the Bank approved by the Board.

MRMU monitors liquidity risk using regulatory ratios, prudential ratios and maturity profile of asset and liability. Further, stress tests are performed on a periodic basis considering scenarios of different severities for a liquidity crisis, credit tightening and speed/time to act in a crisis situation.

The stress test results and liquidity ratios are communicated to the ALCO and the Board through BIRMC.

Liquidity risk management process The Bank manages liquidity in compliance with respective statutory regulations set by the regulator and within the risk appetite framework. Liquidity risk management ensures that the Bank has appropriate amount and diversification to support its obligations at all times.

The Bank manages liquidity risk by monitoring liquidity risk indicators and tools as per Basel III requirements. RMD monitors the funding concentration of the Bank both by significant counterparty and significant product to ensure that funding diversification is maintained across products and to ensure adherence to Board approved risk appetite limits.

Risk Management



Tactical (short term) liquidity risk management

Structural (long term) liquidity risk management

Contingency liquidity risk management

Manage intra-day liquidity positions

Ensure a structurally sound financial position

Monitor and manage early warning liquidity indicators

Ensure LCR and NSFR within the risk appetite

Monitor inter-bank and repo shortage levels

Identify and manage structural liquidity mismatches

Establish and maintain contingency funding plans

Monitor daily cash flow requirements

Determine and apply behavioural profiling

Undertake regular liquidity stress testing and scenario analysis

Manage short-term cash flows Manage long-term cash flows Convene liquidity crisis management committees, if needed

Manage daily foreign currency liquidity

Preserve a diversified funding base Set liquidity buffer levels in accordance with anticipated stress events

Set deposit rates in accordance with structural and contingent liquidity requirements as informed by ALCO.

Inform term funding requirements Advise on the diversification of liquidity buffer portfolios

Assess foreign currency liquidity exposures

Ensure compliance with Basel III liquidity requirements

Establish liquidity risk appetite

Ensure appropriate transfer pricing of liquidity costs

Liquidity management process

Table 8

Regulatory ratios Statutory Liquid Asset Ratio (SLAR) and Liquidity Coverage Ratio (LCR) are monitored on a monthly basis, whereas the Net Stable Funding Ratio (NSFR) is monitored on a quarterly basis.

The Bank has successfully maintained liquidity requirements under Basel III, LCR in excess of 100% and SLAR in excess of 20% to ensure compliance with the minimum regulatory requirements. This is mainly due to the mandatory requirement to invest 60% of the deposits in Government Securities which are highly liquid.

Bank is well above the regulatory minimum for Basel III NSFR. This is achieved mainly by having a more stable retail deposit base of the Bank.

December2018

%

December2017

%

Regulatory minimum

%

SLAR – DBU 54.88 73.44 20

LCR – Rupee 245.06 377.57 90

LCR – All currency 321.29 376.18 90

NSFR 147.00 135.45 90

Liquidity ratios

Table 9

Risk Management



Trends in regulatory ratios %

LCR – All currency (LHS) LCR – Rupee (LHS) SLAR ( RHS)

450

400

350

300

250

200

Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Dec.Oct. Nov.Sep.

%

80

74

68

62

56

50

Figure 24

Bank Up to 3 monthsRs. ’000


1-3 year

Rs. ’000

3-5 year

Rs. ’000

More than 5 year

Rs. ’000

Total as at31.12.2018

Rs. ’000

Assets with contractual maturity (interest-bearing assets)

Cash and cash equivalents 13,528 – – – – 13,528

Placements with banks 8,962,285 8,626,160 – – – 17,588,445


– measured at fair value 526,079 45,164 1,562,229 5,587,752 7,080,240 14,801,463


– loans and advances 24,859,047 76,313,691 116,389,323 75,402,639 130,567,445 423,532,145

– debt and other instruments 36,694,607 60,416,015 100,748,159 124,717,849 196,371,339 518,947,969

Financial assets measured at fair value through other comprehensive income 93,693 2,417 574,676 1,614,189 148,939 2,433,915

71,149,238 145,403,447 219,274,387 207,322,429 334,167,963 977,317,466

Other assets (non-interest-bearing assets)

Cash and cash equivalents 3,420,996 – – – – 3,420,996

Derivative financial instruments 4,740,106 – – – – 4,740,106


– measured at fair value 469,730 1,409,189 – – – 1,878,919

Financial assets measured at fair value through other comprehensive income – – – – 3,750,515 3,750,515

Investments in subsidiaries – – – – 1,700,000 1,700,000

Property, plant and equipment – – – – 13,465,755 13,465,755

Other assets 845,513 9,129,458 8,887,211 6,541,719 5,805,314 31,209,217

9,476,345 10,538,647 8,887,211 6,541,719 24,721,584 60,165,507

Total assets 80,625,583 155,942,094 228,161,598 213,864,148 358,889,547 1,037,482,973

Maturity gap

Risk Management



Bank Up to 3 monthsRs. ’000


1-3 year

Rs. ’000

3-5 year

Rs. ’000

More than 5 year

Rs. ’000

Total as at31.12.2018

Rs. ’000

Liability with contractual maturity (interest-bearing liabilities)Due to banks 58,368,770 6,718,543 12,031,832 – – 77,119,146

Financial liabilities at amortised cost

– due to depositors 425,141,386 396,295,352 13,301,606 4,836,068 – 839,574,411

– due to other borrowers 14,619,083 185,718 – – – 14,804,802

Debt securities issued – 46,389,133 – 6,000,000 – 52,389,133

498,129,239 449,588,746 25,333,438 10,836,068 – 983,887,492

Other liabilities (non-interest-bearing liabilities)Derivative financial instruments – – 1,533 – – 1,533

Retirement benefit obligations – – – – 3,830,795 3,830,795

Differed tax liabilities – – – – 582,463 582,463

Other liabilities 2,750,829 875,249 794,715 779,046 247,437 5,447,277

Due to subsidiaries 750 – – – – 750

Stated capital/assigned capital – – – – 9,400,000 9,400,000

Statutory reserve fund – – – – 3,227,960 3,227,960

Retained earnings – – – – 4,622,080 4,622,080

Other reserves – – – – 26,482,625 26,482,623

2,751,579 875,249 796,248 779,046 48,393,360 53,595,481

Total liabilities 500,880,818 450,463,995 26,129,686 11,615,114 48,393,360 1,037,482,973

Table 10

Other liquidity monitoring tools Maturity gap analysis of assets and liabilities enable to foresee adverse liquidity levels. The Bank raised funding requirements during the year by pledging part of the Government Securities portfolio to increase borrowings.

The Bank monitors net loans to total assets ratio, loans to customer deposits ratio, liquid assets to short-term liabilities ratio, purchased funds to total assets ratio, commitments to total loans ratio and ratio of (large liabilities – temporary investments) to (earning assets – temporary investments) to manage the funding and liquidity risks.

Except from liquid assets to short-term liabilities ratio and purchased funds to total assets ratio, other ratios reported a positive trend during the year. Increase in exposure to repo borrowing and increase in institutional deposits, adversely affected the purchased funds to total assets ratio.

Liquidity ratios under stock approach

Q12018

Q42018

Q32018

Q22018

%

60

45

30

15

0

-15

Net loans to total assets Loans to deposits Liquid assets to short-term liabilities

Large liabilities – temporary investments/Earning assets – temporary investments

Purchased funds to total assets

Commitments to total loans

Figure 25

Risk Management



Liquidity contingency plan Liquidity contingency plan ensures the ability to withstand the Bank specific or market crisis scenarios. Investment of 60% of deposits in Government Securities as per the NSB Act (highly liquid/risk free assets) improves the ability to borrow at lesser cost using fixed income securities as collateral (Repo Borrowings) and high credit rating of the Bank.

MRMU monitors liquidity risk on a frequent basis and provides reports on liquidity indicators and stress testing which will act as early warning to support crisis response strategies.

Operational riskOperational risk is the risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events. Operational risk includes legal risk but excludes reputational and strategic risk. The Bank is exposed to a broad range of operational risks through its daily operations.

The Bank is aware of the emerging operational risk concerns. The role of operational risk management is reviewed on a yearly basis considering the impact from existing and emerging trends in operational risks, such as IT disruptions, data compromise, regulatory risk, theft and fraud, outsourcing, model risk etc.

IT disruption IT disruption can be driven by cyberattack, human error or a failure of aging hardware. The costs from such disruptions are harder to quantify from financial terms and can impact the overall resilience of the Bank.

Business Continuity Management System (BCMS) and Disaster Recovery Policy (DRP) are used by the Bank to minimise impacts from IT disruptions. ITSC ensures the availability of up-to-date hardware and software systems with constant uptime and proper maintenance, whereas Information Security Division monitors the effectiveness of the controls in place.

Data compromise Data can be compromised through cybertheft, unauthorised access, accidental disclosures and employee negligence.

The Bank has in place a Board approved Information Security Policy Framework to ensure appropriate actions are taken to ensure the confidentiality of sensitive data and information. Information Security Unit ensures implementation of Policy Framework to minimise vulnerabilities.

Compliance/ Regulatory risk

The scope of regulatory framework will continue to expand globally. Regulatory changes in areas such as capital, leverage, funding and liquidity are expected to have considerable implications to the Bank’s risk management process. The regulator and the Government are increasingly demanding banks to comply with both local and global regulatory standards.

Since the scope of regulations are expanding substantially, compliance with existing regulations are unlikely to be sufficient. Therefore, NSB is prepared to comply with potential future changes in regulations as well.

Theft and fraud Theft and fraud is the most common operational risk, with the advancement of technology and digitalisation, focus is made on cyberfrauds. Internal control structure of the Bank acts as the first line of defence to minimise thefts and frauds. During the year, the Bank took several measures to minimise fraud risk from cyberbandits.

Outsourcing Outsourcing risk emerged due to growing reliance on external service providers/vendors. Several actions are taken to manage the risk from outsourcing such as conducting vendor due diligence, enforcing new Non Disclosure Agreements (NDAs) and reviewing conditions of Service Level Agreements (SLAs).

Model Risk Increasing dependence on models will require better understanding and managing of model risk. Model errors stem from issues with data quality, technical or implementation issues, and correlation inconsistencies.

These are mitigated through sophisticated model development, improving data quality and consistent monitoring of model outputs.

Existing and emerging operational risks

Table 11

Risk Management



Risk review Operational risk is reviewed in terms of material risks to the Bank. The Bank has a very low tolerance for operational risks which impact critical functions of the business.

Operational risk reviewRisk component Description Monitoring/Management tools Exposure Impact*

Theft and fraud risk

Fraudulent activities by internal or external party

Fraud risk management and whistle-blowing process

Internal controls KORIs Loss event monitoring RCSA

Moderate Moderate

IT disruption and data security

Failed or inadequate processes, systems and information technology

Internal controls Information Security Management

System (ISMS) BCMS KORIs monitoring Incident reporting

High Moderate

Compliance/Regulatory risk

Failure in meeting regulatory requirements

Compliance programme and examinations

KORIs monitoring Compliance risk scorecard

Moderate Moderate

Legal risk Inadequate/failure to comply with legal requirements

Legal clearance on all contractual obligations

KORIs monitoring

Moderate Low


Figure 26

Governance structure The Bank’s Operational Risk Management Framework (ORMF) focuses on providing a sustainable operations by addressing the existing and emerging operational risks and describes a formal governance structure.

Following policies supplement operational risk management policy framework:

Information Security Policy (ISP) Business Continuity Management System Policy (BCMSP) Fraud Risk Management and Whistle-blowing Policy Outsourcing Policy

ORMF is reinforced by the effective governance structure and Senior Management oversight. Responsibility for operational risk management lies with the Board with the assistance of the BIRMC.

Operational risk management structure

Capital computation for operational risk

Internal Loss Risk and

Control Self-

Assessment

Stress Testing

and Scenario Analysis

Key Operational

Risk IndicatorsExternal

Loss

Ope

rati

onal

Ris

k M

anag

emen

t Operational risk analysis, reporting, monitoring, and reviewing

Figure 27

Risk Management



ORMC is the Management Committee dedicated to oversee the operational risk management. Responsibility of designing, implementing, and continuous reviewing of the ORMF lies with the Operational Risk Management Unit (ORMU) of RMD. The responsibilities of ORMU include:

Reviewing/updating policies Operational risk assessment using RCSA, KORIs and

loss event data Monitoring implementation of BCMS Monitoring ISMS Monitoring the risk of outsourcing activities New products/process reviews Reporting to ORMC and Board through BIRMC

Operational risk management process The Bank takes a comprehensive approach to manage operational risk in all operational areas. Operational risk derives from people, processes and systems in the Bank’s operations and/or from external events.

Operational risk profile is defined in comparison to the Bank’s risk appetite and risk management is practised and made part of the risk culture of the Bank. Effectiveness of the processes depends on the commitment of all levels including the Board and the Senior Management.

Branches and divisional staff are the primary owners of operational risk. They are provided with adequate training which assist in identifying inherent risks in their area of responsibility. System controls, access controls, segregation of duties, clear lines of authority and responsibility, dual checks through authorisation and verification of transactions, physical controls over assets, proper record keeping, reconciliations, audit trails and audit logs are parts of the internal control structure, which is the base for operational risk management.

ORMU of the RMD identifies the risks with the intention of implementing corrective actions to address process and control deficiencies.

The Bank uses different tools and techniques to manage and minimise operational risk exposures.

Loss event data collection and analysis Basel Accord defines the loss data base as a key component of sound operational risk management and one of the criteria to be met for being eligible to use advanced capital calculation models.

The Bank’s loss event data collection process captures both internal and external loss event data. The Bank has a documented procedure for identification, collection and recognition of internal loss data from all geographic locations to facilitate timely regulatory reporting and recognition. Further, the Bank’s external loss event data base captures operational loss events published by similar institutions.

Collected data is classified into Basel Level II loss event categories and analysed to identify the nature, root causes and the probability of occurrence to take process improvements, and risk mitigation actions.

In the year 2018, there was a high frequency of business disruptions and system failures which is inherent to a service provider in an automated environment. Internal frauds reported the highest severity during the year. Apart from the internal controls in place, the Bank has in place a fraud risk management and whistle-blowing process to manage fraud risk.

Frequency of loss event data %

2017 2018

EFIF EPWS EDPMDPA BDSFCPBP

12 9

20 21

1622

4650

50

40

30

20

10

0

IF – Internal FraudEF – External FraudEPWS – Employment Practices and Workplace SafetyCPBP – Clients, Products and Business PracticesDPA – Damage to Physical AssetsBDSF – Business Disruption and System FailuresEDPM – Execution, Delivery and Process Management

2 2

Figure 28

Risk Management



Severity of loss event data %

2017 2018

EFIF EPWS EDPMDPA BDSFCPBP

75

60

45

30

15

0

69

17 19

10

6810 5

IF – Internal FraudEF – External FraudEPWS – Employment Practices and Workplace SafetyCPBP – Clients, Products and Business PracticesDPA – Damage to Physical AssetsBDSF – Business Disruption and System FailuresEDPM – Execution, Delivery and Process Management

2

Figure 29

Operational losses for the financial year 2018 was 0.16% of the average audited gross income for last three years, which is far below the internal alert level. The trend line demonstrates the Bank’s consistency in maintaining losses at minimal levels over the last five year period.

Actual operational losses against risk appetite and tolerance limit %

Actual Risk appetite level Risk tolerance level

2014 2015 201820172016

2.50

2.00

1.50

1.00

0.50

0

Figure 30

Key operational risk indicators monitoring KORIs are used to enhance the risk monitoring and risk reporting as those demonstrate the changes in risk factors in terms of frequency and impact. KORIs measure the potential risk related to a specific action and act as an early warning system to alert the Bank’s financial, operational, reputational, compliance, or strategic issues.

The Bank’s KORIs dashboard covers key business operations and support services of the Bank to identify and assess operational risk profile in a risk matrix covering Audit Issue Management, Business Continuity Management, Information Security Management, Product Quality, Process Quality and Compliance. KORIs are defined under each area to assess the risk based on predefined threshold limits. These threshold limits are revised annually or more frequently considering the changes in operational environment.

ORMU monitors the operational risk profile using KORIs and reports to ORMC and the Board through BIRMC.

Risk and control self-assessment RCSA forms an integral element of the overall operational risk framework, as it provides an opportunity to the Bank to integrate and coordinate its risk identification and risk management efforts to improve understanding, control and oversight of its operational risks. Underlying assumption in RCSA is that, business process owners (First Line of Defence) are in a best position to understand their own risks. This helps in raising awareness on risks that need immediate attention and to prioritise addressing operational weaknesses in a structured manner.

RMD Coordinates with the process owners to conduct RCSA in critical functions to identify process level risks and to update the Risk Register of the Bank at process level.

Customer complaints management Customer complaint management process of the Bank includes recording and responding within the benchmark time upon receipt of a complaint to ensure an effective customer service.

ORMU considers customer complaints as a source of identifying operational weaknesses and risks in the Bank’s operations. Customer complaint data are analysed periodically and relevant findings are reported to ORMC to take further risk mitigation actions.

Risk Management



New product and process risk assessment The Bank has a streamlined process for new product launching and reviewing of the existing products. This process ensures minimising of operational risk involved in the product and the related operational activities.

ORMU assesses the operational risk from new products, channels and processes prior to introducing/implementing them within the Bank. Post-introduction/implementation reviews are conducted by the ORMU to further minimise the operational risks.

Information security risk management Technological advancements within the financial service systems has changed the Bank’s business model to a greater extent. Information security management governance framework stipulated in Board-approved ISP provides the background to establish a safe banking service to customers in terms of accuracy, control, integrity, and confidentiality of the information.

Internally the Bank has put in place a Board-approved ISP to protect the Bank’s critical information assets.

Accordingly, NSB’s improved ICT infrastructure and procedures ensure the Information Security Risk Management in prudent manner.

Further steps are taken to comply with the Baseline Security Standards (BSS) and to obtain ISO certification in ISMS (ISO 27001:2013) with the assistance of industry expertise. This process is undertaken by Information Security Unit, monitored through the ITSC and ORMC.

Key areas of information security risk management process

Regulatory Change

Management

Policy Procedure

management

Evidence Management

Risk Assessment

Training

Compliance Management

Figure 31

Business continuity management system BCMSP recognises that products, operations and IT enable services must be continuously delivered without interruption. Business continuity management framework approved by the Board addresses resources and information needed to deal with emergencies such as natural disasters, accidents, power and energy disruptions, communications, transportation, safety and service sector failure, environmental disasters such as pollution and hazardous materials spills, cyberattacks and hacker activities.

Periodical testing of the same will enable to recap weaknesses of the existing plan for further improvements. BCMS minimises financial, operational, and reputational losses to the Bank.

Business continuity management process

Top level

commitment

Initiate the management

process

Identify threats

and risks

Risk assessment

Business Impact

Analysis (BIA)

Develop strategies

Develop and implement

the plan

Test exercise and maintain

the plan

Figure 32

Risk Management



Risk transfer Outsourcing is used as an effective cost saving and a risk transfer strategy. The Bank’s outsourcing operations are conducted in accordance with the Board approved outsourcing policy and other regulatory requirements.

The risk arising from outsourcing of business operations are managed by the Outsourcing Monitoring Unit of the Administration Division.

The Bank conducts comprehensive due diligence exercises to ensure the service providers’ capability to perform the activities outsourced. ORMC monitors the effectiveness of the outsourcing function and risk management practices conduct by the Administration Division.

Insurance plays a key role as an operational risk mitigant to transfer key insurable risk to an insurance service provider. Insurance policies are used to cover “low frequency high impact” events such as damage to physical assets due to natural disasters and fraudulent activities etc.

The adequacy of the insurance policies are continuously reviewed considering the existing and emerging risks to the Bank. Insurance function is centralised within the Administration Division. Effectiveness of insurance processes are monitored by ORMC.

Legal risk Basel Accord defines legal risk as a part of operational risk. Legal risk includes, but not limited to risk of losses due to inaccurately drafted contracts and their execution, absence of written agreements or inadequate agreements resulting in fines, penalties, and punitive damages. Legal risk is managed through:

Ensuring all applicable laws are fully taken into consideration in business operations when entering into contractual relationships with third parties such as customers or service providers

Ensuring all such contractual relationships are supported by required documentation

Establishing mechanisms to ensure conformity to laws and regulations when introducing/reviewing products and processes.

The responsibilities of managing legal risk is delegated to the business owners with the guidance of Legal Division. Legal Division engages in strategic management of legal risk of the Bank.

ORMU monitors the plausible operational loss events arising due to legal processes and systems on a periodical basis and reports to ORMC.

Compliance risk Compliance risk is directly resulted from non-compliance with applicable laws and regulations, code of conduct, and standards of practice in the banking industry. As such, the Compliance Division headed by the Compliance Officer directly reports to the Board through BIRMC and takes measures to mitigate the compliance risk of the Bank.

Compliance risk management process

Policies and

procedures

Assessing and

monitoring

Oversight and

leadership

Reporting and

investigating

Education and

trainingRisk

assessment

Response and

prevention

Figure 33

Risk Management



Reputational risk Reputation risk is the risk of adversities to earnings or solvency of the Bank due to negative stakeholder perception on business practices and financial condition. Management of reputational risk is highly important for financial institutions to maintain the public confidence in its operations. Reputational risk is broadly managed through systems and controls adopted for all other risks as reputational risk is driven by a wide range of other business risks which are managed by the policies, procedures, code of conduct, and business ethics.

The Bank has a zero risk appetite for reputational losses. Thus, RMD closely monitors the reputational vulnerabilities using tools such as KORIs, and customer complaint analysis. A Scorecard based model is used to assess the reputational risk within the ICAAP.

Strategic risk Strategic risk can be considered as the risk of loss arising due to unsuccessful business plan or inability to implement suitable business plan, failure to respond promptly to the changes in the business environment and inadequate resource allocation causing adverse impact on earnings and capital of the Bank. Missing out on potential upside opportunities can also be considered under strategic risk.

Responsibility for strategy development rests with the divisional heads through the strategic planning and budgeting process which aligns NSB’s vision, mission and the risk appetite. Strategic risk could arise due to worsening of general economic and market conditions locally and globally. The inputs from the Research Division are incorporated in formulating business strategies for the Bank.

The Board has the oversight responsibility towards the strategic risk of the Bank, which is monitored by the Senior Management through frequent reviews. A scorecard based model is used to assess the strategic risk within the ICAAP.

Capital managementThe Bank requires a strong capital position in order to satisfy regulatory capital requirements, provide financial security to its depositors/creditors, maintain leeway for future business expansion and generate adequate return to its shareholders.

Shareholders’ equity includes ordinary shares issued to the Government of Sri Lanka, retained earnings and reserves. The shareholders’ equity increased by Rs. 2.7 Bn. during the year which was transferred from unclaimed deposits reserve.

Managing capital is an integral part of the risk management framework to assure resilience of the Bank while generating shareholder return. Capital management process is in line with the guidelines issued by the CBSL.

Minimum capital requirements and buffers – Pillar I The Banking Act Direction No. 01 of 2016, introduced capital requirements under Basel III for licensed banks commencing from 1 July 2017 with specified timelines to increase minimum capital ratios which is to be fully implemented by 1 January 2019.

The Bank achieved the regulatory minimum requirements for capital adequacy during the year 2018. Common Equity Tier 1 (CET1) ratio increased during the year to 13.32% as at 31 December 2018, from 11.93% reported as at 31 December 2017. In the absence of qualifying additional Tier 1 capital instruments, the Bank’s CET1 ratio is equal to Total Tier 1 Capital ratio.

The Bank took initiatives to monitor and maintain the Risk- Weighted Assets (RWA) within the risk appetite levels. Total Capital ratio increased to 16.14% as at 31 December 2018 against 15.31% reported as at 31 December 2017.

The Bank’s subsidiary, NSB Fund Management Company contributes positively to the CAR at Group level. At Group level, CET 1/Tier 1 Ratio is 14.14% and Total Capital ratio is 16.88% as at 31 December 2018.

Composition CET1/Tier 1 and Total Capital % Rs. Mn.

Bank (%) Group (%) Dividend Payment (Rs. Mn.)

CET 1/Tier 12018

Total Capital 2017

CET 1/Tier 12017

Total Capital 2018

6,250

5,000

3,750

2,500

1,250

0

20

16

12

8

4

0

Figure 34

Risk Management



The Bank’s total CAR is below the risk appetite level during the year 2018. As the 100% State Owned savings bank, there are limited options available to raise capital externally. The only regulatory capital instrument available under Basel III is the shares issued to the Government of Sri Lanka.

According to the National Savings Bank Act No. 30 of 1971, the Bank cannot raise Tier 2 capital that fulfils criteria to qualify as regulatory capital under the Basel III guidelines. Hence, the prime source to augment the capital is retained earnings. The main reasons for not achieving the target level of capital is the reduction in profit levels due to the economic and market conditions that prevailed and the legislative change.

The removal of Withholding Tax (WHT) deduction on interest/discount paid to any person on Security or in Treasury Bond or Treasury Bill in new Inland Revenue Act No. 24 of 2017 and the introduction of “Debt Recovery Levy” in Finance Act No. 35 of 2018 caused a significant adverse impact on the profitability of the Bank.

Considering the prevailing capital constraints, the Bank strives to manage capital more efficiently by achieving the optimum balance between performance and risk and conduct stringent monitoring of the RWA mix, and changes in the risk profile.

The Bank has intimated the stakeholders on the increased demand for capital imposed by Basel III and with the intention to obtain stakeholder backing to improve capital level.

Regulatory ratios – Actual vs. regulatory minimum

Actual as at 31 December 2018 Actual as at 31 December 2017

Ratios (%) Bank Group Bank Group Regulatoryminimum

1 December 2017

Regulatoryminimum

1 December 2018

Regulatoryminimum

1 December 2019

CET1 plus CCB and capital surcharge for D-SIBs 13.32 14.14 11.93 12.65 6.25 7.375 8.50

Tier1 plus CCB and capital surcharge for D-SIBs 13.32 14.14 11.93 12.65 7.75 8.875 10.00

Total capital plus CCB and capital surcharge for D-SIBs 16.14 16.88 15.31 16.00 11.75 12.875 14.00

Table 12

Internal Capital Adequacy Assessment Process – Pillar II The ICAAP comprises risk appetite, stress testing, and capital planning concepts along with a sound risk management framework to capture all material risks. This enables combining the business performance, risk management action and risk sensitive capital in a more rational manner to establish a level of internal capital commensurate with the Bank’s risk profile.

Board approved ICAAP Policy is in line with the CBSL directions on Basel III Pillar II issued to banks on conducting Supervisory Review and Evaluation Process (SREP) and international best practices.

The Bank’s ICAAP is governed by four principles which are fundamentals for the Bank and the regulator. The process involves integrating risk to decision making, comprehensive risk assessment, reviewing of internal controls, monitoring, reporting and stress testing risks with the oversight responsibility of the Board.

Risk assessment captures both Pillar I and Pillar II risks. Pillar I risks deal with regulatory capital requirements whilst Pillar II risks deal with economic capital. The Bank uses both qualitative and quantitative approaches to assess Pillar II risks.

ICAAP promotes an integrated approach, combining risk management practices and strategic business planning to gain operational efficiencies, growth and solvency.

Risk Management



According to the ICAAP assessments, the Bank identified the capital requirement to cover the total risk profile of the Bank. Comprehensively documented ICAAP is discussed and approved by ALCO and the Board through BIRMC prior to submitting to the regulator.

Stress testing Stress testing is an integral part of ICAAP process. The stress testing framework is governed by the Board approved stress testing policy and guidelines issued by CBSL. NSB’s Stress Testing framework includes stress tests on all the material risks such as credit risk, interest rate risk in trading book and banking book, operational risk, liquidity risk, concentration risk and residual credit risk. The Bank has defined three levels of increasing adversity, i.e. minor, medium and major (or Low, Medium and High) for the stress testing purposes.

Stress testing provides understanding on ability of the Bank to withstand unforeseen scenarios of varying severity under adverse economic, political, and physical changes in the environment in which it operates. The Bank uses several stress testing techniques, such as scenario analysis, and sensitivity analysis.

The Bank uses sensitivity analysis to measure the impact of individual market factor movements on specific instruments or portfolios, including interest rates, foreign exchange rates and equity prices, such as the effect of a one basis point change in yield. This is mainly used to identify the impact on trading and banking books due to adverse interest rate fluctuations and reports are submitted to ALCO on a periodic basis. These reports are instrumental in asset and liability management, and pricing decisions of the Bank.

Sensitivity analysis – Assessment of yield curve risk in trading book – Government securitiesRs. ’000 FVTPL FVOCI Total

Unrealised gain/(loss) of G sec portfolio against cost at the end of 2018 (702,478.65) (117,010.39) (819,489.05)

Change in M2M value

100 bps increase in yield (547,129.69) (74,284.90) (621,414.59)

200 bps increase in yield (1,065,131.10) (145,527.81) (1,210,658.92)

100 bps decrease in yield 578,282.40 77,476.61 655,759.01

200 bps decrease in yield 1,189,918.70 158,305.09 1,348,223.79

Table 13

Sensitivity analysis – Interest Rate Risk in Banking Book (IRRBB)100bp rate shock on negative gaps

Up to 1month

1-3 months

3-6 months

6-12months

1-3 years

3-5 years

Over 5 years

Total

Stand-alone level RSA/RSL Gap (188,326) (234,376) (132,203) (176,260) 193,941 196,486 334,168 (6,570)

Impact on NII (Rs. Mn.) (1,806) (1,958) (833) (459) – – – (5,056)

Consolidated level RSA/RSL Gap (191,670) (246,064) (127,679) (177,213) 199,789 202,650 336,017 (4,170)

Impact on NII (Rs. Mn.) (1,838) (2,056) (805) (461) – – – (5,160)

Table 14

Risk Management



The results obtained from stress testing exercise is used to identify what might go wrong, how it might go wrong and how badly it affect the Bank. Analysis carried out based on stress testing results are reported to the process owners, management committees and BIRMC/Board to support proactive decision making.

Stress testing is also used as a tool to facilitate setting up risk appetite and tolerance limits, strategic planning, and capital planning.

Impact to the capital adequacy at different stress levels

Impact to CAR

Risk area Scenario Low%

Medium%

High%

Credit risk Credit risk – Increase in PD due to an economic down turn(Low 10% Medium 20% High 30%) (0.12) (0.24) (0.36)

Market risk Interest rate risk: Increase in market yield Low Assets 200bps, Liabilities 100bps Medium Assets/Liabilities 200bps High Assets 100bps, Liabilities 200bps

(7.67) (11.74) (12.12)

Equity price risk: Decline in market prices (Low 10%, Medium 20%, High 30%) (0.21) (0.42) (0.63)

FX risk: LKR depreciation (Low 10%, Medium 15%, High 20%) 0.05 0.07 0.09

Operational risk Increase in operational losses classified under Basel II loss event categories (0.02) (0.03) (0.05)

Table 15

Minimum disclosure requirements – Pillar III Minimum disclosure requirements were introduced by the CBSL within the Basel III Framework to allow the market participants to gauge the capital adequacy and risk exposures of the Bank.

Refer page 389 to 401 for minimum disclosure requirements as per Banking Act No. 1 of 2016.

Future Outlook Considering the upcoming challenges and risks in the banking operations and industry, NSB continues to strengthen Integrated Risk Management Framework to cover broad spectrum of emerging and existing risks.

Initiatives will be taken within the SBP to enhance customer service delivery by upgrading IT systems which will facilitate further strengthening of the internal control structure and risk management practices in compliant with the best practices in risk management and regulatory requirements.


Governance Financial Reports Supplementary InformationGovernance Financial Reports Supplementary Information

FinancialReports

228 229 236Financial Calendar



238 240 241Directors Statement on Internal Control Over Financial Reporting



243 245 247General Manager/CEO’s and Deputy General Manager’s (Finance and Planning) Statement of Responsibility



248 249 250Income Statement



252 256 258Statement of Changes in Equity





Financial Calendar 2018

Publication of Interim Financial Statements for the quarter ended 31 March 2018 31 May 2018

Publication of Interim Financial Statements for the quarter ended 30 June 2018 29 August 2018

Publication of Interim Financial Statements for the quarter ended 30 September 2018 29 November 2018

Publication of Financial Statements (Audited) for the quarter ended 31 December 2018 28 March 2019

Proposed Financial Calendar 2019

Publication of Interim Financial Statements for the quarter ended 31 March 2019 31 May 2019

Publication of Interim Financial Statements for the quarter ended 30 June 2019 30 August 2019

Publication of Interim Financial Statements for the quarter ended 30 September 2019 29 November 2019

Publication of Financial Statements (Audited) for the quarter ended 31 December 2019 31 March 2020

Financial Calendar



GeneralThe Directors of the National Savings Bank have pleasure in presenting their Integrated Annual Report on the affairs of the Bank together with the Audited Financial Statements of the Bank and Consolidated Financial Statements for the year ended 31 December 2018. We ascertain that it gives the strategic picture of the Bank’s business that explains how the Bank creates and sustains value over the years and in the future.

The Annual Financial Statements reviewed and recommended by the Board Audit Committee (BAC) were approved by the Board of Directors on 14 March 2019. The Audited Financial Statements were authorised to be issued on 14 March 2019. The Report also includes certain disclosures required to be made under the Banking Act No. 30 of 1988 and amendments thereto and the Banking Act Direction No. 12 of 2007 on Corporate Governance for Licensed Specialised Banks issued by the Central Bank of Sri Lanka (CBSL) and subsequent amendments thereto. The Annual Report and Financial Statements, together with the Auditor General’s Report will be submitted to the Minister of Finance, on or before 31 May 2019 as per Circular No. PED/27 of 27 January 2005, issued by the Director General of the Department of Public Enterprises to be placed before the Parliament of Sri Lanka.

National Savings Bank is incorporated in Sri Lanka by National Savings Bank Act No. 30 of 1971 and was granted the status of Licensed Specialised Bank in terms of Banking Act No. 30 of 1988. The Bank has been assigned AA+(lka) long-term credit rating by the Fitch Rating Lanka (Pvt) Ltd. It has also been awarded international credit ratings of B stable by Fitch Inc. and B stable by Standard and Poor’s Rating services.

Review of business

Principal activities of the Bank The principal activities of the National Savings Bank is promotion of savings among the people of Sri Lanka and profitable investments of savings so mobilised. Accordingly, during the year under review, the principal activities of the Bank were, retail banking, corporate banking, trade financing, treasury dealing and investments, correspondence banking and money remittance facilities, pawning, foreign currency operations and other financial services.

Vision, Mission, and Values The Bank’s Vision, Mission, and Values are given on the inner cover of this Annual Report. All permanent employees are being abided by the Code of Conduct of the Bank and the Government Oath with the view of maintaining the highest ethical standards in achieving the Vision and Mission of the Bank.

Government guarantee The Government of Sri Lanka guarantees the repayment of the monies deposited with the Bank together with interest thereon.

Subsidiary of the Bank Subsidiary NSB Fund Management Company Ltd., is the Bank’s only Subsidiary and the principal activity of the company is dealing in Government Securities as a primary dealer authorised by the Central Bank of Sri Lanka. Details of the transactions are given in Note 47 (b) to the Financial Statements.

Changes to the group structure The Bank invested an additional Rs. 800 Mn. in Subsidiary during the year 2018 and there were no significant changes in the nature of the principal activities of the Bank and the Group.

Review of business performance The overall review of financial performance of the Bank and the Group for the financial year 2018 are provided in the Chairman’s Message (page 10), General Manager/CEO’s Review (page 12). The “Management Discussion and Analysis” on pages 65 to 128 and Audited Financial Statements (page 248) provides a comprehensive review on key business lines and the state of affairs of the Bank and the Group. These reports form an integral part of the Annual Report.

Branch network expansions Widening the Bank’s presence in the island, two branches were added to the network during the year under review. At the end of the year the Bank has 255 branches in its network. The ATM network was further expanded enhancing customer convenience. The Bank installed 24 ATMs (21 CRMs and 3 ATMs) during the year across the island bringing out the total ATMs to 310 excluding peer banks’ ATMs through which customers of NSB can transact.





Preparation of Financial Statements The Financial Statements are prepared in accordance with the Sri Lanka Accounting Standards (SLFRSs/LKASs) laid down by The Institute of Chartered Accountants of Sri Lanka and comply with the requirements of Banking Act No. 30 of 1988 and amendments thereto and regulatory requirements inclusive of specific disclosures. The Financial Statements of the Bank and the Group for the year ended 31 December 2018 duly certified by the Deputy General Manager – Finance and Planning and approved and signed by the General Manager/CEO and two Directors including Chairman of the Bank are given on page 248 which form an integral part of the Annual Report of the Bank.

Accounting Policies and changes during the year The Bank and the Group prepared its Financial Statements in accordance with Sri Lanka Accounting Standards (SLFRSs/LKASs). The Bank and the Group have adopted SLFRS 9 – “Financial Instruments”, SLFRS 15 – “Revenue from Contracts with Customers” and SLFRS 7 – “Financial Instrument Disclosure” (amendments) from 1 January 2018. Due to the transition method chosen by the Bank and the Group in applying SLFRS 9, comparative information has been restated to reflect its requirements. The accounting policies adopted in preparation of Financial Statements are given on pages 258 to 276 in this Report.

Directors’ responsibilities for financial reporting The Directors are responsible for the preparation of the Financial Statements that will reflect a true and fair view of the state of affairs of the Bank as at 31 December 2018 and its profit for the year then ended. The Directors are of the view that the Financial Statements appearing on pages 248 to 257 have been prepared in conformity with the requirements of the Sri Lanka Accounting Standards (SLFRSs/ LKASs) and the Banking Act No. 30 of 1988 and its amendments, the NSB Act No. 30 of 1971 and amendments thereto. The Statement of Directors’ Responsibility for Financial Reporting appearing on page 236 of this Annual Report describes in detail the Directors’ responsibilities in relation to Financial Statements, which form an integral part of the Annual Report of the Board of Directors.

Auditors’ Report The Auditor General had carried out the audit of the Financial Statements of the Bank and the Consolidated Financial Statements of the Group for the year ended 31 December 2018. In 2018, the continuous audit was carried out throughout the year for the Bank and the NSB

Fund Management Company Ltd. Issues identified in their reports were submitted to the Management regularly for prompt action. Having confirmed the accuracy of the financial reporting, the Financial Statements, together with the necessary data and information were made available to the Auditor General for examination. The Auditor General’s opinion on the Financial Statements appears on page 245 of this Annual Report.

Future developmentsAn overview of the future developments of the Bank is given in the Chairman’s Message (page 10), General Manager/CEO’s Review (page 12) and the “Management Discussion and Analysis” on pages 65 to 128 in Integrated Annual Report 2018.

Gross incomeThe gross income of the Bank for 2018 was Rs. 111,902 Mn. (2017 – Rs. 107,996 Mn.) while the Group’s income was Rs. 112,760 Mn. (2017 – Rs. 108,235 Mn.). Analysis of the gross income are given in Note 3 to the Financial Statements.

Dividends and reserves

Results and appropriation The profit before income tax of the Bank and the Group amounted to Rs. 7,941 Mn. and Rs. 7,944 Mn. (2017 – Rs. 14,135 Mn. and Rs. 13,751 Mn.) respectively.

The profit after tax of the Bank and the Group stood at Rs. 4,500.1 Mn. and Rs. 4,500.2 Mn. respectively (2017 – Rs. 9,716.0 Mn. and Rs. 9,156.4 Mn.). Details of profit relating to the Bank are given in the following table:

2018Rs. Mn.

2017Rs. Mn.

Profit for the year after payment of all expenses and providing for depreciation, expected credit losses and contingencies before VAT, NBT, DRL and income tax 11,171 17,629VAT on financial services 2,578 3,083NBT on financial services 344 411Debt repayment levy (DRL) 308 –Provision for income tax 3,441 4,419Net profit after tax 4,500 9,716Other comprehensive income for the year, net of tax (1,320) 2,693

Total comprehensive income for the year 3,180 12,409




2018Rs. Mn.

2017Rs. Mn.

Appropriations:Transfer to statutory reserve (225) (480)Contribution to the National Insurance Trust Fund (NITF) (45) (96)Contribution to the Consolidated Fund/dividend (500) (5,111)Transfers to reserves 2,410 6,722

Provision for taxation The Income Tax Rate applicable for the Bank on its operation is 28%, the Bank’s operations are liable for Value Added Tax (VAT) at the rate of 15% and Nation Building Tax (NBT) at the rate of 2% on financial services. The Bank is also liable for debt repayment levy (DRL) at 7% on financial services with effect from 1 October 2018.

The Bank provided deferred tax on all known timing differences under the liability method in accordance with Sri Lanka Accounting Standard (LKAS 12) – “Income Taxes”. Information of income tax expenditure and deferred taxation are given in Notes 13 and 29 respectively on pages 286 and 317.

Dividends, taxes and levies/contribution to the Nation The Bank contributed Rs. 7,536 Mn. by way of taxes and levies to the Government in 2018 (2017 – Rs. 13,440 Mn.). This consisted of:

2018Rs. Mn.

2017Rs. Mn.

Income tax 3,441 4,419Value added tax 2,578 3,083Nation building tax 344 411Special fee 320 320Debt repayment levy 308 –Contribution to the Consolidated Fund 500 5,111Contributions to National Insurance Trust Fund 45 96

Total contribution to the Nation 7,536 13,440

Reserves The total reserves of the Bank stood at Rs. 34,333 Mn. as at 31 December 2018 (2017 – Rs. 32,396 Mn.). The Bank’s reserves consist of:

2018Rs. Mn.

2017Rs. Mn.

Statutory reserve fund 3,228 3,003Revaluation reserve 7,793 7,793Retained earnings 4,622 1,103Other reserves 18,690 20,497

Total reserves 34,333 32,396

Information on changes of reserves is given in the Statement of Changes in Equity on page 252.

Service charges to Postmaster General (PMG)

Service charges to the PMG for 2018 amounting to Rs. 147 Mn. has been provided for on the same basis as in 2017.

Retirement benefits and obligationsThe Bank maintains two pension funds namely: Staff Pension Fund I and Staff Pension Fund II. Further the Bank maintains a Widows’/Widowers’ and Orphans Pension Fund as well as a post-employment medical scheme. Details are given on pages 322 to 330 in Notes to the Financial Statements.

Property, plant and equipment and capital expenditure

The total net book value of property, plant and equipment of the Bank and the Group as at the year end 2018 was Rs. 13,466 Mn. and Rs. 13,469 Mn. respectively (2017 – Rs. 12,396 Mn. in the Bank and Rs. 12,399 Mn. in the Group). Details are given in Notes to the Financial Statements as follows:

Note 26 to the Financial Statements: Property, plant and equipment on page 310.

Note 28 to the Financial Statements: Goodwill and intangible assets on page 316.

Note 46.1 to the Financial Statements: Capital commitments on page 336.




The total capital expenditure incurred by the Bank on the acquisition of property, plant and equipment and Intangible Assets (including capital work-in-progress) during the year amounted to Rs. 2,067 Mn. (2017 – Rs. 1,109 Mn.) and Group amounted to Rs. 2,067 Mn. (2017 – Rs. 1,111 Mn.), the details of which are given in Notes 26. (a) and 26. (b) to the Financial Statements on pages 312 to 314 of this Annual Report.

Market value of freehold propertyThe Bank carried out a revaluation on entire class of freehold land and buildings of the Bank in December 2017 by professionally qualified independent valuers and brought in to the Financial Statements in the same year. The revaluation process was carried out as per the Central Bank of Sri Lanka Direction No. 1 of 2014 on “Valuation of Immovable Property of Licensed Specialised Banks”. The Board of Directors is on the view that revalued amounts are not in excess of the current market values.

Stated capital and shareholding

Stated capital The authorised share capital of the Bank is Rs. 10 Bn. which is made of one billion ordinary shares of Rs. 10.00 each. The Bank has issued 270 million ordinary shares of Rs. 10.00 capitalising unclaimed deposit reserve to the Secretary to the Treasury on 31 December 2018. The issued share capital of the Bank as at 31 December 2018 stood at Rs. 9.4 Bn. (2017 – Rs. 6.7 Bn.) The Secretary to the Treasury in his official capacity holds the entirety of the issued share capital. The details are given in Notes 41 and 44 to the Financial Statements on page 332 and 333 of this Annual Report.

Shareholding The Government of Sri Lanka is the sole shareholder of the National Savings Bank.

Borrowed capital The Bank issued an international bond for a value of USD 250 Mn. in September 2014. This is in addition to the Bond of USD 750 Mn. issued in September 2013 which matured by September 2018. This was the highest amount of foreign funds raised in a single issue by a bank so far from foreign investors. Information of borrowed capital is given in Note 35.1 respective on page 321 of this Annual Report.

Issue of subordinated debenture Subordinated liabilities of the Bank as at 31 December 2018 consisted Rs. 6 Bn. rated, unsecured subordinated and redeemable debentures of Rs. 100.00 issued on 29 December 2016 on private placement. This debenture is eligible for the Tier 2 Capital of the Bank. The details of debentures outstanding as at the date of financial position are given in Note 35.2 of the Financial Statements on page 322 to on subordinated liabilities.

Foreign currency borrowingThe Bank has obtained a term loan of USD 100 Mn. from Commerzebank Finance and Covered Bond S.A. in October 2018. The details of the foreign currency borrowing is given in Note 31.1 of the Financial Statements on page 319.

Share informationThe basic earnings per share and net assets value per share of the Bank 2018 were Rs. 6.72 (2017 – Rs. 15.67) and Rs. 46.52 (2017 – Rs. 58.35) respectively for the period under review. The details are given in Note 14 on weighted average number of ordinary shares for basic and diluted earnings per share on page 288 and Note 48 on net assets value per ordinary share on page 341.

Corporate social responsibilityThe programmes carried out under the Corporate Social Responsibility (CSR) are detailed on pages 106 to 119 in this Annual Report.

Board of Directors

Information of the Directors during the year 2018 The Board of Directors comprises seven Directors including the Chairman and two ex officio members representing the Ministry of Finance and the Postmaster General as per the Section 11 (1) of the NSB Act No. 30 of 1971 as amended by Act No. 28 of 1995. The Minister of Finance appoints the Chairman and other four Directors.




The following were the Directors during the year 2018.

Name Date of appointment Membership status

Mr R M P Rathnayake, Chairman (up to 19 February 2019) 19 November 2018 NED/NIDMr Aswin De Silva, Chairman (up to 12 November 2018) 9 February 2015

(Assumed duties on 4 March 2015) NED/NIDMr D L P R Abeyaratne, Director (Ex officio Director) (up to 11 July 2018)

9 February 2012 (Acting Chairman from 23 May 2012 to 5 August 2012) Reappointed on 10 March 2015 NED/NID

Mr S Naullage, Director (up to 31 December 2018) 9 February 2015 NED/NIDMr Ajith Pathirana, Director (up to 19 July 2018) 20 March 2015 NED/NIDMr A K Seneviratne, Director (Ex officio Director) (up to 28 February 2019) 27 May 2015 NED/NIDMr Anil Rajakaruna, Senior Director (up to 31 December 2018) 2 November 2015 NED/NIDMr Chandima C Hemachandra, Director (up to 19 July 2018) 2 November 2015 NED/NIDMs Shehara Jayawardana, Director (up to 12 November 2018) 19 July 2018 NED/NIDDr D Shanmugasundaram, Director 19 July 2018 NED/NIDMr U G R Ariyaratne, Director (Ex officio Director) 31 August 2018 NED/ID

NED – Non-Executive Director, NID – Non-Independent Director, ID – Independent Director

The Board of Directors has also appointed two other voluntary Board Subcommittees namely; Board Credit Committee and Board Information Technology Strategy Committee to assist the Board in discharging its duties. The Terms of Reference of these Board Subcommittees conform to the recommendations on corporate governance made by regulatory bodies such as CBSL and voluntary codes to the Bank issued by CA Sri Lanka.

The composition of both mandatory and voluntary Board Subcommittees as at 31 December 2018 and the details of the attendance by Directors at meetings are disclosed in pages 152 and 153 and the Reports of these Subcommittee are given on pages 179 to 193.

Directors’ meetings The details of Directors’ meetings which comprise Board meetings and Board Subcommittee meetings and the attendance are given in the Corporate Governance Report on pages 152 and 153 of the Annual report.

Directors’ interests in contracts Directors’ interests in contracts with the Bank, both direct and indirect are referred to in Note 47 (d) to the Financial Statements on page 340. These interests have been declared at the Board meetings. The Directors do not have any direct or indirect interest in other contracts or proposed contracts with the Bank.

The details on current composition of the Board and the profiles of the members are given on page 152 and 131 of the Annual Report.

List of Directors of the Subsidiary of the Bank Names of the Directors NSB Fund Management Co. Ltd. are as follows:

Mr H N J Chandrasekara – Chairman (w.e.f. 14 March 2019)Mr S D N Perera – DirectorMr Ajith Pathirana – Director (w.e.f. 14 March 2019)Mr D S Kudahetty – DirectorMs R E Dangalla – DirectorMr K D A G Wickramasinghe – DirectorMr K D M P Weerasinghe – Director

Board subcommittees The Board of Directors while assuming the overall responsibility and accountability has also appointed four mandatory Board Subcommittees namely; Board Audit Committee, Board Human Resource and Remuneration Committee, Board Nomination Committee, Board Integrated Risk Management Committee as required by the Banking Act Direction No. 12 of 2007 on “Corporate Governance for Licensed Specialised Banks in Sri Lanka” issued by the CBSL to ensure oversight control over affairs of the Bank.




Directors’ interest in debentures issued by the Bank There were no debentures registered in the name of any Director.

Directors’ remuneration and other benefits Details of Directors’ emoluments and other benefits in respect of the Bank and the Group for the financial year 2018 are given in Note 47 (d) to the Financial Statements on page 340.

Related party transactions The Directors have also disclosed the transactions if any, that could be classified as related party transactions in terms of Sri Lanka Accounting Standard (LKAS 24) – “Related Party Disclosures” which is adopted in the preparation of the Financial Statements. Those transactions disclosed by the Directors are given in Note 47 (e) on page 340 to the Financial Statements forming part of the Annual Report of the Board of Directors.

Environmental protectionThe Bank and the Group have not, to the best of their knowledge, engaged in activity, which was detrimental to the environment. Specific measures taken to protect the environment are given on pages 120 to 124.

Statutory paymentsThe Directors, to the best of their knowledge and belief, are satisfied that all statutory payments due to the Government, other regulatory bodies, and in relation to the employees have been made in time.

Events after the reporting dateNo circumstances have arisen since the reporting date which would require adjustments to, or disclosure in the accounts, other than those disclosed in Note 50 to the Financial Statements on page 342.

Going concernThe Board of Directors have reviewed and satisfied that the Bank has ample resources to continue its operations in the foreseeable future. Furthermore, the Directors are not aware of any material uncertainties that may cast significant doubt upon the Bank’s ability to continue as a going concern, such as restrictions or plan to curtail operations.

Risk management, internal controls and management information systems

The Board of Directors assumes overall responsibility for managing risk. For this purpose, the Board of Directors has instituted and implemented an effective and comprehensive system of internal controls and management information systems in the Bank. Internal control systems have been redesigned to mitigate the risks to which the Bank is exposed, to provide reasonable assurance against material misstatements or loss. There is an ongoing process for identifying evaluating and managing the risks that are faced by the Bank. The specific measures taken by the Bank in mitigating the risk are detailed on pages 194 to 226 in Risk Management Report and Board Integrated Risk Management Report on pages 187 to 189 of this Report.

Appointment of Auditors their remuneration

The Auditor General is the Auditor of National Savings Bank in terms of the provisions of Article 154 of the Constitution of the Democratic Socialist Republic of Sri Lanka.

The expenses incurred in respect of audit fees and other services rendered during the accounting period of 2018 are given in Note 12 to the Financial Statements on page 286.

Regulatory supervisionAs a regulatory supervisory body, the Central Bank of Sri Lanka (CBSL) carried out a periodic examination of the records and affairs of the Bank to ascertain compliance with directives issued by the Central Bank of Sri Lanka. It also determines whether required financial indicators are being maintained at the required level so that the interests of the stakeholders, particularly depositors are safeguarded.

Corporate governanceThe Directors have placed emphasis on conforming with, the best Corporate Governance Practices and Procedures in managing the Bank. Accordingly, the Directors have declared that:

(a) The Bank has complied with applicable laws and regulations in conducting its business and have not engaged in any activity breaching the relevant laws and regulations.

(b) They have declared all material interest in contracts involving the Bank and refrained from involving any matter which they have a material interest.




(c) The business is a going concern and the Board of Directors have reviewed the Strategic Business Plan and is satisfied that the Bank is having adequate resources to accelerate the future momentum of NSB in foreseeable future. Thus, the Financial Statements of the Bank and its Subsidiary are prepared based on the going concern assumption.

(d) The Bank has disclosed in the Financial Statements on Related Party Transactions.

(e) The Bank has conducted a review on internal controls which covers financial, operational and compliance controls, risk management and have obtained a reasonable assurance of their effectiveness and adherence.

Focus on new regulationsThe Bank has conducted the impact assessment of SLFRS 16 on “Leases” which will be effective from 1 January 2019 and developed required models to assess the impact under the new standard.

SustainabilityWhen formulating its business strategies, the Bank has considered the sustainability aspects, the details of which are disclosed in pages 125 to 128 under GRI Index.

Human resourcesThe Bank continued to develop and maintain dedicated and highly-motivated employees who are committed to create sustainable value through high quality service. Significant investments have been made in the development of quality of Human Capital of the Bank. The policies and procedures adopted by the Bank to upgrade Human Capital is described in this Annual Report 2018 on page 93.

Outstanding litigationIn the opinion of the Directors and the Bank’s lawyers, outstanding litigation against the Bank disclosed in Note 49 to the Financial Statements on page 341 will not have a material impact on the financial position of the Bank or its future operations.

Acknowledgement of the contents of the report

The Board of Directors hereby acknowledge the contents of this Annual Report.

By Order of the Board,


Chairman

M A P Muhandiram

Secretary to the Board




The responsibility of the Directors in relation to the Financial Statements of the National Savings Bank (the Bank) and the Consolidated Financial Statements of the Bank and its Subsidiary (the Group) is set out in this Statement.

Financial StatementsThe Directors of the Bank are responsible for ensuring that the Bank and the Group keep proper books of accounts of all the transactions and prepare Financial Statements in accordance with Generally Accepted Accounting Principles, Sri Lanka Accounting Standards and Sri Lanka Financial Reporting Standards that give a true and fair view of the financial position of the Bank and the Group at the end of each financial year in compliance with the relevant statutory requirements. The Financial Statements comprise, the Statement of Financial Position as at 31 December 2018, the Income Statement and the Statement of Comprehensive Income, Statement of Changes in Equity and Statement of Cash Flows for the year ended 2018 and Significant Accounting Policies and Notes thereto.

Accordingly, the Board of Directors confirm that, the Financial Statements of the Bank and its Subsidiary give a true and fair view of the:

1. Financial Position of the Bank and its Subsidiary as at 31 December 2018; and

2. Financial performance of the Bank and its Subsidiary for the financial year then ended.

In preparing these Financial Statements, the Directors are required to ensure that:

1. The accounting policies adopted to prepare the Financial Statements which are depicted in pages 258 to 276 were appropriate according to the existing financial reporting framework. These policies were consistently applied and material departures if any have been adequately disclosed.

2. Reasonable and prudent judgements have been made where necessary to ensure the proper reflection of the form and substance of transaction when preparing the Financial Statements.

3. The Financial Statements of the Bank and the Group are prepared in accordance with the Sri Lanka Accounting Standards (SLFRSs/LKASs).

As per the provisions of the Finance Act No. 38 of 1971, the Banking Act No. 30 of 1988 and Section 7 (i) of NSB Act No. 30 of 1971, the Board of Directors is required to control and administer the affairs and the business of the Bank.

The Board of Directors ensures that the Financial Statements comply with the prescribed format issued by the Central Bank for Licensed Banks.

The Board of Directors are also responsible for ensuring that proper accounting records which correctly record and explain the Bank’s financial position, with reasonable accuracy at any point of time is determined by the Bank, enabling preparation of the Financial Statements.

The Board of Directors accepts the responsibility for the integrity and objectivity of the Financial Statements presented in this Annual Report (Financial Statements are exhibited on pages 248 to 257). The Financial Statements for the year 2018 prepared and presented in this Annual Report are consistent with the underlying books of accounts and are in conformity with the requirements of Sri Lanka Accounting Standards, Sri Lanka Accounting and Auditing Standards Act No. 15 of 1995 and Banking Act No. 30 of 1988 and amendments thereto.

Internal controlsThe Board of Directors has been responsible for taking reasonable measures and care to safeguard the assets of the Bank and the Group, detect frauds and other irregularities and has also instituted an effective and comprehensive system of internal controls and an effective system of monitoring its effectiveness which includes internal audit and applied and practiced within predetermined procedures and limits. The Directors ensure that the Financial Statements are reviewed by them directly at their regular meetings and also through the Board Audit Committee. The Directors’ Statement on Internal Control Over Financial Reporting is given on page 238 of this Annual Report and Auditor General’s Assurance Report on the Bank’s Internal Control is given on page 240.

Audit reportThe Auditor General has been made available with all records of the Bank including the Financial Statements by the Board of Directors and provided every opportunity to undertake the inspections they considered appropriate all of which the Auditor General’s Department has examined and have expressed the Auditor General’s opinion which appears as reported by him on page 245 of this Annual Report.





Compliance reportThe Directors confirm that to the best of their knowledge and belief that all taxes, duties and levies payable by the Bank and the Group and all contributions and taxes payable on behalf of and in respect of employees of the Bank and the Group, and all other known statutory dues to the Government and the other relevant regulatory and statutory authorities which were due and payable by the Bank and the Group as at the date of Statement of Financial Position have been paid or where relevant provided for. Further, the Directors have confirmed that after considering the financial position, operating conditions, regulatory and other factors required to be addressed in the “Code of Best Practice on Corporate Governance” issued by CA Sri Lanka.

The Bank and the Group have adequate resources to continue in operation for the foreseeable future and to justify the application of the going concern basis in preparing these Financial Statements and the Board has taken all necessary measures to comply with the directives issued by the Central Bank of Sri Lanka.


M A P Muhandiram

Secretary to the Board




ResponsibilityThis report has been issued in line with the Banking Act Direction No. 12 of 2007, Section 3 (8) (ii) (b), and prepared based on principles D.1.5 of Code of Best Practice on Corporate Governance 2017 issued by The Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka) (Code) the Board of Directors presents this report on internal control.

The Board of Directors (The Board) is responsible for ensuring that an adequate and effective system of internal control is established and maintained at the National Savings Bank. However, such a system is designed to manage the Bank’s significant risk areas within acceptable risk parameters, rather than eliminating the risk of failure to achieve business objectives of the Bank. Accordingly, the system of internal controls can only provide reasonable but not absolute assurance against material misstatement of management and financial information and records or against financial losses or frauds.

The Board has established an ongoing process for identifying, evaluating and managing the significant risks faced by the Bank and this process includes enhancing the system of internal controls as and when there are changes to business environment or regulatory requirements and other guidelines. The process is regularly reviewed by the Board and confirmed the compliance with the Guidance for Directors of the Bank’s on the Directors’ Statement on Internal Controls issued by CA Sri Lanka. The Board has assessed the internal control system taking into principles for the assessment of internal control system as given in that guidance.

The Board is of the view that the system of internal controls in place is sound and adequate to provide reasonable assurance regarding the reliability of financial reporting, and the preparation of financial statements for external purposes and is in accordance with the relevant accounting principles and regulatory requirements.

The Management assists the Board in the implementation of the Board’s policies and procedures on risk and control by identifying and assessing the risks faced by the Bank, and in the design, operation and monitoring of suitable internal controls to mitigate and control these risks.

Key features of the process adopted in applying and reviewing the design and effectiveness of the internal control system on financial reporting

The Board has also put in place the system of reviewing the design and the effectiveness of system of internal control periodically. The key processes, among other things include the following:

The Board Subcommittees have been established with defined scopes and functions to assist the Board in ensuring the effectiveness of the Bank’s operations and that the Bank’s operations are in accordance with the corporate objectives, strategies, and policies and business directions that have been approved.

The Board Audit Committee (BAC) reviews periodically the internal control issues identified by the Internal Audit Division of the Bank, the External Auditors, Regulatory Authorities and corrective actions taken to rectify such deficiencies. The Auditor General carries out the external audit of the Bank. The Superintendent of the Government Audit is generally invited to BAC meetings.

The BAC reviews the internal audit function with particular emphasis on the scope of audits and quality of the same. The activities attended to by the BAC during the year 2018 are set out in the Board Audit Committee Report appearing on page 179 of this Annual Report. The Internal Audit Division of the Bank carries out audit of branches, divisions and other units as per the Annual Audit Plan. The frequency of audit is determined by the level of risk assessed. The Audit Plan is approved by the BAC for implementation. The Internal Audit Division carries out audit checks to ensure compliance with policies and procedures and the effectiveness of the internal control systems and reports its findings in respect of any non-compliance. Audits are carried out to provide an independent and objective report on operational and management activities. The findings of the audits are submitted to the BAC for review at their periodic meetings. The activities of the BAC, along with minutes of the Committee meetings are submitted for information of the Board on a periodic basis.

The Board Integrated Risk Management Committee (BIRMC) has been established by the Board to assist the Board to oversee the overall management of principal areas of risk of the Bank. The Board has also established an independent Compliance Unit which ensures that Bank’s activities are conducted in accordance with applicable laws, regulations and regulatory directives and any issues of non-compliance are reported to BIRMC periodically. The report on the risk assessment is submitted by the BIRMC to the Board periodically.

Directors’ Statement on Internal Control over Financial Reporting


Directors’ Statement on Internal Control over Financial Reporting


Management level committees have also been functioning with appropriate empowerment to ensure effective management and supervision of Bank’s core areas in the day-to-day business operations. The assessment covered only the process applied by the Bank and did not include the processes carried out by its subsidiary.

The Bank adopted the new Sri Lanka Accounting Standards Comprising LKAS and SLFRS in 2012. Since adoption of such Sri Lanka Accounting Standards, continue monitoring and progressive enhancement on processes to comply with new requirements of recognition, measurement, classification, and disclosure are being made. The Board also has taken into consideration the requirements of the Sri Lanka Accounting Standard – SLFRS 9 on “Financial Instruments” that is effective from 1 January 2018, as it had a significant impact on the calculation of impairment of financial instruments on an “expected credit loss model” compared to the “incurred credit loss model”.

The Bank carried out a gap analysis with the assistance of Messrs Ernst & Young to identify areas expected to have a potentially higher impact on amounts already reported in financial statements as at 31 December 2017 consequent to adoption of SLFRS 9. Subsequent to that and as per the Implementation Plan of the Working Committee formed, Bank developed statistical models to compute the expected credit loss as require by SLFRS 9. The Bank has restated its financial statements to comply with the SLFRS 9.

The Board has taken into consideration the requirement of the SLFRS – 16 “Leases” which is effective from 1 January 2019 and necessary steps are being taken to assess its impact to financial statements.

ConfirmationBased on the above processes, the Board of Directors confirms that the financial reporting system of the Bank has been designed to provide reasonable assurance regarding their liability of financial reporting and the preparation of financial statements for external purposes has been done in accordance with Sri Lanka Accounting Standards and regulatory requirements of the Central Bank of Sri Lanka.

Review of the Statement by the External Auditors

The External Auditors, the Auditor General has reviewed the above Directors’ Statement on Internal Control Over Financial Reporting for the year ended 31 December 2018 and report to the Board of Directors that nothing has come to their attention that causes them to believe that the statement is inconsistent with their understanding of the process adopted by the Board in the review of the design and effectiveness of the internal control system over financial reporting of the Bank. Their Report on the Statement of Internal Control over Financial Reporting is given on page 240 of this Annual Report.



Chairman

Dr D Shanmugasundaram

Chairman – Board Audit Committee/Director

Anil Rajakaruna

Senior Director




The ChairmanNational Savings Bank

Assurance Report of the Auditor General to the Board of Directors on the Directors’ Statement on Internal Control of National Savings Bank.

IntroductionThis report is to provide assurance on the Directors’ Statement on Internal Control (“Statement”) of National Savings Bank included in the Annual Report for the year ended 31 December 2018.

Management’s responsibilityManagement is responsible for the preparation and presentation of the Statement in accordance with the “Guidance for Directors of Bank on the Directors’ Statement on Internal Control” issued in compliance with the Section 3 (8) (ii) (b) of the Banking Act Direction No. 12 of 2007, by The Institute of Chartered Accountants of Sri Lanka.

My responsibilities and compliance with SLSAE 3050

My responsibility is to issue a report to the Board of Directors on the Statement based on the work performed. I conducted my engagement in accordance with Sri Lanka Standard on Assurance Engagements SLSAE 3050 – Assurance Report for Banks on Directors’ Statement on Internal Control issued by The Institute of Chartered Accountants of Sri Lanka.

Summary of work performedMy engagement has been conducted to assess whether the Statement is both supported by the documentation prepared by or for Directors and appropriately reflects the process the Directors have adopted in reviewing the system of internal control for the Bank.

The procedures performed are limited primarily to inquiries of Bank personnel and the existence of documentation on a sample basis that supports the process adopted by the Board of Directors.

SLSAE 3050 does not require me to consider whether the Statement covers all risks and controls, or to form an opinion on the effectiveness of the Bank’s risk and control procedures. SLSAE 3050 also does not require me to consider whether the processes described to deal with material internal control aspects of any significant problems disclosed in the Annual Report will, in fact, remedy the problems.

My conclusionBased on the procedures performed, nothing has come to my attention that causes me to believe that the Statement included in the Annual Report is inconsistent with my understanding of the process the Board of Directors has adopted in the review of the design and effectiveness of internal control over financial reporting of the Bank.

W P C Wickramaratne

Auditor General




We have been engaged by the Directors of National Savings Bank (“Bank”) to provide reasonable assurance and limited assurance in respect of the Sustainability Indicators as identified below for the year ended 31 December 2018. The Sustainability Indicators are included in National Savings Bank’s Integrated Annual Report for the year ended 31 December 2018 (the “Report”).

The reasonable assurance sustainability indicators covered by our reasonable assurance engagement are:

Reasonable assurance sustainability indicators Integrated Annual Report page

Financial highlights 8

The limited assurance sustainability indicators covered by our limited assurance engagement are:

Limited assurance – sustainability indicators

Integrated Annual Report page

Non-financial highlights 9

Information provided on following capitalsFinancial capital 66 – 82Manufactured capital 83 – 87Intellectual capital 88 – 92Human capital 93 – 105Social and relationship capital 106 – 119Natural capital 120 – 124

Our conclusionsOur conclusion has been formed on the basis of, and is subject to, the matters outlined in this Report. We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our conclusions.

Reasonable assurance-sustainability indicators In our opinion, the Reasonable Assurance-Sustainability Indicators, as defined above, for the year ended 31 December 2018 are, in all material respects, prepared and presented

in accordance with the Consolidated Set of Global Reporting Initiative Sustainability Reporting Standards Guidelines.

Limited assurance-sustainability indicators Based on the limited assurance procedures performed and evidence obtained, as described below, nothing has come to our attention that causes us to believe that the Limited Assurance-Sustainability Indicators, as defined above, for the year ended 31 December 2018, have not in all material respects, been prepared and presented in accordance with the Consolidated Set of Global Reporting Initiative Sustainability Reporting Standards Guidelines.

Management’s responsibility Management is responsible for the preparation and presentation of the Reasonable Assurance Sustainability Indicators and the Limited Assurance Sustainability Indicators in accordance with the Consolidated Set of Global Reporting Initiative Sustainability Reporting Standards Guidelines.

These responsibilities includes establishing such internal controls as Management determines are necessary to enable the preparation of the Reasonable Assurance Sustainability Indicators and the Limited Assurance Sustainability Indicators that are free from material misstatement whether due to fraud or error.

Management is responsible for preventing and detecting fraud and for identifying and ensuring that the Bank complies with laws and regulations applicable to its activities.

Management is also responsible for ensuring that staff involved with the preparation and presentation of the description and Report are properly trained, information systems are properly updated and that any changes in reporting encompass all significant business units.

Our responsibilityOur responsibility is to express a reasonable assurance conclusion on the Bank’s preparation and presentation of the Reasonable Assurance Sustainability Indicators and a limited assurance conclusion on the preparation and presentation of the Limited Assurance Sustainability Indicators included in the Report, as defined above.

M.R. Mihular FCA P.Y.S. Perera FCA C.P. Jayatilake FCAT.J.S. Rajakarier FCA W.W.J.C. Perera FCA Ms. S. Joseph FCAMs. S.M.B. Jayasekara ACA W.K.D.C Abeyrathne FCA S.T.D.L. Perera FCAG.A.U. Karunaratne FCA R.M.D.B. Rajapakse FCA Ms. B.K.D.T.N. Rodrigo FCAR.H. Rajan ACA M.N.M.B. Shameel ACA Ms. C.T.K.N. Perera ACA

Principals - S.R.I. Perera FCMA(UK), LLB, Attorney-at-Law, H.S. Goonewardene ACA

KPMG Tel : +94 - 11 542 6426(Chartered Accountants) Fax : +94 - 11 244 587232A, Sir Mohamed Macan Markar Mawatha, : +94 - 11 244 6058P. O. Box 186, : +94 - 11 254 1249Colombo 00300, Sri Lanka. Internet : www.kpmg.com/lk


Independent Assurance Report to National Savings Bank

GRI 102-56




We conducted our assurance engagement in accordance with Sri Lanka Standard on Assurance Engagements SLSAE 3000: Assurance Engagements other than Audits or Reviews of Historical Financial Information (SLSAE 3000) issued by The Institute of Chartered Accountants of Sri Lanka.

We have complied with the independence and other ethical requirements of the Code of Ethics issued by the Institute of Chartered Accountants of Sri Lanka.

SLSAE 3000 requires that we plan and perform the engagement to obtain reasonable assurance about whether the Reasonable Assurance Sustainability Indicators are free from material misstatement and limited assurance about whether the Limited Assurance Sustainability Indicators are free from material misstatement.

Reasonable Assurance Over Reasonable Assurance Sustainability Indicators The procedures selected in our reasonable assurance engagement depend on our judgement, including the assessment of the risks of material misstatement of the Reasonable Assurance Sustainability Indicators whether due to fraud or error.

In making those risk assessments, we have considered internal control relevant to the preparation and presentation of the Reasonable Assurance Sustainability Indicators in order to design assurance procedures that are appropriate in the circumstances, but not for the purposes of expressing a conclusion as to the effectiveness of the Bank's internal control over the preparation and presentation of the Report.

Our engagement also included assessing the appropriateness of the Reasonable Assurance Sustainability Indicators, the suitability of the criteria, being the Consolidated Set of Global Reporting Initiative Sustainability Reporting Standards Guidelines, used by the Bank in preparing and presenting the Reasonable Assurance Sustainability Indicators within the Report, obtaining an understanding of the compilation of the financial and non-financial information to the sources from which it was obtained, evaluating the reasonableness of estimates made by the Bank, and recomputation of the calculations of the Reasonable Assurance Sustainability Indicators.

Limited Assurance on the Assured Sustainability Indicators Our limited assurance engagement on the Limited Assurance Sustainability Indicators consisted of making enquiries, primarily of persons responsible for the preparation of the Limited Assurance Sustainability Indicators, and applying analytical and other procedures, as appropriate. These procedures included:

interviews with Senior Management and relevant staff at corporate and selected site level concerning sustainability strategy and policies for material issues, and the implementation of these across the business;

enquiries of management to gain an understanding of the Bank's processes for determining material issues for the Bank’s key stakeholder groups;

enquiries of relevant staff at corporate and selected site level responsible for the preparation of the Limited Assurance Sustainability Indicators;

enquiries about the design and implementation of the systems and methods used to collect and report the Limited Assurance Sustainability Indicators, including the aggregation of the reported information;

comparing the Limited Assurance Sustainability Indicators to relevant underlying sources on a sample basis to determine whether all the relevant information has been appropriately included in the Report;

reading the Limited Assurance Sustainability Indicators presented in the Report to determine whether they are in line with our overall knowledge of, and experience with, the sustainability performance of the Bank;

reading the remainder of the Report to determine whether there are any material misstatements of fact or material inconsistencies based on our understanding obtained as part of our assurance engagement.

The procedures performed in a limited assurance engagement vary in nature and timing from, and are less in extent than for, a reasonable assurance engagement, and consequently the level of assurance obtained in a limited assurance engagement is substantially lower than the assurance that would have been obtained had a reasonable assurance engagement been performed. Accordingly, we do not express a reasonable assurance conclusion on the Limited Assurance Sustainability Indicators.

Purpose of our reportIn accordance with the terms of our engagement, this assurance report has been prepared for the Bank for the purpose of assisting the Directors in determining whether the Bank’s Reasonable and Limited Assurance Sustainability Indicators are prepared and presented in accordance with the Consolidated Set of Global Reporting Initiative Sustainability Reporting Standards Guidelines and for no other purpose or in any other context.

Restriction of use of our reportOur report should not be regarded as suitable to be used or relied on by any party wishing to acquire rights against us other than the Bank, for any purpose or in any other context. Any party other than the Bank who obtains access to our report or a copy thereof and chooses to rely on our report (or any part thereof) will do so at its own risk. To the fullest extent permitted by law, we accept or assume no responsibility and deny any liability to any party other than the Bank for our work, for this independent assurance report, or for the conclusions we have reached.

Chartered AccountantsColombo

27 March 2019



ComplianceThe Financial Statements of the National Savings Bank (the Bank) and the Consolidated Financial Statements of the Bank and its Subsidiary (the Group) as at 31 December 2018 are prepared and presented in compliance with the following:

National Savings Bank Act No. 30 of 1971 and amendments thereto.

Finance Act No. 38 of 1971.

Sri Lanka Accounting and Auditing Standards Act No. 15 of 1995.

Banking Act No. 30 of 1988 and amendments thereto and Directions, Determinations and Guidelines issued by the Central Bank of Sri Lanka (CBSL) there under relating to Financial Statements, formats and disclosure of information.

Sri Lanka Financial Reporting Standards/Sri Lanka Accounting Standards (SLFRSs/LKASs) issued by The Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka).

Code of Best Practice on Corporate Governance 2017 issued by The Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka).

The Banking Act Direction No. 12 of 2007 on Corporate Governance issued by the CBSL.

The formats used in the preparation of the Financial Statements and disclosures made, comply with the specified formats prescribed by the Central Bank of Sri Lanka which are also in compliance with the disclosure requirements of the Sri Lanka Accounting Standard 1 (LKAS 1) – “Presentation of Financial Statements”. The Bank and the Group presents the financial results to its users on a quarterly basis.

The Accounting Policies used in the preparation of the Financial Statements are appropriate and are consistently applied by the Bank and the Group. The Bank and the Group restated the comparative information for 2017 with regard to the financial instrument with the scope of SLFRS 9. The Significant Accounting Policies and estimates that involved a high degree of judgement and complexity were discussed with the Bank’s External Auditors and the Board Audit Committee (BAC). Comparative information has been restated wherever necessary to comply with the current presentation and material departures, if any, have been disclosed and explained.

The Bank applied the Sri Lanka Accounting Standard – SLFRS 9 on “Financial Instruments”, which replaced the Sri Lanka Accounting Standard – LKAS 39 on Financial Instruments: “Recognition and Measurement” which was effective until 31 December 2017. The Bank had a significant impact on calculation of impairment of financial instruments on an “expected loss model” on adoption of the Sri Lanka Accounting Standard – SLFRS 9 on “Financial Instruments” compared to “incurred credit loss model” applied until 31 December 2017 under the Sri Lanka Accounting Standard – LKAS 39 on Financial Instruments: Recognition and Measurement”. The Bank has restated the Financial Statements of prior period as permitted by the Sri Lanka Accounting Standard – SLFRS 9 on “Financial Instruments”. Accordingly, comparative information has been restated and disclosed under Note 52 of the Notes to the Financial Statements.

We confirm that to the best of our knowledge, the Financial Statements, Significant Accounting Policies and other financial information included in this Annual Report, fairly present in all material aspects of the assets, liabilities, results of the operations and the cash flows of the Bank and the Group during the year under review and given a true and fair view of the Financial Statements. We also confirm that the Bank and the Group has adequate resources to continue in operation and have applied the going concern basis in preparing these Financial Statements.

Responsibility of internal control and procedures

We are responsible for establishing, implementing and maintaining internal controls and procedures of the Bank and its Subsidiary. We ensure that effective internal controls and procedures are in place ensuring material information relating to the Bank and the Group are made known to us for safeguarding assets, preventing and detecting fraud and/ or error as well as other irregularities, which are reviewed, evaluated and updated on an ongoing basis. We are satisfied that there were no significant deficiencies and weaknesses in the design or operation of the internal controls and procedures, to the best of our knowledge. We confirm, based on our evaluations, that there were no significant deficiencies and material weaknesses in the design or operation of

General Manager/CEO’s and Deputy General Manager’s (Finance and Planning)

Statement of Responsibility



internal controls and any fraud that involved Management or other employees. The Bank’s Internal Auditors also conduct periodic reviews to ensure that the established internal controls over financial reporting and procedures are consistently followed. However, there are inherent limitations that should be recognised in weighing the assurance provided by any system of internal control and accounting.

Directors’ Statement on Internal Control over Financial Reporting is provided on page 238 of this Annual Report. The Auditor General have audited the effectiveness of the internal controls over financial reporting adapted by the Bank and have given an unqualified opinion and provided on page 240 of this Annual Report.

External auditThe Financial Statements of the Bank and its Subsidiary were audited by the Auditor General. The Auditor General’s Report on the Bank’s Consolidated Financial Statements is given on page 245 of this Annual Report. The Board Audit Committee, inter alia, reviewed all internal audit and inspection programmes, the efficiency of internal control systems and procedures and also reviewed the Significant Accounting Policies and their adherence to statutory and regulatory requirements, the details of which are given in the Board Audit Committee Report on pages 179 to 182 of this Annual Report. To ensure complete independence, the Auditor General and the Internal Auditors have full and free access to the members of the Board Audit Committee to discuss any matter of substance.

ConfirmationWe confirm that to the best of our knowledge –

The Bank and the Group have complied with all applicable laws and regulations and prudential requirement.

There are no materials non-compliances and

There are no material litigations that are pending against the Bank and the Group other than those disclosed in Note 49 on page 341 of the Financial Statements.

All taxes, duties, levies and all statutory payments payable by the Bank and the Group and all contributions, levies and taxes payable on behalf of and in respect of the employees of the Bank and the Group as at 31 December 2018 have been paid, or where relevant, provided for.

Dammika Perera

General Manager/CEO

Kithsiri Wijeyaratne

Deputy General Manager(Finance and Planning)


General Manager/CEO’s and Deputy General Manager’s (Finance and Planning) Statement of Responsibility



Chairman

National Savings Bank

Report of the Auditor General on the Financial Statements and Other Legal and Regulatory Requirements of the National Savings Bank and its subsidiary for the year ended 31 December 2018 in terms of Section 12 of the National Audit Act, No. 19 of 2018.

1. Financial Statements

1.1 Opinion The audit of the Financial Statements of the National Savings Bank (“Bank”) and the Consolidated Financial Statements of the Bank and its Subsidiary (“Group”) for the year ended 31 December 2018 comprising the Statements of Financial Position as at 31 December 2018 and the Statements of Comprehensive Income, Statement of Changes in Equity and Cash Flow Statement for the year then ended, and Notes to the Financial Statements, including a summary of significant accounting policies, was carried out under my direction in pursuance of provisions in Article 154 (1) of the Constitution of the Democratic Socialist Republic of Sri Lanka read in conjunction with provisions of the National Audit Act No. 19 of 2018. My report to Parliament in pursuance of provisions in Article 154 (6) of the Constitution will be tabled in due course.

In my opinion, the accompanying Financial Statements of the Bank and the Group give a true and fair view of the financial position of the Bank and the Group as at 31 December 2018, and of their financial performance and cash flows for the year then ended in accordance with Sri Lanka Accounting Standards.

1.2 Basis for opinion I conducted my audit in accordance with Sri Lanka Auditing Standards (SLAuSs). My responsibilities, under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements

section of my Report. I believe that the audit evidence I have obtained is sufficient and appropriate to provide a basis for my opinion.

1.3 Responsibilities of Management and Those Charged with Governance for the Financial Statements Management is responsible for the preparation of Financial Statements that give a true and fair view in accordance with Sri Lanka Accounting Standards, and for such internal control as Management determine is necessary to enable the preparation of Financial Statements that are free from material misstatement, whether due to fraud or error.

In preparing the Financial Statements, Management is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless Management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Bank’s and the Group’s financial reporting process.

As per Section 16 (1) of the National Audit Act No. 19 of 2018, the Group is required to maintain proper books and records of all its income, expenditure, assets and liabilities, to enable annual and periodic financial statements to be prepared of the Group.

1.4 Auditor’s Responsibilities for the Audit of the Financial Statements My objective is to obtain reasonable assurance about whether the Financial Statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an Auditor’s Report that includes my opinion.





Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Sri Lanka Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these Financial Statements.

As part of an audit in accordance with Sri Lanka Auditing Standards, I exercise professional judgement and maintain professional scepticism throughout the audit. I also:

Identify and assess the risks of material misstatement of the Financial Statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for my opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control.

Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Management.

Conclude on the appropriateness of the Management’s use of the going concern basis of accounting and based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If I conclude that a material uncertainty exists, I am required to draw attention in my Auditor’s Report to the related disclosures in the Financial Statements or, if such disclosures are inadequate, to modify my opinion. My conclusions are based on the audit evidence obtained up to the date of my Auditor’s Report. However, future events or conditions may cause the Group to cease to continue as a going concern.

Evaluate the overall presentation, structure and content of the Financial Statements, including the disclosures, and whether the Financial Statements represent the underlying transactions and events in a manner that achieves fair presentation.

I communicate with those charged with governance regarding, among other matters, significant audit findings, including any significant deficiencies in internal control that I identify during my audit.

2. Report on Other Legal and Regulatory Requirements National Audit Act, No. 19 of 2018 includes specific provisions for following requirements.

I have obtained all the information and explanation that required for the audit and as far as appears from my examination, proper accounting records have been kept by the Bank as per the requirement of Section 12 (a) of the National Audit Act, No. 19 of 2018.

The Financial Statements presented is consistent with the preceding year as per the requirement of Section 6 (1) (d) (iii) of the National Audit Act, No. 19 of 2018.

The financial statements presented includes all the recommendations made by me in the previous year as per the requirement of section 6 (1) (d) (iv) of the National Audit Act, No. 19 of 2018.

Based on the procedures performed and evidence obtained were limited to matters that are material, nothing has come to my attention:

to state that any member of the governing body of the Bank has any direct or indirect interest in any contract entered into by the Bank which are out of the normal cause of business as per the requirement of Section 12 (d) of the National Audit Act, No. 19 of 2018;

to state that the Bank has not complied with any applicable written law, general and special directions issued by the governing body of the Bank as per the requirement of Section 12 (f) of the National Audit Act, No. 19 of 2018;

to state that the Bank has not performed according to its powers, functions and duties as per the requirement of Section 12 (g) of the National Audit Act, No. 19 of 2018;

to state that the resources of the Bank had not been procured and utilised economically, efficiently and effectively within the time frames and in compliance with the applicable laws as per the requirement of Section 12 (h) of the National Audit Act, No. 19 of 2018.

H M Gamini Wijesinghe

Auditor General



Pagenumber

Primary Financial Statements

Income statement 248Statement of comprehensive income 249Statement of financial position 250Statement of changes in equity – Bank 252Statement of changes in equity – Group 254Statement of cash flows 256

Notes to the Financial Statements – General1. Reporting entity 2582. Accounting policies: 2582.1 Basis of preparation 2582.2 Changes in accounting policies and transitional

disclosures on the adoption of SLFRS 9 in replacing of LKAS 39 261

2.3 Fair value measurement 2622.4 Significant accounting policies – general 2622.5 Significant accounting policies –

recognition of assets and liabilities 2632.6 Significant accounting policies – recognition of

income and expenses for financial instruments 2752.7 Significant accounting policies – taxation 2752.8 Statement of cash flows 2762.9 Regulatory provisions 2762.10 Events after the reporting period 2762.11 Accounting standards issued but not yet

effective as at reporting date 276

Notes to the Financial Statements – Income Statement3. Gross income 2774. Net interest income 2775. Net fee and commission income 2796. Net gain/(loss) from trading 2817. Net fair value gains/(losses) from financial

instrument at fair value through profit or loss 2818. Net gains/(losses) from derecognition

of financial assets 2829. Net other operating income 28210. Impairment charges 28311. Personnel expenses 28412. Other expenses 28613. Tax expenses 28614. Earnings per share (EPS) 288

Notes to the Financial Statements – Statement of Financial Position: Assets15. Analysis of financial instruments

by measurement basis 28916. Cash and cash equivalents 29217. Balances with central banks 29218. Placements with banks 29219. Derivative financial instruments 293

Pagenumber

20. Financial assets recognised through profit or loss 29621. Financial assets at amortised cost –

loans and advances 29922. Financial assets at amortised cost –

debt and other instruments 30423. Financial assets at fair value through

other comprehensive income 30524. Investments in subsidiaries 31025. Investment in associates and joint ventures 31026. Property, plant and equipment 31027. Investment properties 31628. Goodwill and intangible assets 31629. Deferred tax assets/liabilities 31730. Other assets 318

Notes to the Financial Statements – Statement of Financial Position: liabilities and equity31. Due to banks 31832. Derivative financial instruments 31933. Financial liabilities recognised through profit or loss 31934. Financial liabilities at amortised cost: 32034. Due to depositors 32034. Due to debt securities holders 32034. Due to other borrowers 32035. Debt securities issued 32136. Retirement benefit obligations 32237. Current tax liabilities 33038. Other provisions 33139. Other liabilities 33140. Due to subsidiaries 33141. Stated capital/assigned capital 33242. Statutory reserve fund 33243. Retained earnings 33344. Other reserves 33345. Non-controlling interest 336

Notes to the Financial Statements – Other disclosures46. Contingent liabilities and commitments 33647. Related party disclosures 33748. Net assets value per ordinary share 34149. Litigation against the Bank and the Group 34150. Events occurring after the reporting date 34251. Comparative figures 34252. Explanation of transition to Sri lanka financial

reporting standard (SLFRS 9) 34253. Financial risk management 35454. Maturity analysis 37255. Fair value of financial instruments 37556. Capital management (as per regulatory reporting) 380




Bank Group


2018

Rs. ’000


Change

%

2018

Rs. ’000


Change

%

Gross income 3 111,902,078 107,995,784 4 112,760,454 108,234,622 4

Interest income 110,506,931 103,578,838 7 111,718,948 104,424,417 7Less: Interest expenses 85,622,275 78,444,825 9 86,460,269 78,987,596 9

Net interest income 4 24,884,656 25,134,013 (1) 25,258,679 25,436,821 (1)Fee and commission income 1,005,262 782,776 28 1,008,482 785,077 28Less: Fee and commission expenses 141,196 109,082 29 144,685 113,037 28

Net fee and commission income 5 864,066 673,694 28 863,797 672,040 29Net gain/(loss) from trading 6 (707,433) 1,206,408 (159) (1,062,421) 1,520,740 (170)Net fair value gains/(losses) from financial instruments at fair value through profit or loss 7 – – – – – –Net gains/(losses) from derecognition of financial assets 8 6,906 707,491 (99) 6,906 707,491 (99)Net other operating income 9 1,090,412 1,720,272 (37) 1,088,539 796,897 37

Total operating income 26,138,607 29,441,877 (11) 26,155,500 29,133,988 (10)Less: Impairment charges 10 871,049 765,847 14 870,994 765,858 14

Net operating income 25,267,558 28,676,030 (12) 25,284,506 28,368,130 (11)

Less: Expenses Personnel expenses 11 9,262,705 6,886,505 35 9,302,548 6,918,813 34Depreciation and amortisation expenses 638,795 423,547 51 639,779 424,352 51Other expenses 12 4,194,979 3,737,364 12 4,160,782 3,682,765 13

Operating profit before value added tax (VAT), nation building tax (NBT) and debt repayment levy (DRL) on financial services 11,171,079 17,628,615 (37) 11,181,397 17,342,200 (36)Less: VAT on financial services 2,577,657 3,082,619 (16) 2,584,220 3,168,299 (18) NBT on financial services 343,688 411,016 (16) 344,563 422,440 (18) DRL on financial services 308,371 – 100 308,371 – 100

Operating profit after VAT, NBT and DRL on financial services 7,941,364 14,134,980 (44) 7,944,243 13,751,461 (42)


Profit before income tax 7,941,364 14,134,980 (44) 7,944,243 13,751,461 (42)

Less: Income tax expenses 13 3,441,213 4,419,019 (22) 3,444,056 4,595,065 (25)Profit for the year 4,500,151 9,715,961 (54) 4,500,187 9,156,396 (51)

Profit attributable to:Equity holders of the Bank 4,500,151 9,715,961 (54) 4,500,187 9,156,396 (51)Non-controlling interests – – – – – –


Earnings per share on profit Basic earnings per ordinary share (Rs.) 14 6.72 15.67 (57) 6.72 14.77 (55)Diluted earnings per ordinary share (Rs.) 6.72 15.67 (57) 6.72 14.77 (55)


Income Statement



Bank Group


2018

Rs. ’000


Change

%

2018

Rs. ’000


Change %


Items that will be reclassified to income statementExchange differences on translation of foreign operations – – – – – – Net gains/(losses) on cash flow hedges (291,924) 290,074 (201) (291,924) 290,074 (201)Net gains/(losses) on investments in debt instruments measured at fair value through other comprehensive income – – – – – –


Debt instruments at fair value through other comprehensive income (127,741) 693,559 (118) (149,144) 858,802 (117)Less: Fair value gains/(losses) transferred to income statement on disposal of debt instrument at fair value through other comprehensive income 1,370 (690,388) 99 1,370 (690,388) 99 Less: Tax expense relating to items that will be reclassified to income statement – – – – – –


Items that will not be reclassified to income statementChange in fair value on investments in equity instruments designated at fair value through other comprehensive income (690,435) (36,752) 1,779 (690,435) (36,752) 1,779 Change in fair value attributable to change in the Bank's own credit risk on financial liabilities designated at fair value through profit or loss – – – – – – Remeasurement of post-employment benefit obligations (210,861) (2,072,425) (90) (211,258) (2,072,155) (90)Changes in revaluation surplus – 4,508,480 (100) – 4,508,480 (100)Share of profits of associates and joint ventures – – – – – – Less: Tax expense relating to items that will not be reclassified to income statement – – – – – –

Total items that will not be reclassified to income statement (901,296) 2,399,303 (138) (901,694) 2,399,573 (138)

Other comprehensive income for the year, net of taxes (1,319,591) 2,692,547 (149) (1,341,392) 2,858,060 (147)


Attributable to:Equity holders of the Bank 3,180,560 12,408,508 (74) 3,158,795 12,014,456 (74)Non-controlling interests – – – – – –






Bank Group


2018

Rs. ’000


Change

%

2018

Rs. ’000


Change

%

AssetsCash and cash equivalents 16 3,434,524 3,849,530 (11) 3,436,929 3,853,989 (11)Balances with central banks 17 – – – 177 94 89Placements with banks 18 17,588,445 23,437,274 (25) 17,588,445 23,437,274 (25)Derivative financial instruments 19 4,740,106 1,360,714 248 4,740,106 1,360,714 248Financial assets recognised through profit or loss 20

– measured at fair value 16,680,382 6,472,314 158 26,867,533 9,389,950 186– designated at fair value – – – – – –

Financial assets at amortised cost– loans and advances 21 423,532,145 375,703,730 13 423,557,119 374,416,626 13– debt and other instruments 22 518,947,969 555,468,618 (7) 522,973,159 559,319,752 (6)

Financial assets measured at fair value through other comprehensive income 23 6,184,430 5,693,829 9 7,788,560 7,513,932 4Investments in subsidiaries 24 1,700,000 900,000 89 – – –Investments in associates and joint ventures 25 – – – – – –Property, plant and equipment 26 13,465,755 12,395,684 9 13,468,776 12,399,334 9Investment properties 27 – – – – – –Goodwill and intangible assets 28 – – – – – –Deferred tax assets 29 – – – 73 – 100Other assets 30 31,209,216 25,695,689 21 31,532,684 25,976,944 21

Total assets 1,037,482,973 1,010,977,382 3 1,051,953,560 1,017,668,610 3

LiabilitiesDue to banks 31 77,119,146 48,596,591 59 83,615,264 49,352,574 69Derivative financial instruments 32 1,533 956,937 (100) 1,533 956,937 (100)Financial liabilities recognised through profit or loss 33 – – – – – –Financial liabilities at amortised cost 34

– due to depositors 839,574,411 737,212,640 14 839,574,411 737,212,640 14– due to debt securities holders – – – – –– due to other borrowers 14,804,802 12,837,008 15 21,750,178 17,545,212 24

Debt securities issued 35 52,389,133 162,709,027 (68) 52,389,133 162,709,027 (68)Retirement benefit obligations 36 3,830,795 3,711,431 3 3,832,777 3,712,665 3Current tax liabilities 37 – – – – 137,344 (100)Deferred tax liabilities 29 582,463 507,063 15 582,463 507,138 15Other provisions 38 – – – – – –Other liabilities 39 5,447,277 5,350,244 2 5,452,317 5,394,795 1Due to subsidiaries 40 750 750 – – – –

Total liabilities 993,750,308 971,881,691 2 1,007,198,076 977,528,332 3






Bank Group


2018

Rs. ’000


Change

%

2018

Rs. ’000


Change

%

EquityStated capital/assigned capital 41 9,400,000 6,700,000 40 9,400,000 6,700,000 40Statutory reserve fund 42 3,227,960 3,002,952 7 3,227,960 3,002,952 7Retained earnings 43 4,622,080 1,102,798 319 5,198,451 1,679,540 210Other reserves 44 26,482,625 28,289,941 (6) 26,929,074 28,757,786 (6)

Total shareholders’ equity 43,732,665 39,095,691 12 44,755,484 40,140,278 11Non-controlling interests 45 – – – – – –

Total equity 43,732,665 39,095,691 12 44,755,484 40,140,278 11

Total equity and liabilities 1,037,482,973 1,010,977,382 3 1,051,953,560 1,017,668,610 3

Contingent liabilities and commitments 46 4,481,397 18,320,312 (76) 4,481,397 18,320,312 (76)

Memorandum informationNumber of employees 4,512 4,470 Number of branches 255 253

Note: Amounts stated are net of impairment and depreciation.


CertificationI certify that the above Financial Statements give a true and fair view of the state of affairs of National Savings Bank and the Group as at 31 December 2018 and its profit for the year ended.

Kithsiri Wijeyaratne

Deputy General Manager (Finance and Planning)

The Board of Directors is responsible for the preparation and presentation of these Financial Statements.

Approved and signed for and on behalf of the Board,

Jayaraja Chandrasekera Anil Rajakaruna Dammika Perera

Chairman Senior Director General Manager/CEO

14 March 2019

ColomboSri Lanka



Bank

Stated capital/ assigned capital

Rs. ’000

Statutory reserve fund

Rs. ’000

Revaluation reserve

Rs. ’000

OCI reserve

Rs. ’000

Cash flow hedging reserve

Rs. ’000

Other reservesRs. ’000

Retained earningsRs. ’000

Total equity

Rs. ’000

Balance as at 1 January 2017 6,200,000 2,522,467 3,296,565 1,378,818 1,850 16,466,570 2,379,307 32,245,580 Impact of adopting SLFRS 9 – – – – – – (1,232,348) (1,232,348)Restated opening balance as at 1 January 2017 6,200,000 2,522,467 3,296,565 1,378,818 1,850 16,466,570 1,146,959 31,013,232 Profit for the year 2017 – – – – – – 9,715,961 9,715,961 Other comprehensive income (net of tax) – – 4,508,480 (33,581) 290,074 – (2,072,425) 2,692,547

Total comprehensive income for the year – – 4,508,480 (33,581) 290,074 – 7,643,536 12,408,508

Transaction with equity holders, recognised directly in equity

Transfers to/from reserves during the year – 480,485 (11,728) – – 2,000,000 (2,480,485) (11,728)Contribution to consolidated fund-dividend/levy – – – – – – (5,111,114) (5,111,114)Contribution to national insurance trust fund – – – – – – (96,097) (96,097)Transfers to unclaimed deposits reserve/issued share capital 500,000 – – – – 392,891 – 892,891

Total transactions with equity holders 500,000 480,485 (11,728) – – 2,392,891 (7,687,696) (4,326,048)

Balance as at 31 December 2017 6,700,000 3,002,952 7,793,317 1,345,237 291,924 18,859,461 1,102,798 39,095,691

Profit for the year 2018 – – – – – – 4,500,151 4,500,151

Other comprehensive income (net of tax) – – – (816,806) (291,924) – (210,861) (1,319,591)

Total comprehensive income for the year – – – (816,806) (291,924) – 4,289,290 3,180,560


Transfers to/from reserves during the year – 225,008 – – – – (225,008) –Contribution to consolidated fund-dividend/levy – – – – – – (500,000) (500,000)Contribution to national insurance trust fund – – – – – – (45,002) (45,002)Transfers to unclaimed deposits reserve/issued share capital 2,700,000 – – – – (698,587) – 2,001,413

Total transactions with equity holders 2,700,000 225,008 – – – (698,587) (770,009) 1,456,411

Balance as at 31 December 2018 9,400,000 3,227,960 7,793,317 528,430 – 18,160,874 4,622,080 43,732,665


Statement of Changes in Equity




Bank


Rs. ’000


Rs. ’000

Revaluation reserve

Rs. ’000

OCI reserve

Rs. ’000


Rs. ’000



Total equity

Rs. ’000

Balance as at 1 January 2017 6,200,000 2,522,467 3,296,565 1,378,818 1,850 16,466,570 2,379,307 32,245,580 Impact of adopting SLFRS 9 – – – – – – (1,232,348) (1,232,348)Restated opening balance as at 1 January 2017 6,200,000 2,522,467 3,296,565 1,378,818 1,850 16,466,570 1,146,959 31,013,232 Profit for the year 2017 – – – – – – 9,715,961 9,715,961 Other comprehensive income (net of tax) – – 4,508,480 (33,581) 290,074 – (2,072,425) 2,692,547

Total comprehensive income for the year – – 4,508,480 (33,581) 290,074 – 7,643,536 12,408,508


Transfers to/from reserves during the year – 480,485 (11,728) – – 2,000,000 (2,480,485) (11,728)Contribution to consolidated fund-dividend/levy – – – – – – (5,111,114) (5,111,114)Contribution to national insurance trust fund – – – – – – (96,097) (96,097)Transfers to unclaimed deposits reserve/issued share capital 500,000 – – – – 392,891 – 892,891



Profit for the year 2018 – – – – – – 4,500,151 4,500,151

Other comprehensive income (net of tax) – – – (816,806) (291,924) – (210,861) (1,319,591)



Transfers to/from reserves during the year – 225,008 – – – – (225,008) –Contribution to consolidated fund-dividend/levy – – – – – – (500,000) (500,000)Contribution to national insurance trust fund – – – – – – (45,002) (45,002)Transfers to unclaimed deposits reserve/issued share capital 2,700,000 – – – – (698,587) – 2,001,413







Group


Rs. ’000


Rs. ’000

Revaluation reserve

Rs. ’000

OCI reserve

Rs. ’000


Rs. ’000



Total equity

Rs. ’000

Balance as at 1 January 2017 6,200,000 2,522,467 3,296,565 1,096,758 1,850 16,960,532 3,708,614 33,786,788 Impact of adopting SLFRS 9 – – – – – – (1,232,437) (1,232,437)Restated opening balance as at 1 January 2017 6,200,000 2,522,467 3,296,565 1,096,758 1,850 16,960,532 2,476,177 32,554,351 Profit for the year 2017 – – – – – – 9,156,396 9,156,396 Other comprehensive income (net of tax) – – 4,508,480 131,662 290,074 – (2,072,155) 2,858,060

Total comprehensive income for the year – – 4,508,480 131,662 290,074 – 7,084,241 12,014,456


Transfers to/from reserves during the year – 480,485 (11,728) – – 2,090,699 (2,571,184) (11,728)Contribution to consolidated fund/dividend-levy – – – – – – (5,111,114) (5,111,114)Withholding tax on dividend – (102,483) (102,483)Contribution to national insurance trust fund – – – – – – (96,097) (96,097)Transfers to unclaimed deposits reserve/issued share capital 500,000 – – – – 392,891 – 892,891



Profit for the year 2018 – – – – – – 4,500,187 4,500,187 Other comprehensive income (net of tax) – – – (838,210) (291,924) – (211,258) (1,341,392)


Transaction with equity holders, recognised directly in equityTransfers to/from reserves during the year – 225,008 – – – 9 (225,016) –Contribution to consolidated fund-dividend/levy – – – – – – (500,000) (500,000)Withholding tax on dividend – – – – – – – –Contribution to national insurance trust fund – – – – – – (45,002) (45,002)Transfers to unclaimed deposits reserve/issued share capital 2,700,000 – – – – (698,587) – 2,001,413






Bank Group

For the year ended 31 December 2018Rs. ’000

2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

Cash flows from operating activitiesInterest receipts 108,759,712 98,133,606 109,734,424 98,979,184 Interest payments (85,287,503) (72,290,143) (86,068,354) (72,832,914)Net commission receipts 864,066 673,694 863,797 672,040 Trading income 546,667 1,044,274 563,393 1,070,689 Payment to employees (8,944,003) (6,976,586) (8,983,846) (7,008,894)VAT, NBT and DRL on financial services (3,372,310) (3,291,976) (3,379,748) (3,389,080)Receipts from other operating activities 283,187 691,445 281,314 690,422 Payment on other operating activities (3,731,927) (3,411,069) (3,697,730) (3,356,470)

Operating profit before change in operating assets and liabilities 9,117,889 14,573,245 9,313,250 14,824,977

(Increase)/decrease in operating assetsBalances with Central Bank of Sri Lanka – – – – Placements with banks 6,015,111 (4,455,574) 6,015,111 (4,455,574)Derivative financial instruments (3,671,316) 1,657,805 (3,671,316) 1,657,805 Financial assets at FVPL (10,995,919) 14,276,771 (18,404,137) 18,659,670 Financial assets at amortised cost – loans and advances (48,291,029) (63,124,831) (49,603,184) (62,636,549)Financial assets at amortised cost – debt and other instrument 37,230,245 (34,546,469) 37,060,618 (36,397,298)Proceeds from the sale and maturity of financial investments – – – – Other assets (4,947,187) (4,760,511) (4,989,400) (4,946,620)

(24,660,094) (90,952,809) (33,592,308) (88,118,565)

Increase/(decrease) in operating liabilitiesDue to Bank 28,385,587 28,770,730 34,111,452 26,783,430 Derivative financial instruments (956,937) 956,937 (956,937) 956,937 Financial liabilities at amortised cost – due to depositors 101,633,538 75,188,272 101,633,538 75,188,272 Financial liabilities at amortised cost – due to debt securities holders – – – – Financial liabilities at amortised cost – due to other borrowers 2,699,945 (21,197,538) 4,894,246 (22,078,851)Debt securities issued (107,552,900) 3,480,000 (107,552,900) 3,480,000 Other liabilities (494,589) (1,796,670) (533,749) (1,760,565)

23,714,644 85,401,731 31,595,650 82,569,223

Net cash generated from operating activities before income tax 8,172,439 9,022,167 7,316,592 9,275,634Income tax paid (3,365,813) (4,328,136) (3,506,148) (4,383,328)

Net cash (used in)/from operating activities 4,806,626 4,694,031 3,810,444 4,892,306





Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

Cash flows from investing activitiesPurchase of property, plant and equipment (1,742,224) (1,049,920) (1,742,579) (1,052,269)Proceeds from the sale of property, plant and equipment 7,474 7,189 7,474 7,189 Net (increase)/decrease in finance instruments at fair value through other comprehensive income (1,309,089) 1,232,344 (1,114,522) 1,289,898 Proceeds from the sale and maturity of financial investments – – – – Net cash flow from acquisition of investment in subsidiaries and associates (800,000) – – – Dividends received from investment in subsidiaries and associates – 172,350 – –

Net cash (used in)/from investing activities (3,843,839) 361,963 (2,849,627) 244,817

Cash flows from financing activitiesNet proceeds from the issue of subordinated debt – – – – Repayment of subordinated debt – – – – Interest paid on subordinated debt (780,000) (780,000) (780,000) (780,000)Dividend paid to shareholders of the parent company – – – – Withholding tax on dividend paid – – – (84,983)Contribution to consolidated fund-dividend/levy (500,000) (5,111,114) (500,000) (5,111,114)

Net cash from financial activities (1,280,000) (5,891,114) (1,280,000) (5,976,097)

Net increase/(decrease) in cash and cash equivalents (317,213) (835,120) (319,183) (838,974)

Cash and cash equivalents at the beginning of the year 3,669,188 4,504,308 3,673,741 4,512,715 Exchange difference in respect of cash and cash equivalent – – – –

Cash and cash equivalents at the end of the year 3,351,975 3,669,188 3,354,558 3,673,741

Reconciliation of cash and cash equivalentsCash in hand 699,401 944,759 699,411 944,769 Balances with bank 2,735,350 2,892,643 2,737,745 2,897,093 Money at call and short notice – 12,224 – 12,224 Balances with Central banks – – 177 94 Due to banks (82,775) (180,439) (82,775) (180,439)

3,351,975 3,669,188 3,354,558 3,673,741




1 Reporting entity

1.1 Corporate information National Savings Bank (NSB) is a licensed specialised bank incorporated in 1972 under the National Savings Bank Act No. 30 of 1971 and domiciled in Sri Lanka. It is a licensed specialised bank regulated under the Banking Act No. 30 of 1988 and amendments thereto. The registered office of the Bank is located at No. 255, “Savings House”, Galle Road, Colombo 3, Sri Lanka.

The staff strength of the Bank as at 31 December 2018 was 4,512. (2017 – 4,470).

The Bank possesses 255 branches, and 310 ATMs of its service outlets and 653 post offices and 3,409 sub-post offices as its agency network.

1.2 Consolidated financial statements The Consolidated Financial Statements for the year ended 31 December 2018 comprise of the Bank (Parent) and its fully-owned subsidiary, NSB Fund Management Company Limited.

The Bank is fully-owned by the Government of Sri Lanka. The Bank is the ultimate parent of the Group. The Financial Statements of the Bank and its Subsidiary have a common financial year which ends on 31 December. The Financial Statements of the “Bank” and the “Group” are prepared for the twelve months period ended 31 December each year to be tabled in Parliament.

1.3 Principal activities and nature of operations GRI 102-2

Bank The principal activities of the Bank continued to be the promotion of savings among the people of Sri Lanka and profitable investment of savings so mobilised. NSB is providing wide range of solutions such as accepting deposits, corporate and retail credit, trade financing, loans to government projects, pawning, internet banking, SMS banking etc. As per the National Savings Bank Act No. 30 of 1971, the Bank is required to invest in Government Securities a minimum of 60% out of its deposits.

Subsidiary Bank’s fully-owned subsidiary, namely, NSB Fund Management Company Limited, acts as a primary dealer and engaged in dealing in Government Securities.

There were no changes in the nature of the principal activities of the Group during the financial year under review.

2 Accounting policies The accounting policies set out below have been applied consistently in all periods when presenting the Financial Statements, unless otherwise indicated. These policies of the Bank are also consistently applied by the Group where applicable and deviations if any have been disclosed accordingly.

2.1 Basis of preparation 2.1.1 Statement of compliance The Consolidated Financial Statement of the Group and the Separated Financial Statements of the Bank which comprise the Income Statement, Statement of Comprehensive Income, Statement of Financial Position, Statement of Changes in Equity, Statement of Cash Flows, and Notes to the Financial Statements have been prepared and presented in accordance with the Sri Lanka Accounting Standards (LKASs and SLFRSs) issued by The Institute of Chartered Accountants of Sri Lanka and are in compliance with the information required by the Banking Act No. 30 of 1988 and subsequent amendments thereto. These Financial Statements, except for the information in cash flow have been prepared following the accrual basis of accounting.

The formats used in the preparation of Financial Statements and the disclosures made therein also comply with the specified formats prescribed by the Central Bank of Sri Lanka for the preparation, presentation, and publication of Annual Audited Financial Statements of Licensed Banks.

2.1.2 Responsibility for financial statements The Board of Directors is responsible for the preparation and presentation of the Financial Statements of the Group and the Bank as per the provisions of the National Savings Bank Act No. 30 of 1971 and amendments thereto and the Sri Lanka Accounting Standards.

2.1.3 Approval of Financial Statements by the Board of Directors The Financial Statements of the Bank and the Group for the year ended 31 December 2018 were approved on 14 March 2019, by the Board of Directors.





2.1.4 Basis of measurement The Consolidated Financial Statements have been prepared on a historical cost basis, except for the following material items in the Statement of Financial Position, which are measured at fair value.

i. Financial assets measured at fair value though other comprehensive income, (Note 23)

ii. Derivative financial instruments, (Note 19 and 32)

iii. Financial assets and liabilities recognised through profit or loss (Note 20 and 33)

iv. Financial assets designated at fair value through profit or loss, (Note 20)

v. Land and buildings which are measured at cost at the time of acquisition subsequently measured at revalued amounts, which are the fair values at the date of revaluation. (Note 26)

vi. Liability for employee defined benefits obligations are recognised at the present value of the defined benefit obligation less the fair value of the plan assets. (Note 36)

2.1.5 Functional and presentation currency The Consolidated Financial Statements are presented in Sri Lankan Rupees (Rs.) which is the currency of the primary economic environment in which Group operates and all values are rounded to the nearest thousand Rupees, unless indicated otherwise. There was no change in the Group’s presentation and functional currency during the year under review.

2.1.6 Presentation of financial statements The assets and liabilities of the Bank and the Group presented in the Statement of Financial Position are grouped by their nature and listed in an order that reflects their relative liquidity and maturity pattern.

No adjustment has been made for inflationary factors affecting the Financial Statements. An analysis of maturity patterns of assets and liabilities of the Bank and the Group is presented in Note 54 on pages 372 to 374.

Financial assets and financial liabilities are offset, and the net amount reported in the Statement of Financial Position if and only if there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the assets and settle the liability simultaneously. Income and expenses are not offset in the Income Statement unless required or permitted by any accounting standard or interpretation, and as specifically disclosed in the accounting policies of the Group.

2.1.7 Going concern The Board of Directors/Management of the Bank has made an assessment of its ability to continue as a going concern and is satisfied that it has the resources to continue in business for the foreseeable future. Furthermore, the Management is not aware of any material uncertainties that may cast significant doubt upon the Group’s ability to continue as a going concern. Therefore, the Financial Statements are prepared on the going concern basis.

2.1.8 Materiality and aggregation Each material class of similar items are presented separately in the Financial Statements. Items of dissimilar nature or functions are presented separately unless they are immaterial as permitted by the Sri Lanka Accounting Standard – LKAS 01 on “Presentation of Financial Statements”.

2.1.9 Comparative information Comparative information including quantitative, narrative, and descriptive information is disclosed in respect of the previous period in the Financial Statements in order to enhance the understanding of the current period’s Financial Statements and to enhance the inter period comparability. The comparative information is reclassified where necessary for the better presentation and to conform to the current year’s presentation. The comparative figures of 2017 have been restated as per the adoption of SLFRS 9 – “Financial Instrument” Standard. The details are given in Note 51 to the Financial Statements on page 342.

2.1.10 Rounding The amounts in the Financial Statements have been rounded-off to the nearest rupees thousand, except where otherwise indicated as permitted by the Sri Lanka Accounting Standard – LKAS 1 on “Presentation of Financial Statements” (LKAS 1).

2.1.11 Offsetting Financial assets and financial liabilities are offset, and the net amount reported in the Statement of Financial Position, only when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis or to realise the assets and settle the liabilities simultaneously. Income and expenses are not offset in the Income Statement, unless required or permitted by an Accounting Standard or Interpretation (issued by the IFRS Interpretations Committee and Standard Interpretations Committee) and as specifically disclosed in the Significant Accounting Policies of the Bank.




2.1.12 Significant accounting judgements, estimates, and assumptions The preparation of Financial Statements of the Bank and the Group in conformity with Sri Lanka Accounting Standards requires the Management to make judgements, estimates, and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income, and expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revise and in any future periods affected.

The significant areas of estimation, critical judgements and assumptions in applying accounting policies that have most significant effect on the amounts recognised in the Financial Statements of the Bank and the Group are as follows:

A. Significant accounting judgement Information about judgements made in applying accounting policies that have the most significant effects on the amounts recognised in these Financial Statements is included in Note 2.1.12.1 below:

2.1.12.1 Classification of financial assets and liabilities As per SLFRS 9, the significant accounting policies of the Group provides scope for financial assets to be classified and measured into different categories, namely, at Amortised Cost, Fair Value through Other Comprehensive Income (FVOCI), and Fair Value Through Profit or Loss (FVPL) based on the following criteria:

The entity’s business model for managing the financial assets as set out in Note 2.5.1.4.1 on page 264.

The contractual cash flow characteristics of the financial assets as set out in Note 2.5.1.4.2 on page 264.

B. Assumptions and estimation uncertainties Information about assumptions and estimation uncertainties that have a significant risk of resulting in material adjustments are included in Notes 2.1.12.2 to 2.1.12.9 below.

2.1.12.2 Fair value of financial instruments Where the fair value of financial assets and financial liabilities recorded in the Statement of Financial Position cannot be derived from active markets, they are determined using the valuation techniques that include the use of

mathematical models. The inputs to these models are derived from observable market data where possible, but where observable market data are not available, judgement is required to establish fair values.

Methodologies used for valuation of financial instruments and fair value hierarchy are described in more detail in Note No. 55 to the Financial Statements on page 375.

2.1.12.3 Impairment losses on financial assets The measurement of impairment losses both under SLFRS 9 and LKAS 39 across all categories of financial assets requires judgement, in particular, the estimation of the amount and timing of future cash flows and collateral values when determining impairment losses.

Accordingly, the Group reviews its individually significant loans and advances at each reporting date to assess whether an impairment loss should be provided in the Income Statement. In particular, the Management’s judgement is required in the estimation of the amount and timing of future cash flows when determining the impairment loss. These estimates are based on assumptions about a number of factors and hence actual results may differ, resulting in future changes to the impairment allowance made.

The individual impairment provision applies to financial assets evaluated individually for impairment and is based on Management’s best estimate of the present value of the future cash flows that are expected to be received. In estimating these cash flows, Management makes judgements about a borrower’s financial situation and the net realisable value of any underlying collateral. Each impaired asset is assessed on its merits, and the workout strategy and estimate of cash flows considered recoverable.

A collective impairment provision is established for:

groups of homogeneous loans and advances that are not considered individually significant; and

groups of assets that are individually significant but that were not found to be individually impaired.

As per SLFRS 9, the Group’s expected credit loss (ECL) calculations are outputs of complex models with a number of underlying assumptions regarding the choice of variable inputs and their interdependencies. Elements of the ECL models that are considered accounting judgements and estimates include:

The Group’s criteria for qualitatively assessing whether there has been a significant increase in credit risk and if so allowances for financial assets measured on a lifetime expected credit loss (LTECL) basis;




The segmentation of financial assets when their ECL is assessed on a collective basis;

Development of ECL models, including the various statistical formulas and the choice of inputs;

Determination of associations between macro-economic inputs, such as GDP growth, inflation, interest rates, exchange rates and unemployment and the effect on Probability of Default (PD), Exposure at Default (EAD), and Loss Given Default (LGD);

Selection of forward-looking macroeconomic scenarios and their probability weightings, to derive the economic inputs into the ECL models.

2.1.12.4 Revaluation of property, plant and equipment The freehold land and buildings of the Bank and the Group are reflected at revalued amounts. The Group engaged independent professional valuers to determine the fair value of freehold land and buildings in terms of Sri Lanka Accounting Standard (SLFRS 13) “Fair Value Measurement”.

The methods and key assumptions used to determine the fair value of the freehold land and buildings are further explained in Note 2.3 to the Financial Statements.

2.1.12.5 Useful lifetime of property, plant and equipment The Group reviews the residual values, useful lives and methods of depreciation of property, plant and equipment at each reporting date. Judgement of the Management is exercised in the estimation of these values, rates, methods and hence they are subject to uncertainty.

2.1.12.6 Impairment of non-financial assets The Group assess at each reporting date whether there is an indication that an asset other than deferred tax asset, may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Group estimates the asset’s recoverable amount. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount.

2.1.12.7 Deferred tax asset Deferred tax assets are recognised in respect of tax losses to the extent that it is probable that future taxable profits will be available against which such tax losses can be utilised. Judgement is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and level of future taxable profits, together with the future tax-planning strategies.

2.1.12.8 Defined benefit obligation The cost of the defined benefit plans and the present value of their obligations are determined using actuarial valuations. The actuarial valuation involves making assumptions about discount rates, expected rates of return on assets, future salary increases, mortality rates, and future pension increases.

In determining the appropriate discount rate, Management considers the interest rates of Sri Lanka Government Bonds.

The mortality rate is based on publicly available mortality tables. Future salary increases, and pension increases are based on expected future inflation rates and expected future salary increase rate of the Bank.

Due to the long-term nature of these plans, such estimates are subject to significant uncertainty.

2.1.12.9 Provisions, commitments, and contingencies The Group receives legal claims against it in the normal course of business. Management makes judgements as to the likelihood of any claim succeeding in making provisions. The time of concluding legal claims is uncertain, as is the amount of possible outflow of economic benefits. Timing and cost ultimately depend on the due process in respective legal jurisdiction.

2.2 Changes in accounting policies and transitional disclosures on the adoption of SLFRS 9 in replacing of LKAS 39 2.2.1 SLFRS 9 – Financial Instrument SLFRS 9 issued in December 2014 replaced LKAS 39 and is applicable for annual reporting periods beginning on or after 1 January 2018. The Group elected as a policy choice permitted under SLFRS 9, to continue to apply hedge accounting in accordance with LKAS 39.

Details of policies under SLFRS 9 are given under Note 2.5 on page 263.

In accordance with the option given in SLFRS 9, the Group has restated comparative information for 2017 for financial instruments within the scope of SLFRS 9. The transitional disclosures are given below:

2.2.1.1 Day 1 impact on equity Details of Day 1 impact on equity are given in Note 52.6 on page 353.




2.2.1.2 Reconciliation of statement of financial position balances from LKAS 39 to SLFRS 9 Details of reconciliation of Statement of Financial Position balances from LKAS 39 to SLFRS 9 are given in Note 52.2 and 52.3 on pages 345 to 351.

2.2.1.3 Reconciliation of impairment allowance balance from LKAS 39 to SLFRS 9 Details of reconciliation of impairment allowance balance from LKAS 39 to SLFRS 9 are given in Note 52.4 on page 352.

2.2.1.4 Reconciliation of reserve and retained earnings from LKAS 39 to SLFRS 9 Details of reconciliation of reserve and retained earnings from LKAS 39 to SLFRS 9 are given in Note 52.5 on page 353.

2.2.2 SLFRS 7: Financial Instrument – disclosures To reflect the differences between LKAS 39 and SLFRS 9, SLFRS 7 was updated and Group has adopted it, together with SLFRS 9, effective from 1 January 2018. Changes including transition disclosures, detail quantitative and qualitative information about the expected credit Loss calculations such as the assumption and inputs used are given in Notes 2.5.2 and 52 on page 269 and 342.

2.2.3 SLFRS 15 – Revenue from Contract with Customers SLFRS 15 was effective from 1 January 2018 and the core principle of SLFRS 15 is that an entity has to recognise revenue to depict the transfer of promised goods or services to customers. This core principle is delivered in a five-step model framework as disclosed below:

Identify the contracts with a customer

Identify the performance obligation in the contact

Determine the transaction price

Allocate the transaction price to the performance obligations in the contract

Recognise revenue when the entity satisfies a performance obligation.

Application of this guidance will depend on the facts and circumstances present in a contract with a customer and will require the exercise of judgement. The Bank and the Group did not have any material impact on its fee and commission income with the adoption of SLFRS 15 for the year beginning 1 January 2018.

2.3 Fair value measurement “Fair value” is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or, in its absence, the most advantageous market to which the Group has access at that date. The fair value of a liability reflects its non-performance risk.

The Group measures the fair value of an instrument using the quoted price in an active market for that instrument. A market is regarded as active if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.

If there is no quoted pricing in an active market, then the Group uses valuation techniques that maximise the use of relevant observable inputs and minimise the use of unobservable inputs. The chosen valuation technique incorporates all the factors that market participants would consider in pricing a transaction.

The fair value of an asset or a liability is measured using the assumptions that market participants would use the fair value hierarchy when pricing the asset or liability, if market participants act in their economic best interest.

The Group recognises transfers between levels of the fair value hierarchy as of the end of the reporting period during which the change has occurred.

A fair value measurement of a non-financial asset considers a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. External professional valuers are involved for valuation of significant assets such as land and building.

An analysis of fair value measurement of financial assets and liabilities is provided in Note 55 on pages 375 to 380.

2.4 Significant accounting policies – General 2.4.1 Basis of consolidation The Financial Statements of the Bank and the Group comprise the Financial Statements of the Bank and its Subsidiary in terms of the SLFRS 10 – “Consolidated Financial Statements” and LKAS 27 – “Separate Financial Statements”.




2.4.1.1 Subsidiary The Financial Statements of the subsidiary is fully consolidated from the date on which control is transferred to the Bank and continued to be consolidated until the date when such control ceases. The control exists where the Bank has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The Financial Statements of the Bank’s Subsidiary for the purpose of consolidation are prepared for the same reporting period as that of National Savings Bank, using consistent accounting policies.

2.4.1.2 Transactions eliminated on consolidation All intra-group balances, income and expenses and unrealised gains and losses resulting from intra-group transactions are eliminated in full in preparing the Consolidated Financial Statements. Refer Note 47 (b) – transaction with subsidiary company on page 338.

2.4.1.3 Foreign currency transactions and balances All foreign currency transactions are translated into the functional currency, which is Sri Lankan Rupees, using the exchange rates prevailing at the dates on which the transactions were affected.

Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to Sri Lankan Rupees using the middle exchange rate ruling at that date. All exchange differences arising on the settlement of monetary items or on translating monetary items at rates different to those at which they are initially recorded are recognised in the Income Statement in the period in which they arise.

Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions. Non-monetary items measured at fair value in foreign currency are translated using the exchange rates at the date when the fair value was determined.

The Statement of Financial Position of Foreign Currency Banking Unit is translated to Sri Lankan Rupees at the middle rate of exchange ruling at the reporting date. The transactions of the Foreign Currency Banking Unit have been recorded in accordance with the above policy and the resulting gains/losses are recognised in the Income Statement.

2.5 Significant accounting policies – Recognition of assets and liabilities Financial instruments SLFRS 9 – “Financial Instrument” replaces LKAS 39 for annual periods on or after 1 January 2018. The Bank elected, as a policy choice permitted under SLFRS 9, to continue to apply hedge accounting in accordance with LKAS 39.

The Bank and the Group have restated comparative information for 2017 for financial instruments in the scope of SLFRS 9. Therefore, the comparative information for 2017 is reported under SLFRS 9.

2.5.1 Financial instruments – initial recognition, classification and subsequent measurement 2.5.1.1 Date of recognition The Group initially recognises loans and advances, deposits and subordinated liabilities, etc., on the date on which they are originated. Loans and advances to customers are recognised when funds are transferred to the customers’ accounts. The Bank recognises balances due to depositors when funds are transferred to the Bank. All other financial instruments (including regular-way purchases and sales of financial assets) are recognised on the trade date, which is the date on which the Group becomes a party to the contractual provisions of the instrument.

2.5.1.2 Recognition and initial measurement of financial instruments The classification of financial instruments at initial recognition depends on their contractual terms and the business model for managing the instruments, as described in Notes 2.5.1.4.1 and 2.5.1.4.2 on page 264.

Financial instruments are initially measured at their fair value (as defined in Note 55), except in the case of financial assets and financial liabilities recorded at FVPL, transaction costs are added to, or subtracted from, this amount. Trade receivables are measured at the transaction price. When the fair value of financial instruments at initial recognition differs from the transaction price, the Bank and the Group accounts for the Day 1 profit or loss, as described below.




2.5.1.3 “Day 1” profit or loss When the transaction price differs from the fair value of other observable current market transactions in the same instrument, or fair value based on a valuation technique whose variables include only data from observable markets, the Group immediately recognises the difference between the transaction price and fair value (a “Day 1” profit or loss). In cases where fair value is determined using data which is not observable, the difference between the transaction price and model value is only recognised in the Statement of Comprehensive Income when the inputs become observable, or when the instrument is derecognised. The “Day 1 loss” arising in the case of loans granted to employees at concessionary rates under uniformly applicable schemes is deferred and amortised using Effective Interest Rates (EIR) in “Interest Income and Personnel Expenses” over the remaining service period of the employees or tenure of the loan whichever is shorter.

2.5.1.4 Classification and subsequent measurement of financial assets From 1 January 2018, the Bank classifies all of its financial assets based on the business model for managing the assets and the asset’s contractual terms, measured at either:

Amortised cost,

Fair Value though Other Comprehensive Income (FVOCI),

Fair Value through Profit or Loss (FVPL)

The Bank and the Group classifies and measures its derivative and trading portfolio at FVPL as explained in Note 2.5.1.6. The Bank may designate financial instruments at FVPL, if so doing eliminates or significantly reduces measurement or recognition inconsistencies.

Up to 31 December 2017 as per LKAS 39, the Group classified its financial assets into one of the following categories:

Financial assets at fair value through profit or loss (FVPL), and within this category

– Held for trading

– Designated at fair value through profit or loss

Loans and receivables

Held to maturity

Available for sale

Details of the impact on reclassification and measurement from LKAS 39 to SLFRS 9 are disclosed in transition disclosures given in Note 52 on pages 342 to 354.

Detailed analysis of classification and subsequent measurement of financial assets is given in Note 15 on page 289.

2.5.1.4.1 Business model assessment The Bank and the Group determines its business model at the level that best reflects how it manages groups of financial assets to achieve its business objective.

The Bank’s business model is not assessed on an instrument-by-instrument basis, but at a higher level of aggregated portfolios and is based on observable factors such as:

How the performance of the business model and the financial assets held within that business model are evaluated and reported to the entity's Key Management Personnel,

The risks that affect the performance of the business model (and the financial assets held within that business model) and, in particular, the way those risks are managed,

How managers of the business are compensated, (for example, whether the compensation is based on the fair value of the assets managed or on the contractual cash flows collected)

The expected frequency, value and timing of sales are also important aspects of the Bank’s assessment.

The business model assessment is based on reasonably expected scenarios without taking “worst case” or “stress case” scenarios into account. If cash flows after initial recognition are realised in a way that is different from the Bank’s original expectations, the Bank does not change the classification of the remaining financial assets held in that business model but incorporates such information when assessing newly originated or newly purchased financial assets going forward.

2.5.1.4.2 Assessment of whether contractual cash flows are solely payments of principal and interest (SPPI test) As a second step of its classification process, the Bank assesses the contractual terms of financial to identify whether they meet the SPPI test.

“Principal” for the purpose of this test is defined as the fair value of the financial asset at initial recognition and may change over the life of the financial asset (for example, if there are repayments of principal or amortisation of the premium/discount).




The most significant elements of interest within a lending arrangement are typically the consideration for the time value of money and credit risk. To make the SPPI assessment, the Bank applies judgement and considers relevant factors such as the currency in which the financial asset is denominated, and the period for which the interest rate is set.

In contrast, contractual terms that introduce a more than de minimis exposure to risks or volatility in the contractual cash flows that are unrelated to a basic lending arrangement do not give rise to contractual cash flows that are solely payments of principal and interest on the amount outstanding. In such cases, the financial asset is required to be measured at FVPL.

Refer Notes 2.5.1.4.3 to 2.5.1.4.5 below for details on different types of financial assets recognised on the Statement of Financial Position.

2.5.1.4.3 Financial assets measured at amortised cost A financial asset is measured at amortised cost if it meets both of the following conditions and is not designated as at FVPL:

The asset is held within a business model whose objective is to hold assets to collect contractual cash flows; and

The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

Financial assets measured at amortised cost are given below:

(a) Cash and cash equivalents Details of “Cash and cash equivalents” are given in

Note 16 on page 292.

(b) Balances with central banks Details of “Balances with central banks” are given in


(c) Placement with bank Details of “Placement with banks” are given in Note 18

on page 292.

(d) Financial assets at amortised cost – Loan and advances

Details of “Loan and advances” are given in Note 21 on page 299.

(e) Financial assets at amortised cost – Debt and other instruments

Details of “Debt and other instruments” are given in Note 22 on page 304.

2.5.1.4.4 Financial assets measured at FVOCI Financial assets at FVOCI include debt and equity instruments measured at fair value through other comprehensive income.

Financial assets measured at FVOCI are given in Notes (a) and (b) below:

(a) Debt instruments measured at FVOCI Debt instruments are measured at FVOCI if they are

held within a business model whose objective is to hold for collection of contractual cash flows and for selling financial assets, where the asset’s cash flows represent payments that are solely payments of principal and interest on principal outstanding.

Details of “Debt instruments at FVOCI” are given in Note 23 on pages 305 to 309.

(b) Equity instruments designated at FVOCI Upon initial recognition, the Group elects to classify

irrevocably some of its equity investments held for strategic and statutory purposes as equity instruments at FVOCI. Details of “Equity instruments at FVOCI” are given in Note 23 on pages 305 to 309.

2.5.1.4.5 Financial assets measured at FVPL As per SLFRS 9, all financial assets other than those classified at amortised cost or FVOCI are classified and measured at FVPL. Financial assets at fair value through profit or loss include financial assets that are held for trading or managed and whose performance is evaluated on a fair value basis as they are neither held to collect contractual cash flows nor held both to collect contractual cash flows and to sell financial assets and financial assets designated upon initial recognition at fair value through profit or loss which are discussed in below:

(a) Financial assets designated at fair value through profit or loss

Financial assets designated at fair value through profit or loss are recorded in the Statement of Financial Position (SOFP) at fair value. Changes in fair value are recorded in “Net gain or loss on financial assets and liabilities designated at fair value through profit or loss”. Interest earned is accrued in “Interest income”, using the EIR, while dividend income is recorded in “Other operating income” when the right to receive the payment has been established.

The Group do not have any designated financial assets upon initial recognition as fair value through profit or loss as at the end of the reporting period.




2.5.1.5 Classification and subsequent measurement of financial liabilities As per SLFRS 9, the Group classifies financial liabilities, other than financial guarantees and loan commitments into one of the following categories:

Financial liabilities at fair value through profit or loss, and within this category as –

– Held for trading; or

– Designated at fair value through profit or loss;

Financial liabilities measured at amortised cost.

The subsequent measurement of financial liabilities depends on their classification. SLFRS 9, largely retains the existing requirements in LKAS 39 for the classification of financial liabilities.

2.5.1.5.1 Financial liabilities at fair value through profit or loss The Group do not have any designated financial liabilities as at fair value through profit or loss as at the end of the reporting period.

2.5.1.5.2 Financial liabilities at amortised cost Financial liabilities issued by the Group that are not designated at FVPL are classified as financial liabilities at amortised cost under “Due to banks”, “Due to depositors”, “Due to debt securities holders”, “due to other borrower”, or “Debt security issued” as appropriate, where the substance of the contractual arrangement results in the Group having an obligation either to deliver cash or another financial asset to the holder, or to satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of own equity shares. The Group classifies capital instruments as financial liabilities or equity instruments in accordance with the substance of the contractual terms of the instrument.

After initial recognition, such financial liabilities are subsequently measured at amortised cost using the EIR (Effective Interest Rate) method. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR.

The EIR amortisation is included in “interest expense” in the Income Statement. Gains and losses too are recognised in the Income Statement when the liabilities are derecognised as well as through the EIR amortisation process.

(a) Due to banks Details of “Due to banks” are given in Note 31 on page 318.

(b) Due to depositors Details of “Due to depositors” are given in Note 34

on page 320.

(c) Due to debt securities holders Details of “Due to debt securities holders” are given in


(d) Due to other borrowers Details of “Due to other borrowers” are given in Note 34

on page 320.

(e) Debt securities issued Details of “Debt securities issued” are given in Note 35

on page 321.

2.5.1.6 Derivative assets and liabilities Derivative assets and liabilities are broadly classified into derivative recorded at fair value through profit or loss and derivatives held for risk management purposes.

2.5.1.6.1 Derivative recorded at fair value through profit or loss A derivative is a financial instrument or other contract with all three of the following characteristics:

Its value changes in response to the change in a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable, provided that, in the case of a non-financial variable, it is not specific to a party to the contract (i.e. the “underlying”).

It requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts expected to have a similar response to changes in market factors.

It is settled at a future date.

The Bank enters into derivative transactions with various counterparties. These include interest rate swaps, futures, credit default swaps, cross-currency swaps, forward foreign exchange contracts and options on interest rates, foreign currencies and equities. Derivatives are recorded at fair value and carried as assets when their fair value is positive and as liabilities when their fair value is negative. The notional amount and fair value of such derivatives are disclosed separately in Note 19. Changes in the fair value of derivatives are included in net trading income unless hedge accounting is




applied. Hedge accounting disclosures are provided in Note 19 on pages 293 to 295.

2.5.1.6.2 Derivatives held for risk management purposes and hedge accounting Derivatives held for risk management purposes include all derivative assets and liabilities that are not classified as trading assets and liabilities. Derivatives held for risk management purposes are measured at fair value in the Statement of Financial Position (SOFP).

2.5.1.6.2.1 Fair value hedges When a derivative is designated as the hedging instrument in a hedge of the change in fair value of a recognised asset or liability or a firm commitment that could affect the profit or loss, changes in the fair value of the derivative are recognised immediately in profit or loss in the same line item as the hedged item that is attributable to the hedged risk.

If the hedging derivative expires or is sold, terminated or exercised, or the hedge no longer meets the criteria for fair value hedge accounting, or the hedge designation is revoked, then hedge accounting is discontinued prospectively. However, if the derivative is novated to a central counterparty by both parties as a consequence of laws or regulations without changes in its terms except for those are necessary for the novation, then the derivative is not considered as expired or terminated.

Any adjustment up to the point of discontinuation to a hedged item for which the effective interest method is used is amortised to profit or loss as part of the recalculated EIR of the item over its remaining life.

2.5.1.6.2.2 Cash flow hedges When a derivative is designated as the hedging instrument in a hedge of the variability in cash flows attributable to a particular risk associated with a recognised asset or liability that could affect the profit or loss, the effective portion of changes in the fair value of the derivative are recognised in OCI and presented in the hedging reserve within equity. Any ineffective portion of changes in the fair value of the derivative is recognised immediately in profit or loss.

The amount recognised in OCI is reclassified to profit or loss as a reclassification adjustment in the same period as the hedged cash flows affect profit or loss, and in the same line item in the Statement of Profit or Loss and OCI.

If the hedging derivative expires or is sold, terminated, or exercised, or the hedge no longer meets the criteria for cash flow hedge accounting, or the hedge designation is revoked,

then hedge accounting is discontinued prospectively. However, if the derivative is novated to a central counterparty by both parties as a consequence of laws or regulations without changes in its terms except for those are necessary for the novation, then the derivative is not considered as expired or terminated.

2.5.1.6.2.3 Embedded derivatives An embedded derivative is a component of a hybrid instrument that also includes a non-derivative host contract with the effect that some of the cash flows of the combined instrument vary in a way similar to a stand-alone derivative. An embedded derivative cause some or all of the cash flows that otherwise would be required by the contract to be modified according to a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable, provided that, in the case of a non-financial variable, it is not specific to a party to the contract. A derivative that is attached to a financial instrument, but is contractually transferable independently of that instrument, or has a different counterparty from that instrument, is not an embedded derivative, but a separate financial instrument.

As per SLFRS 9, derivatives may be embedded in another contractual arrangement (a host contract). The Group treats derivatives embedded in financial liabilities and non-financial host contracts as separate derivatives if –

The host contract is not itself carried at FVPL;

The terms of the embedded derivative would meet the definition of a derivative if they were contained in a separate contract; and

The economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract.

As at the reporting date the Group do not have embedded derivatives.

2.5.1.7 Reclassification of financial assets and liabilities As per SLFRS 9, financial assets are not reclassified subsequent to their initial recognition, except and only in those rare circumstances when the Group changes its objective of the business model for managing such financial assets which may include the acquisition, disposal, or termination of a business line.

Financial liabilities are not reclassified as such reclassifications are not permitted by SLFRS 9.




From 1 January 2018, the Bank and the Group have not reclassified its financial assets subsequent to their initial recognition, apart from the exceptional circumstances in which the Bank acquires, disposes of, or terminates a business line. The Bank did not reclassify any of its financial assets or liabilities as at 1 January 2018 other than the re-arrangement of financial instruments to restate the comparative figure in 2017.

2.5.1.7.1 Measurement of reclassification of financial assets 2.5.1.7.1.1 Reclassification of financial instruments at fair value through profit or loss

to fair value through other comprehensive income

The fair value on reclassification date becomes the new gross carrying amount. The EIR is calculated based on the new gross carrying amount. Subsequent changes in the fair value is recognised in OCI.

to amortised cost

The fair value on reclassification date becomes the new carrying amount. The EIR is calculated based on the new gross carrying amount.

2.5.1.7.1.2 Reclassification of financial instruments at “Fair value through other comprehensive income”

to fair value through profit or loss

The accumulated balance in OCI is reclassified to profit and loss on the reclassification date.

to amortised cost

The financial asset is reclassified at fair value. The cumulative balance in OCI is removed and is used to adjust fair value on the reclassification date. The adjusted amount becomes the amortised cost.

EIR determined at initial recognition and gross carrying amount are not adjusted as a result of reclassification.

2.5.1.7.1.3 Reclassification of financial instruments at “amortised cost”

to Fair value through other comprehensive income

The asset is remeasured to fair value, with any difference recognised in OCI. EIR determined at initial recognition is not adjusted as a result of reclassification.

to fair value through profit or loss

The fair value on the reclassification date becomes the new carrying amount. The difference between amortised cost and fair value is recognised in profit and loss.

2.5.1.8 Derecognition of financial assets and financial liabilities

2.5.1.8.1 Financial assets The Group derecognises a financial asset (or where applicable a part thereof) when the contractual rights to the cash flows from the financial asset expire or it transfers the rights to receive the contractual cash flows in a transaction in which substantially all risks and rewards of ownership of the financial asset are transferred or in which the Group neither transfers nor retains substantially all risks and rewards of ownership and it does not retain control of the financial asset.

On derecognition of a financial asset, the difference between the carrying amount of the asset (or the carrying amount allocated to the portion of the asset derecognised) and the sum of the consideration received (including any new asset obtained less and new liability assumed) and any cumulative gain or loss that had been recognised in OCI is recognised in profit or loss.

However, cumulative gain/loss recognised in OCI in respect of equity investment securities designated as at FVOCI is not recognised in profit or loss on derecognition of such securities as per SLFRS 9. Any interest in transferred financial assets that qualify for derecognition that is created or retained by the Group is recognised as a separate asset or liability.

The Group enters into transactions whereby it transfers assets recognised on its SOFP, but retains either all or substantially all risks and rewards of the transferred assets or a portion of them. In such cases, the transferred assets are not derecognised. When assets are sold to a third party with a concurrent total rate of return swap on the transferred assets, the transaction is accounted for as a secured financing transaction similar to sale and repurchase transactions because the Group retains all or substantially all risks and rewards of ownership of such assets.

When the Group has transferred its right to receive cash flows from an asset or has entered into a pass-through arrangement and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Group’s continuing involvement in the asset. In that case, the Group also recognises an associated liability. The transferred asset and the associated liability are measured on the basis that reflected the rights and obligations that the Group has retained.

2.5.1.8.2 Financial liabilities The Group derecognises a financial liability when its contractual obligations are discharged, cancelled, or expired.




2.5.1.9 Modification of financial assets and financial liabilities

2.5.1.9.1 Financial assets If the terms of a financial asset are modified, the Group evaluates whether the cash flows of the modified asset are substantially different. If the cash flows are substantially different, then the contractual rights to cash flows from the original financial asset are deemed to have expired. In this case, the original financial asset is derecognised, and a new financial asset is recognised at fair value.

As per SLFRS 9, if the cash flows of the modified asset carried at amortised cost are not substantially different, then the modification does not result in derecognition of the financial asset. In this case, the Group recalculates the gross carrying amount of the financial asset and recognises the amount arising from adjusting the gross carrying amount as a modification gain or loss in profit or loss. If such a modification is carried out because of financial difficulties of the borrower, then the gain or loss is presented together with impairment losses. In other cases, it is presented as interest income.

2.5.1.9.2 Financial liabilities Where an existing financial liability is replaced by another from the same lender on substantially different terms or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability. In this case, a new financial liability based on the modified terms is recognised at fair value. The difference between the carrying amount of the financial liability extinguished and the new financial liability with modified terms is recognised in profit or loss.

2.5.1.10 Offsetting of financial instruments Financial assets and financial liabilities are offset, and the net amount reported in the SOFP if, and only if, there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the assets and settle the liabilities simultaneously.

2.5.1.11 Amortised cost and gross carrying amount The “amortised cost” of a financial asset or financial liability is the amount at which the financial asset or financial liability is measured on initial recognition minus the principal repayments, plus or minus the cumulative amortisation using the EIR method of any difference between that initial amount and the maturity amount and, for financial assets, adjusted for any ECL allowance.

The “gross carrying amount of a financial asset” is the amortised cost of a financial asset before adjusting for any ECL allowance.

2.5.1.12 Fair value of financial instruments Fair value measurement of financial instruments including the fair value hierarchy is explained in Notes 2.3 and 55 on pages 262 and 375.

2.5.2 Impairment of financial assets

2.5.2.1 Impairment of financial assets (Policies applicable before 1 January 2018) The Group assesses at each reporting date whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred “loss event”) and that loss event (or events) has a impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated.

Objective evidence of impairment includes indications that the borrower or a group of borrowers is experiencing significant financial difficulty, the probability that they will enter bankruptcy or other financial restructuring, default or delinquency in interest or principal payments and also other observable data indicating that there is a measurable decrease in the estimated future cash flows, or economic conditions that correlate with defaults.

Objective evidence that financial assets (including equity securities) are impaired can include –

Significant financial difficulty of the borrower or issuer,

Reschedulement of credit facilities,

Adverse financial ratio and gearing ratios,

Downgrading of the external credit rating,

Default or delinquency by a borrower,

Restructuring of a loan or advance by the Group on terms that the Group would not otherwise consider,

Indications that a borrower or issuer will enter bankruptcy,

The disappearance of an active market for a security, or

Other observable data relating to a group of assets such as adverse changes in the payment status of borrowers or issuers in the group or economic conditions that correlate with defaults in the Group.




In general, the Group considers a decline of 20% to be “significant” and a period of six months to be “prolonged”. However, in specific circumstances a smaller decline or a shorter period may be appropriate.

i. Impairment of financial assets carried at amortised cost

Details of the individual and collective assessment of impairments are given in Note 21 on page 299.

ii. Impairment of available-for-sale financial investments

Details of the Impairment of available-for-sale financial investments is given in Note 23 on page 305.

2.5.2.2 Impairment of financial assets (Policy applicable from 1 January 2018)

2.5.2.2.1 Individual assessment of impairment For financial assets above a predetermined threshold (i.e. for individually significant financial assets), if there is objective evidence that an impairment loss had been incurred, the amount of the loss was measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that had not been incurred).

The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure was probable. Detail of Individual assessment of impairment are given in Note 21. (d) on page 301.

2.5.2.2.2 Individually significant assessment and not impaired individually Loans which are individually significant but not impaired will be assessed collectively for impairment either under Stage 1 or Stage 2 based on the criteria whether there has been significant credit deterioration since origination.

While establishing significant credit deterioration Bank will consider the following criteria’s:

Other changes in the rates or terms of an existing financial instrument that would be significantly different if the instrument was newly originated.

Significant changes in external market indicators of credit risk for a particular financial instrument or similar financial instrument.

Other information related to the borrower, such as changes in the price of a borrower’s debt/equity instrument.

An actual/expected internal credit rating downgrade for the borrower or decrease in behavioural score used to assess credit risk internally.

Existing or forecast adverse changes in business, financial or economic condition that are expected to cause significant change in the borrower’s ability to meet its obligation.

An actual or expected significant change in the operating results of the borrower in relating to actual/expected decline in revenue, increase in operating risk, working capital deficiency, decrease in asset quality, increase in gearing, liquidity management problems.

Significant increase in credit risk on other financial instruments of the same borrower.

An actual or expected significant adverse change in the regulatory, economic, or technological environment of the borrower that result in a significant change in the borrower’s ability to meet the debt obligation.

2.5.2.2.3 Overview of the ECL principles The adoption of SLFRS 9 has fundamentally changed the Bank’s loan loss impairment method by replacing LKAS 39’s incurred loss approach with a forward-looking ECL approach.

From 1 January 2018, the Bank has been recording the allowance for expected credit losses for all loans and other debt financial assets not held at FVPL, together with loan commitments and financial guarantee contracts, in this section all referred to as “financial instruments”. Equity instruments are not subject to impairment under SLFRS 9.

The ECL allowance is based on the credit losses expected to arise over the life of the asset (the lifetime expected credit loss or LTECL), unless there has been no significant increase in credit risk since origination, in which case, the allowance is based on the 12 months’ expected credit loss (12mECL). The Bank’s policies for determining if there has been a significant increase in credit risk are set out in Note 2.5.2.2.7 on page 272.

The 12mECL is the portion of LTECLs that represent the ECLs that result from default events on a financial instrument that are possible within the 12 months after the reporting date. Both LTECLs and 12mECLs are calculated on either an individual basis or a collective basis, depending on the nature of the underlying portfolio of financial instruments.

The Bank has established a policy to perform an assessment, at the end of each reporting period, of whether a financial instrument’s credit risk has increased significantly since initial recognition, by considering the change in the risk of default occurring over the remaining life of the financial instrument.




Based on the above process, the Bank groups its loans into Stage 1, Stage 2 and Stage 3 as described below:

Stage 1

When loans are first recognised, the Bank recognises an allowance based on 12mECLs. Stage 1 loans also include facilities where the credit risk has improved, and the loan has been reclassified from Stage 2.

Stage 2

When a loan has shown a significant increase in credit risk since origination, the Bank records an allowance for the LTECLs. Stage 2 loans also include facilities, where the credit risk has improved, and the loan has been reclassified from Stage 3.

Credit facilities, where contractual payments of a customer are more than 30 days past due, other than the credit facilities categorised under Stage 3 below, subject to the rebuttable presumption as stated in SLFRS 9.

Stage 3

Credit facilities where contractual payments of a customer are more than 90 days past due, subject to the rebuttable presumption as stated in SLFRS 9.

All restructured loans, which are restructured more than twice.

All rescheduled loans.

All credit facilities/customers classified as non-performing as per CBSL Directions.

When the risk rating of a customer or an instrument has been downgraded to B+ by an external credit rating agency and/or when there is a two-notch downgrade in the Bank’s internal rating system.

Non-performing credit facilities/customers significant increase in credit risk (refer Note 2.5.2.2.7).

For financial assets for which the Bank has no reasonable expectations of recovering either the entire outstanding amount, or a proportion thereof, the gross carrying amount of the financial asset is reduced. This is considered a (partial) derecognition of the financial asset.

2.5.2.2.4 The calculation of ECL The Bank calculates ECL to measure the expected cash shortfalls, discounted at an approximation to the EIR. A cash shortfall is the difference between the cash flows that are due to an entity in accordance with the contract and the cash flows that the entity expects to receive.

The mechanics of the ECL calculations are outlined below and the key elements are, as follows:

Probability of Default (PD) The probability of default is an estimate of the likelihood

of default over a given time horizon. A default may only happen at a certain time over the assessed period, if the facility has not been previously derecognised and is still in the portfolio.

Exposure at Default (EAD) The exposure at default is an estimate of the exposure at a

future default date, taking into account expected changes in the exposure after the reporting date, including repayments of principal and interest, whether scheduled by contract or otherwise, expected draw downs on committed facilities, and accrued interest from missed payments.

Loss Given Default (LGD) The Loss Given Default is an estimate of the loss arising in

the case where a default occurs at a given time. It is based on the difference between the contractual cash flows due and those that the lender would expect to receive, including from the realisation of any collateral. It is usually expressed as a percentage of the EAD.

The maximum period for which the credit losses are determined is the contractual life of a financial instrument unless the Bank has the legal right to call it earlier.

Impairment losses and releases are accounted for and disclosed separately from modification losses or gains that are accounted for as an adjustment of the financial asset’s gross carrying value

The mechanics of the ECL method are summarised below:

Stage 1

The 12mECL is calculated as the portion of LTECLs that represent the ECLs that result from default events on a financial instrument that are possible within the 12 months after the reporting date. The Bank calculates the 12mECL allowance based on the expectation of a default occurring in the 12 months following the reporting date. These expected 12-month default probabilities are applied to a forecast EAD and multiplied by the expected LGD and discounted by an approximation to the original EIR.

Stage 2

When a loan has shown a significant increase in credit risk since origination, the Bank records an allowance for the LTECLs. The mechanics are similar to those explained above, but PDs and LGDs are estimated over the lifetime of the instrument. The expected cash shortfalls are discounted by an approximation to the original EIR.




Stage 3

For loans considered credit-impaired, the Bank recognises the lifetime expected credit losses for these loans. The method is similar to that for Stage 2 assets, with the PD set at 100%.

2.5.2.2.5 Debt instruments measured at fair value through OCI The ECLs for debt instruments measured at FVOCI do not reduce the carrying amount of these financial assets in the Statement of Financial Position, which remains at fair value. Instead, an amount equal to the allowance that would arise if the assets were measured at amortised cost is recognised in OCI as an accumulated impairment amount, with a corresponding charge to profit or loss. The accumulated loss recognised in OCI is recycled to the profit and loss upon derecognition of the assets.

2.5.2.2.6 Forward–looking information In its ECL models, the Bank relies on a broad range of forward-looking information as economic inputs, such as:

GDP growth

Unemployment rates

Inflation rates

Exchange rates

Interest rates

The inputs and models used for calculating ECLs may not always capture all characteristics of the market at the date of the Financial Statements. To reflect this, qualitative adjustments or overlays are occasionally made as temporary adjustments when such differences are significantly material.

2.5.2.2.7 Significant increase in credit risk The Bank continuously monitors all assets subject to ECL, in order to determine whether an instrument or a portfolio of instruments is subject to 12mECL or LTECL, the Bank assess whether there has been a significant increase in credit risk since initial recognition. The Bank considers the significant increase in credit risk when one of the following factors/condition are met.

When contractual payments of a customer are more than 30 days past due (subject to the rebuttable presumption in the SLFRS 9)

When the risk rating of a customer or an instrument has been downgraded to B+ by an external credit rating agency

Restructured facilities

Secondary qualitative indicators triggering a significant increase in credit risk for an asset, such as moving a customer/facility to watch list

When reasonable and supportable forecasts of future economic conditions directly affect the performance of a customer/group of customers, portfolios or instruments

When there is a significant change in the geographical locations or natural catastrophes that directly impact the performance of a customer/group of customers or an instrument

When the value of collateral is significantly reduced and/or realisability of collateral is doubtful

When a customer is subject to litigation, that significantly affects the performance of the credit facility

Frequent changes in the Senior Management of an institutional customer

Delay in the commencement of business operations/projects by more than two years from the originally agreed date

Modification of terms resulting in concessions, including extensions, deferment of payments, waiver of covenants etc.

When the customer is deceased/insolvent

When the Bank is unable to contact or find the customer

A fall of 50% or more in the turnover and/or profit before tax of the customer when compared to the previous year; and

Erosion in net-worth by more than 25% when compared to the previous year

2.5.2.2.8 Definition of default and credit impaired assets The Group considers loans and advances to other customers be defaulted when:

The borrower is unlikely to pay its obligations to the Group in full, without recourse by the Group to actions such as realising security (if any is held); or

The borrower becomes 90 days past due on its contractual payments.

In addition, the Group classifies the financial investments under Stage 3 when the external credit rating assigned to the particular investment is “default”.

2.5.3 Property, plant and equipment (PPE) Details of property, plant and equipment are given in Note 26 on page 310.

2.5.4 Intangible assets Details of intangible assets are given in Note 28 on page 316.




2.5.5 Impairment of non-financial assets The Group assess at each reporting date whether there is an indication that an asset other than deferred tax asset, may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Group estimates the asset’s recoverable amount. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount.

2.5.6 Retirement benefit obligation 2.5.6.1 Defined benefit pension plans 2.5.6.1.1 Staff pension fund – I The Bank operates a defined benefit pension plan, for the permanent staff members who have joined the Bank prior to 1 October 1995, which requires contributions to be made to a separately administered fund. The cost of providing benefits under the defined benefit pension plan – I is determined using the Projected Unit Credit actuarial valuation method. Actuarial gains and losses are recognised in the Other Comprehensive Income in the period in which they arise.

The defined benefit asset or liability is calculated as the present value of the defined benefit obligation less past service costs not yet recognised and less the fair value of planned assets out of which the obligations are to be settled directly, less actuarial losses not yet recognised. The value of the defined benefit liability is borne by the Bank and recognised in the profit or loss. The value of any asset is restricted to the sum of any actuarial losses and past service cost not yet recognised and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan.

The latest actuarial valuation was carried out as of 31 December 2018, by Mr Piyal S Gunatilleke FSA (USA), Member of the American Academy of Actuaries and Consulting Actuaries.

The principal financial assumptions used in the valuation as at 31 December 2018 are as follows:

Interest/discount rate 12.00% p.a.

Increase in cost of living allowances 4.50% p.a.

Increase in average basic salary 6.50% p.a.

The assets of the fund are held separately from these of the Bank and are independently administrated by the Trustees as per the provisions of the Trust Deed and are subject to annual audit by Independent External Auditors. The Financial Statements as well as the Auditor’s Report are tabled and reviewed by the Board of Trustees. They are also submitted for review of the disclosure of the Bank, as the Bank has an obligation of ensuring that funding is made at optimum levels. Pension is payable monthly as long as the participant is alive.

Details of Staff Pension Fund – I are given in Note 36. (a) 1. on pages 323 to 325.

2.5.6.1.2 Unfunded pension liability The past service cost not funded is recognised in Other Comprehensive Income immediately upon actuarial valuation. The actuarial valuation as at 31 December 2018 indicated a past service cost deficit of Rs. 2,596 Mn. which has been provided in full. The details of Unfunded Pension Liability are given in Note 36. (a) 1 on pages 323 to 325.

2.5.6.1.3 Staff Pension Fund – II The Bank established and operates a defined benefit pension plan, for the permanent staff members who have joined the Bank on or after 1 October 1995, which requires the Bank to monthly contribute 12% of members’ gross salary to a separately administered fund. The cost of providing benefits under the defined benefit pension plan is determined using the Projected Unit Credit actuarial valuation method. Actuarial gains and losses are recognised in the Other Comprehensive Income in the period in which they arise.

The defined benefit asset or liability is calculated as the present value of the defined benefit obligation less past service costs not yet recognised and less the fair value of planned assets out of which the obligations are to be settled directly, less actuarial losses not yet recognised. The value of the defined benefit liability is borne by the Bank and recognised in the profit or loss. The value of any asset is restricted to the sum of any actuarial losses and past service cost not yet recognised and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan.

The latest actuarial valuation was carried out as of 31 December 2018, by Mr Piyal S Gunatilleke FSA (USA), Member of the American Academy of Actuaries and Consulting Actuaries.




The principal financial assumptions used in the valuation as at 31 December 2018 are as follows:

Interest/discount rate 12.00% p.a.

Increase in cost of living allowances 4.50% p.a.

Increase in average basic salary 6.50% p.a.

The assets of the fund are held separately from these of the Bank and are independently administrated by the Trustees as per the provisions of the Trust Deed and are subject to annual audit by independent external auditors. The Financial Statements as well as the Auditor’s Report are tabled and reviewed by the Board of Trustees. They are also submitted for review of the disclosure of the Bank, as the Bank has an obligation of ensuring that funding is made at optimum levels. Pension is payable monthly as long as the participant is alive.

Details of Staff Pension Fund – II are given in Note 36. (a) 2. on pages 325 to 327.

2.5.6.1.4 Widows’/Widowers’ and Orphans Pension Fund Effective from 2013 December, the Bank has established a “Widows’/Widowers’ and Orphans” Pension Scheme for the members of Pension scheme – II. Members of Pension Scheme II are opting for be members of the Widows’/Widowers’ and Orphans Pension Scheme. The Bank does not contribute to the Fund while Bank’s employees monthly contribute 5% of their basic salary, to the Fund.

2.5.6.2 Gratuity With the establishment of Staff Pension Scheme II, employees who joined the Bank on or after 1 October 1995 become members of the Pension Scheme II, thus they are not entitle to the rights and privileges under Service Gratuity Scheme. However, a minimum period of 120 months uninterrupted active service in the Bank at the time of retirement is required to be eligible for any retirement benefit under this pension scheme. Therefore, employees who retire before 10 years of service and whose services are terminated after five years other than by retirement are eligible to receive a terminal gratuity under the Payment of Gratuity Act No. 12 of 1983, at the rate of one half of the gross salary applicable to the last month of the financial year, for each year of continuous service.

Probability of occurrence of such event is rare according to Management’s judgement and past experiences. A gratuity provision is not maintained in the Financial Statements unless a significant liability is estimated at reporting date. Where a gratuity is paid to an employee in such event under Payment of Gratuity Act No. 12 of 1983, it is recognised as a gratuity expense in the Income Statement in the same year.

2.5.6.3 Post-employment medical benefits The Bank has a contributory medical assistance scheme for the retired employees. The assets of the plan are held independently of the Bank’s assets and administered by Boards of Trustees, representing the Management and the employees, as provided in the trust deed of the fund.

The Bank contributes to the contributory medical scheme an amount determined by the Management of the Bank based on actuarial recommendation made from time to time. Accordingly, a sum of Rs. 135.6 Mn. has been provided from the profit of 2018.

Details of post-employment medical benefits are given in Note 36. (a) 3 on page 327.

2.5.6.4 Defined contribution plans Details of defined contribution plans are given in Note 11 on page 284.

2.5.7 Other liabilities Details of other liabilities are given in Note 39 on page 331.

2.5.8 Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. The expenses relating to any provision is presented in the Income Statement net of any reimbursement.

2.5.8.1 Provision for fraudulent withdrawals The total value of fraudulent withdrawals identified as at 31 December 2018 was Rs. 110.3 Mn. A provision of Rs. 81.3 Mn. already exists in the account.

2.5.9 Contingent liabilities and commitments This includes Bank Guarantees, Letter of Credit, undrawn credit facilities, other indirect credit facilities and capital commitment. The Bank guarantees are contracts that require the Group to make specified payments to reimburse the holder for a loss that it incurs because a specified debtor fails to make payment when it is due in accordance with the terms of a debt instrument. Undrawn loan commitments and Letters of Credits are commitments under which, over the duration of the commitment, the Bank is required to provide a loan with pre-specified terms to the customer.

Effective from 1 January 2018, these contracts are subject to the assessment of impairment under SLFRS 9.




Details of contingent liabilities and commitments are given in Note 46 on page 336.

2.5.10 Earnings per share (EPS) Details of “Basic and Diluted EPS” are given in Note 14 on page 288.

2.6 Significant accounting policies – Recognition of income and expenses for financial instruments Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Bank and the revenue can be reliably measured. Details of “Income and expenses” are given in Notes 3 to 14 on pages 277 to 288.

2.6.1 Interest and similar income and expense Details of “Interest income and expenses” are given in Note 3 to 4 on page 277 to 279.

2.6.2 Fee and commission income Details of “Commission income and expenses” are given in Note 5 on page 279.

2.6.3 Net trading income Details of “Net gains/(losses) from trading” are given in Note 6 on page 281.

2.6.4 Dividend income Dividend income is recognised when the right to receive income is established. Usually, this is the ex-dividend date for quoted equity securities. Details of “Dividend income” is given in Note 9 on page 282.

2.6.5 Rent income Rent income is recognised in profit or loss on an accrual basis. Details of “Rent income” is given in Note 9 on page 282.

2.7 Significant accounting policies – taxation

2.7.1 Current taxation Details of current taxation are given in Note 13 on page 286.

2.7.2 Deferred taxation Details of deferred taxation are given in Notes 13 and 29 on page 286 and 317 respectively.

2.7.3 Value added tax (VAT) on financial services VAT on financial services is calculated in accordance with section 25A of Value Added Tax Act No. 14 of 2002 and subsequent amendments thereto.

VAT on financial services is payable at 15% on operating profit before value added tax and nation building tax on financial services adjusted for emoluments of employees and economic depreciation.

2.7.4 Nation building tax (NBT) on financial services NBT on financial services is calculated in accordance with Nation Building Tax (Amendment) Act No. 10 of 2014. NBT on financial services is payable at 2% on same base subjected to value added tax on financial services.

2.7.5 Debt repayment levy (DRL) on financial services The new Finance Act No. 35 of 2018 has imposed a new tax termed the “Debt Repayment Levy” (DRL) which is a temporary levy (From 1 October to 31 December 2021) charged on banks and financial institutions as indicated in the Budget 2018. DRL on financial services is payable at 7% on same base subjected to value added tax on financial services.

2.7.6 Economic service charge (ESC) Economic Service Charge (ESC) has been administered since 1 April 2006 under the Economic Service Charge (ESC) Act No. 13 of 2006, as amendments thereafter. Prior to this, it has been administered under Finance Acts 11 of 2004 and 11 of 2005 from 1 April 2004 up to 1 April 2006. The rate applicable is 0.25% on relevant turnover. Unclaimed ESC, if any, can be carried forward and set-off against the income tax payable in the five subsequent years. As per budget proposal 2017, the applicable rate is increased to 0.50% on relevant turnover and claimable period limited to three years including existing year effective from 1 January 2017.

As per the provisions of the Finance Act No. 11 of 2004, and amendments thereto, the ESC was introduced with effect from 1 April 2004. Currently, the ESC is payable at 0.25% on “Exempt Turnover” and is deductible from the income tax payments. Unclaimed ESC, if any, can be carried forward and set-off against the income tax payable in the five subsequent years.




2.8 Statement of cash flows The Statement of Cash Flows has been prepared by using the “Direct Method” of preparing cash flows in accordance with the LKAS 7. Cash and cash equivalents comprise short-term, highly liquid investment that is readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value. The cash and cash equivalents include cash in hand, balances with banks, and money at call and short notice. The Statement of Cash Flows is given on page 256.

2.9 Regulatory provisions 2.9.1 Deposit insurance scheme The Bank calculates the insurance premium on eligible deposit base at the rate of 0.10% which is the applicable statutory rate based on capital adequacy ratio of the Bank. The Bank has remitted the applicable premium within a period of 15 days from the end of each quarter as stipulated by the Direction.

2.9.2 Crop insurance levy (CIL) As per the provisions of the Section 14 of the Finance Act No. 12 of 2013, the CIL was introduced with effect from 1 April 2013 and is payable to the National Insurance Trust Fund. Currently, the CIL is payable at 1% of the profit after tax.

2.10 Events after the reporting period Details of events after reporting date are given in Note 50 on page 342.

2.11 Accounting standards issued but not yet effective as at reporting date The following SLFRSs have been issued by The Institute of Chartered Accountants of Sri Lanka that have an effective date in the future and have not been applied in preparing these Financial Statements. Those SLFRSs will have an effect on the accounting policies currently adopted by the Bank and the Group and may have an impact on the future Financial Statements.

2.11.1 Sri Lanka Accounting Standard (SLFRS 16) – Leases This Standard sets out the principles for the recognition, measurement, presentation, and disclosure of leases. The objective is to ensure that lessees and lessors provide relevant information in a manner that faithfully represents those transactions. This information gives a basis for users of financial statements to assess the effect that leases have on the financial position, financial performance, and cash flows of an entity. This Standard supersedes the following Standard and interpretations:

(a) LKAS 17 – Leases;

(b) IFRIC 4 Determining Whether an Arrangement Contains a Lease;

(c) SIC-15 Operating Leases — Incentives; and

(d) SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease.

An entity shall apply this Standard for annual reporting periods beginning on or after 1 January 2019. The Bank and the Group have no material net impact on the implementation of the above Standard.




3 Gross income

Accounting policy

Gross revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. The specific recognition criteria must also be met before revenue recognition is discussed under respective income notes.

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

Interest income 110,506,931 103,578,838 111,718,948 104,424,417Fee and commission income 1,005,262 782,776 1,008,482 785,077Net gain/(loss) from trading (707,433) 1,206,408 (1,062,421) 1,520,740Net fair value gains/(losses) from financial instruments at fair value through profit or loss – – – –Net gains/(losses) from derecognition of financial assets 6,906 707,491 6,906 707,491Net other operating income 1,090,412 1,720,272 1,088,539 796,897

Gross income 111,902,078 107,995,784 112,760,454 108,234,622

4 Net interest income

Accounting policy

Recognition of interest income and interest expenses

For all financial instruments measured at amortised cost, interest-bearing financial assets classified as fair value through other comprehensive income and financial instruments measured at fair value through profit or loss, interest income or expense is recorded using the EIR, which is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or financial liability. The calculation takes into account all contractual terms of the financial instrument (for example, prepayment options) and includes any fees or incremental costs that are directly attributable to the instrument and are an integral part of the EIR, but not future credit losses.

The carrying amount of the financial asset or financial liability is adjusted if the Group revises its estimates of payments or receipts. The adjusted carrying amount is calculated based on the original EIR and the change in carrying amount is recorded as interest income for financial assets and interest expense for financial liabilities. However, for a reclassified financial asset for which the Bank subsequently increases its estimates of future cash receipts as a result of increased recoverability of those cash receipts, the effect of that increase are recognised as an adjustment to the EIR from the date of the change in estimate.

Once the recorded value of a financial asset or a group of similar financial assets has been reduced due to an impairment loss, interest income continues to be recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.




4. Net interest income (contd.)

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

4. (a) Interest income Cash and cash equivalents 27,501 51,967 27,501 51,967Balances with central banks – – – –Placements with banks 1,867,470 710,462 1,867,470 710,462Derivative financial instruments – – – –Financial assets recognised through profit or loss

– Measured at fair value 814,915 1,337,694 1,489,010 1,854,041– Designated at fair value – – – –

Financial assets at amortised cost– Loans and advances 49,905,753 42,645,354 49,866,308 42,478,728– Debt and other instruments 57,733,319 58,265,141 58,150,208 58,603,901

Financial assets measured at fair value through other comprehensive income 157,972 568,219 318,450 725,318

Total interest income 110,506,931 103,578,838 111,718,948 104,424,417

4. (b) Interest expenses Due to banks 5,305,589 2,916,210 5,544,866 3,183,899Financial liabilities recognised through profit or loss – – – –Financial liabilities at amortised cost

– due to depositors 68,955,361 60,161,942 68,955,361 60,161,942– due to debt securities holders – – – –– due to other borrowers 927,510 2,246,794 1,526,227 2,521,876

Debt securities issued 10,433,816 13,119,880 10,433,816 13,119,880

Total interest expenses 85,622,275 78,444,825 86,460,269 78,987,596

Net interest income 24,884,656 25,134,013 25,258,679 25,436,821

Interest income

2018

110,

507

2017

103,

579

Rs. Mn.

112,500

110,000

107,500

105,000

102,500

100,000

Interest expense

20182017

85,6

22

78,4

45

Rs. Mn.

90,000

85,000

80,000

75,000

70,000

65,000




4. Net interest income (contd.)

4. (c) Net interest income from Sri Lanka Government Securities

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

Interest income 57,237,192 58,878,205 58,460,191 59,870,757(Less): Interest expenses – – – –

Net interest income from Sri Lanka Government Securities 57,237,192 58,878,205 58,460,191 59,870,757

4. (d) Notional tax credit for withholding tax on Government Securities on secondary market transactions In accordance with the Section 137 of the Inland Revenue Act No. 10 of 2006 and amendment thereto, the Group is entitled to a notional tax credit equivalent to 1/9th of the interest income derived from the market transaction in Government Securities up to 31 March 2018. From 1 April 2018 onward, Group is not entitled to get notional tax credit based on the provision of Inland Revenue Act No. 24 of 2017.

Accordingly, the net income earned by the Group from the secondary market transactions up to 31 March 2018 in Government securities, has been grossed up in the Financial Statements and the resulting notional tax credit amounted to Rs. 1,235 Mn. (2017: Rs. 4,787 Mn.) for the Bank and Rs. 1,243.5 Mn. (2017: Rs. 4,815 Mn.) for the Group.

4. (e) Notional tax receivable The notional tax receivable is given in Note 30 on page 318 to the Financial Statements after deducting the recoverable amounts.

5 Net fee and commission income

Accounting policy

The Group earns fee and commission income from range of services it provides to customers which can be divided into the following two categories.

(a) Fee and commission income earned from services that are provided over a certain period of time: Fee and commission earned for the provision of services over a period of time are accrued over that period.

(b) Fee and commission income from providing transaction services:

Fee and commission income arising from renegotiating or participating in the negotiation of a transaction for a third party are recognised on completion of the underlying transaction. Fees or components of fees that are linked to a certain performance are recognised as the related services are performed.

Fees and commission expenses relating to transaction and service fees are expensed as the services are received. Fee and commission expenses are recognised on an accrual basis.




5. Net fee and commission income (contd.)

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

Fee and commission income 1,005,262 782,776 1,008,482 785,077Fee and commission expenses (141,196) (109,082) (144,685) (113,037)

Net fee and commission income 864,066 673,694 863,797 672,040

ComprisingLoans 849,434 660,273 849,434 660,273Cards (53,299) (43,413) (53,299) (43,413)Trade and remittances – – – –Investment banking 17,640 6,644 17,640 6,644Deposits 24,999 23,110 24,999 23,110Guarantees 9,302 8,465 9,302 8,465Others 15,990 18,616 15,720 16,961

Net fee and commission income 864,066 673,694 863,797 672,040

Fee and commission income

20182017

1,0

05

783

Rs. Mn.

1,250

1,000

750

500

250

0

Fee and commission expenses

20182017

141

109

Rs. Mn.

150

120

90

60

30

0




6 Net gain/(loss) from trading

Accounting policy

Net trading income includes all gains and losses and related dividend for “financial assets recognised through profit or loss” other than interest income and include income from foreign exchange.

Dividend income is recognised when the Group’s right to receive the payment is established.

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

Foreign exchangeFrom banks – – – –From other customers 171,015 200,639 171,015 200,639

Fixed income securities (591,815) 973,468 (946,802) 1,287,800Equity securities (309,451) 334,601 (309,451) 334,601Derivative financial instruments 22,817 (302,300) 22,817 (302,300)

Total (707,433) 1,206,408 (1,062,421) 1,520,740

7 Net fair value gains/(losses) from financial instruments at fair value through profit or loss

Accounting policy

Net trading income includes all unrealised gains and losses from changes in fair value of “financial assets and financial liabilities recognised through profit or loss”.

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

Gains on financial assets at fair value through profit or loss – – – –Losses on financial assets at fair value through profit or loss – – – –Gains on financial liabilities at fair value through profit or loss – – – –Losses on financial liabilities at fair value through profit or loss – – – –

Total – – – –




8 Net gains/(losses) from derecognition of financial assets

Accounting policy

“Net gains/(losses) from financial investments” comprise gains less losses related to financial assets measured at fair value through other comprehensive income and derecognised asset at amortised cost.

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

Recognised at:Fair value through profit or loss – – – –Amortised cost – – – –Fair value through other comprehensive income 6,906 707,491 6,906 707,491

Total 6,906 707,491 6,906 707,491

9 Net other operating income

Accounting policy

i. Gain/(Loss) on disposal of property, plant and equipment

The gains or losses on the disposal of property, plant and equipment is determined on the difference between the carrying amount of the assets at the time of disposal and the proceeds of disposal, net of disposal costs. This is recognised in other operating income in the year in which significant risks and rewards of ownership are transferred to the buyer.

ii. Foreign Exchange gain/(loss)

Foreign currency positions are revalued at each reporting date. Gains and losses arising from changes in exchange rates are included in Income Statement in the period in which they arise.

iii. Dividend income

Dividend earned from financial assets measured at fair value through other comprehensive income is recognised when the Group’s right to receive the payment is established.

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

Gain/(Loss) on investment properties – – – –Gain/(Loss) on sale of property, plant and equipment (25,884) 2,826 (25,884) 2,824Gain/(Loss) on revaluation of foreign exchange 843,326 111,687 843,326 111,687Recovery of loans written off – – – –Less: Loans written off – – – –Dividend income 162,601 1,086,057 162,601 163,743Rent income 15,738 15,643 13,864 13,769Other income 94,631 504,059 94,632 504,874

Total 1,090,412 1,720,272 1,088,539 796,897




10 Impairment charges

Accounting policy

The Group recognise the changes in the impairment provisions for all financial instruments, which are assessed as per Sri Lanka Financial Reporting Standard – SLFRS 9 on “Financial Instruments”. The measurement of impairment losses both under SLFRS 9 and LKAS 39 across all categories of financial assets requires judgement, in particular, the estimation of the amount and timing of future cash flows and collateral values when determining impairment losses and the assessment of a significant increase in credit risk. These estimates are driven by a number of factors, changes in which can result in different levels of allowances. The Bank’s ECL calculations are outputs of complex models with a number of underlying assumptions regarding the choice of variable inputs and their interdependencies. The methodology adopted for impairment is explained in Note 21 (d) to the Financial Statements.

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

Impairment charge 851,462 639,183 851,407 639,194Write-off/waive off 19,587 126,664 19,587 126,664

Total impairment charges 871,049 765,847 870,994 765,858

Impairment chargesCash and cash equivalentsStage 1 130 (28) 130 (28)

Placement with banksStage 1 2,191 469 2,191 469

Financial assets at amortised cost – loans and advances [Note 21 (d)] Stage 1 483,565 102,057 483,565 102,057 Stage 2 143,916 16,730 143,916 16,730 Stage 3 484,055 510,307 484,055 510,307

Financial assets at amortised cost – debt instruments [Note 22 (b)] Stage 1 (262,395) 9,649 (262,450) 9,660 Stage 2 – – – – Stage 3 – – – –Financial assets measured at fair value through other comprehensive income [Note 23 (b)] – – – –Contingent liabilities and commitments (Note 46) – – – –Investment in subsidiaries [Note 24 (a)] – – – –Investments in associates and joint ventures (Note 25) – – – –Property, plant and equipment (Note 26) – – – –Investment properties (Note 27) – – – –

Total 851,462 639,183 851,407 639,194




11 Personnel expenses

Accounting policy

i Defined contribution plans

The Group operates a defined contribution plan. The contribution payable to a defined contribution plan is in proportion to the services rendered to the Group by the employees and is recorded as an expense under “Personnel expenses”. Unpaid contributions are recorded as a liability. The Group contributes to the following defined contribution plans:

(a) Employees’ Provident Fund

The Bank and employees contribute 12% and 8% respectively of the employee’s monthly gross salary (excluding overtime) to the Provident Fund. The Bank’s Provident Fund is an approved fund under the Employees’ Provident Fund Act. The Bank guarantees 8% p.a. return to the members of the Employees’ Provident Fund.

NSB Fund Management Company and its employees contribute 12% and 8% respectively to the Employees Provident Fund (EPF) maintained by Central Bank of Sri Lanka.

(b) Employees’ Trust Fund

The Group contributes 3% of the employee’s monthly gross salary (excluding overtime) to the Employees’ Trust Fund maintained by the Employees Trust Fund Board.

ii Defined benefit plans

Contribution to defined benefit plans are recognised in the Income Statement based on an actuarial valuation carried out separately for each defined benefit plan in accordance with Sri Lanka Accounting Standard LKAS – 19 on “Employee Benefits”.

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

Salary and bonus 7,493,963 5,582,332 7,525,513 5,610,084Contributions to defined contribution/benefit plans 682,797 505,189 684,250 506,243Provision for defined benefit obligations (Note 36) 826,392 585,425 826,743 585,669Share based expenses – – – –Others 259,553 213,558 266,043 216,818

Total 9,262,705 6,886,505 9,302,548 6,918,813

11. (a) Contribution – Staff pension fund – I

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

Amount recognised as expense 522,936 392,077 522,936 392,077

Actuarial valuation was carried out by Mr Piyal S Goonetilleke, Fellow of Society of Actuaries (USA) of Piyal S Goonetilleke and Associates, on 31 December 2018 (refer Note 36 (a) 1 on page 323).




11. Personnel expenses (contd.)

11. (b) Contribution – Staff pension fund – II

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000


Pension scheme II has been established for the employees who joined the Bank on or after 1 October 1995. Actuarial valuation was carried out by Mr Piyal S Goonetilleke, Fellow of Society of Actuaries (USA) of Piyal S Goonetilleke and Associates, on 31 December 2018. (Refer Note 36 (a) 2 on page 325)

11. (c) Contribution – Retired staff medical scheme

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000


Retired staff medical scheme has been established for the employees who joined the Bank on or after 1 October 1995. Actuarial valuation was carried out by Mr Piyal S Goonetilleke, Fellow of Society of Actuaries (USA) of Piyal S Goonetilleke and Associates, on 31 December 2018. (Refer Note 36 (a) 3 on page 327)

11. (d) Contribution – Gratuity

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

Amount recognised as expense – – 351 244

The staff members of the subsidiary company is not entitled for pension scheme and hence they are continue to the members of Gratuity plan as per the provision of Gratuity Act No. 12 of 1983. (Refer Note 36 (a) 4 on page 329)

Total provision for defined benefit obligations

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

Total provision for defined benefit obligations 826,392 585,425 826,743 585,669




12 Other expenses

Accounting policy

Other operating expenses are recognised in the Statement of Profit or Loss on the basis of a direct association between the cost incurred and the earning of specific items of income. All expenditure incurred in the running of the business and maintaining the property, plant and equipment in a state of efficiency has been charged to the Statement of Profit or Loss in arriving at the profit of the year. Provisions in respect of other expenses are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Expenses of depreciation and amortisation of property plant and equipment and intangible assets are separated from other expenses and disclosed in the face of income statement.

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

Directors’ emoluments 1,890 1,929 2,895 3,089Auditors’ remunerations 4,087 5,478 4,677 5,988Non-audit fees to auditors – – – –Professional and legal expenses 21,369 25,126 21,369 25,126Operating lease expenses – – – –Special fees paid to Treasury 320,000 320,000 320,000 320,000Office administration and establishment expenses 3,267,647 2,828,558 3,272,909 2,832,989Others 579,986 556,273 538,931 495,573

Total 4,194,979 3,737,364 4,160,782 3,682,765

13 Tax expenses

Accounting policy

As per Sri Lanka Accounting Standard – LKAS 12 on “Income Taxes”, tax expense is the aggregate amount included in determination of profit or loss for the period in respect of current and deferred taxes. Income tax expense is recognised in Income Statement, except to the extent it relates to items recognised directly in Equity or Other Comprehensive Income (OCI).

Current taxation

Current tax assets and liabilities consist of amounts expected to be recovered from or paid to the Commissioner General of Inland Revenue in respect of the current as well as prior years. The tax rates and tax laws used to compute the amount are those that are enacted or subsequently enacted at the reporting date. Accordingly, provision for taxation is made on the basis of the profit for the year as adjusted for taxation purpose in accordance with the provision of the Inland Revenue Act No. 10 of 2006 and the amendment thereto, at the rates specified below.

Deferred taxation

Deferred tax is provided using the liability method on temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purpose.

Deferred tax assets are recognised for all deductible differences. Carry forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profits will be available against which the deductible temporary differences and the carry forward of unused tax credits and unused tax losses can be utilised.




The carrying amount of a deferred tax asset is reviewed at each reporting date and reduced to the extent it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Unrecognised deferred tax asset are reassessed at each reporting date and are recognise to the extent that is probable that future taxable profit will allow the deferred tax asset to be recovered.

Deferred tax assets and liabilities are measured at the tax rate that are expected to apply in the year when the assets are realised or the liabilities are settled, based on tax rates and tax laws that have been enacted or subsequently enacted at the reporting date.

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

Current tax expensesCurrent year 3,359,383 4,328,136 3,362,374 4,503,829Prior years’ (over)/under provision 6,430 – 6,430 (310)

Deferred tax expensesEffect of change in tax rates – – – –Temporary differences [refer Note 13 (b)] 75,400 90,883 75,252 91,546Prior years’ provision – – – –

Total 3,441,213 4,419,019 3,444,056 4,595,065

Effective tax rate (%) 43.33 31.50 43.35 33.68Effective tax rate (excluding deferred tax) (%) 42.38 30.85 42.41 33.00

13. (a) Reconciliation of tax expenses

Bank Group


2017*Rs. ’000

2018Rs. ’000

2017*Rs. ’000

Profit before tax 7,941,364 14,028,719 7,944,243 13,645,212Income tax for the period (Accounting profit @ 28%) 2,223,582 3,928,041 2,224,388 3,820,659

Adjustment in respect of current income tax of prior periodsAdd: Tax effect of expenses that are not deductible for tax purposes 1,884,775 2,854,015 1,888,211 2,881,503(Less): Tax effect of expenses that are deductible for tax purposes 748,974 2,453,920 750,225 2,198,334

Tax expense for the period 3,359,383 4,328,136 3,362,374 4,503,829

* Bank did not restate impact on tax expense due to SLFRS 9.

13. (b) The deferred tax (credit)/charge in the Income Statement comprises the following:

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

Deferred tax assets – – (148) –Deferred tax liabilities 75,400 90,883 75,400 91,546

Deferred tax (credit)/charge to Income Statement 75,400 90,883 75,252 91,546

13. Tax expenses (contd.)




14 Earnings per share

Accounting policy

The Group presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss for the year attributable to ordinary shareholders of the Bank by the weighted average number of ordinary shares outstanding during the year. Diluted EPS is determined by adjusting the profit or loss attributable to the ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares, if any.

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

Net profit attributable to ordinary equity holders 4,500,151 9,715,961 4,500,187 9,156,396Net profit attributable to ordinary equity holders adjusted for the effect of dilution 4,500,151 9,715,961 4,500,187 9,156,396Weighted average number of ordinary shares for basic earnings per share 670,000 620,000 670,000 620,000Effect of dilution – – – –Weighted average number of ordinary shares adjusted for the effect of dilution 670,000 620,000 670,000 620,000

Basic earnings per ordinary share 6.72 15.67 6.72 14.77

Diluted earnings per ordinary share 6.72 15.67 6.72 14.77

14. (a) Weighted average number of ordinary shares for basic and diluted earnings per share

Outstanding number of shares Weight average number of shares

2018Rs. ’000

2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

Number of shares in issue as at 1 January 670,000 620,000 670,000 620,000Add: Number of shares issued during the year* (refer Note 41) 270,000 50,000 – –

Number of ordinary shares basic and diluted earnings per share 940,000 670,000 670,000 620,000

* Bank has issued 270 Mn. ordinary shares on 31 December 2018.




15 Analysis of financial instruments by measurement basis

Accounting policy

The carrying amounts of financial instruments by category as defined in Sri Lanka Accounting Standard – SLFRS 9 on “Financial Instruments” under headings of the Statement of Financial Position are summarised below:

15. (a) Bank – 2018

ACRs. ’000

FVPLRs. ’000

FVOCIRs. ’000

TotalRs. ’000

AssetsCash and cash equivalents 3,434,524 – – 3,434,524Balances with central banks – – – –Placements with banks 17,588,445 – – 17,588,445Derivative financial instruments – – 4,740,106 4,740,106Loans and advances 423,532,145 – – 423,532,145Debt instruments 518,947,969 14,801,463 2,433,915 536,183,346Equity instruments – 1,878,919 3,750,515 5,629,434

Total financial assets 963,503,083 16,680,382 10,924,536 991,108,000

ACRs. ’000

FVPLRs. ’000

TotalRs. ’000

LiabilitiesDue to banks 77,119,146 – 77,119,146Derivative financial instruments – 1,533 1,533Financial liabilities

– Due to depositors 839,574,411 – 839,574,411– Due to debt securities holders – – –– Due to other borrowers 14,804,802 – 14,804,802


Total financial liabilities 983,887,492 1,533 983,889,025

AC – Financial assets/liabilities measured at amortised cost

FVPL – Financial assets/liabilities measured at fair value through profit or loss

FVOCI – Financial assets measured at fair value through other comprehensive income




15. Analysis of financial instruments by measurement basis (contd.)

15. (b) Bank – 2017

ACRs. ’000

FVPLRs. ’000

FVOCIRs. ’000

TotalRs. ’000

AssetsCash and cash equivalents 3,849,530 – – 3,849,530Balances with central banks – – – –Placements with banks 23,437,274 – – 23,437,274Derivative financial instruments – 650 1,360,064 1,360,714Loans and advances 375,703,730 – – 375,703,730Debt instruments 555,468,618 4,114,978 1,252,878 560,836,474Equity instruments – 2,357,336 4,440,951 6,798,287


ACRs. ’000

FVPLRs. ’000

TotalRs. ’000





15. (c) Group – 2018

ACRs. ’000

FVPLRs. ’000

FVOCIRs. ’000

TotalRs. ’000

AssetsCash and cash equivalents 3,436,929 – – 3,436,929Balances with central banks 177 – – 177Placements with banks 17,588,445 – – 17,588,445Derivative financial instruments – – 4,740,106 4,740,106Loans and advances 423,557,119 – – 423,557,119Debt instruments 522,973,159 24,988,614 4,037,045 551,998,818Equity instruments – 1,878,919 3,751,515 5,630,434

Total financial assets 967,555,829 26,867,533 12,528,666 1,006,952,028




15. Analysis of financial instruments by measurement basis (contd.)

15. (c) Group – 2018 (contd.)

ACRs. ’000

FVPLRs. ’000

TotalRs. ’000





15. (d) Group – 2017

ACRs. ’000

FVPLRs. ’000

FVOCIRs. ’000

TotalRs. ’000

AssetsCash and cash equivalents 3,853,989 – – 3,853,989Balances with central banks 94 – – 94Placements with banks 23,437,274 – – 23,437,274Derivative financial instruments – – 1,360,714 1,360,714Loans and advances 374,416,626 – – 374,416,626Debt instruments 559,319,752 7,032,614 3,071,981 569,424,346Equity instruments – 2,357,336 4,441,951 6,799,287


ACRs. ’000

FVPLRs. ’000

TotalRs. ’000

LiabilitiesDue to banks 49,352,574 – 49,352,574Derivative financial instruments – 956,937 956,937Financial liabilities– Due to depositors 737,212,640 – 737,212,640– Due to debt securities holders – – –– Due to other borrowers 17,545,212 – 17,545,212Debt securities issued 162,709,027 – 162,709,027





16 Cash and cash equivalents

Accounting policy

Cash and cash equivalents includes cash in hand, balances with banks, money at call and short notice that are subject to an insignificant risk of change in their value. Cash and cash equivalents are carried at amortised cost less impairment in the Statement of Financial Position. Balances with banks, and money at call and short notice are subject to the impairment as per SLFRS 9 – “Financial Instrument”.

Bank Group

As at 31 December 2018Rs. ’000

2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

Cash in hand 699,401 944,759 699,411 944,769Balances with banks 2,735,350 2,892,643 2,737,745 2,897,093Money at call and short notice – 12,224 – 12,224

Gross total 3,434,750 3,849,627 3,437,155 3,854,086Less: Impairment (227) (97) (227) (97)

Net Total 3,434,524 3,849,530 3,436,929 3,853,989

17 Balances with central banks

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

Statutory balances with central banks

Central Bank of Sri Lanka – – 177 94

Total – – 177 94

18 Placements with banks

Accounting policy

Placement with banks include short-term deposits placed in banks that are subjected to insignificant risk of changes in fair value, and are used by the Bank and the Group in the management of its short-term commitments. They are recorded in the Financial Statements at their face values or the gross values less impairment, where appropriate. The Group has calculated impairment provision as per SLFRS 9 – “Financial Instrument” based on external rating of particular bank.




18. Placements with banks (contd.)

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

Placements with banks – Sri LankaBank of Ceylon 4,968,528 13,607,749 4,968,528 13,607,749People’s Bank – 27,509 – 27,509Commercial bank 294,392 4,409,474 294,392 4,409,474National Development Bank 2,606,216 3,578,552 2,606,216 3,578,552Seylan Bank 8,683,222 1,724,471 8,683,222 1,724,471Development Finance Corporation of Ceylon (DFCC) 633,275 90,350 633,275 90,350Union Bank of Colombo 405,834 – 405,834 –

Gross total 17,591,466 23,438,104 17,591,466 23,438,104

Less: Impairment (3,021) (830) (3,021) (830)

Net total 17,588,445 23,437,274 17,588,445 23,437,274

19 Derivative financial instruments

Accounting policy

Derivatives are financial instruments that derive their value in response to changes in interest rates, financial instrument prices, commodity prices, foreign exchange rates, credit risk and indices. Derivatives are categorised as “trading” unless they are designated as hedging instruments. The Group uses derivatives such as interest rate swaps and forward foreign exchange contracts.

Derivatives recorded at fair value through profit or loss

Derivatives except for derivatives used as hedging instruments are recorded at fair value and carried as assets when their fair value is positive and as liabilities when their fair value is negative. Changes in the fair value of derivatives are included in “Net trading income”.

Derivatives used as hedge instruments

The Group entered into derivative contacts to hedge against the foreign exchange rate or interest rate. These derivatives are measured at fair value. The Group adopts hedge accounting mismatch to eliminate the accounting resulting from volatility in the Financial Statements between derivatives measured at fair value and the financial asset or liability (hedge exposure) measured at cost/amortised cost, if hedge is efficient.

Cash flow hedge

Cash flow hedge is measured at fair value at the end of each reporting period.

If a hedge of the exposure to variability in cash flow, the effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in Other Comprehensive Income within “cash flow hedge” – fair value gain/(loss). Any gain or losses in fair value relating to an ineffective portion is recognised immediately in the Income Statements.

The accumulated gains and losses recognised in Other Comprehensive Income are reclassified to the Income Statement in the periods in which the hedged item will affect profit or loss. However, when the forecast transaction that is hedged result in the recognised of a non-financial assets or a non-financial liability, the gains and losses previously recognised in Other Comprehensive Income are removed from equity and included in the initial measurement of the cost of the asset or liability.

When a hedging instrument expires or is sold, or when a hedge no longer meet the criteria for hedge accounting, any cumulative gain or loss recognised in Other Comprehensive Income at that time remains in equity until the forecast transaction is eventually recognised in the Income Statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was recognised in Other Comprehensive Income is immediately reclassified to the Income Statement.




19. Derivative financial instruments (contd.)

19.1 Derivative assets Bank and Group

As at 31 December Assets 2018

Rs. ’000

Notional amount – 2018

Rs. ’000

Assets 2017

Rs. ’000

Notional amount – 2017

Rs. ’000

Interest rate derivativesForeign currency derivatives

Currency swaps [Note 19. 2 (b)] 4,740,106 45,551,031 1,360,064 28,106,213Forward foreign exchange contracts – – 650 306,400

Total 4,740,106 45,551,031 1,360,714 28,412,613

19.2 Foreign Currency SWAPs The Bank has raised USD 750 Mn. on 18 September 2013 through foreign borrowings for a period of five years against which two Swaps agreements have been entered into with the Central Bank of Sri Lanka for USD 183.425 Mn. and USD 187.5 Mn. with annual and monthly renewal basis respectively.

The Bank has also raised USD 250 Mn. on 10 September 2014 through foreign borrowings for a period of five years against which a Swap agreement has been entered into with the Central Bank of Sri Lanka for USD 249.31 Mn. with monthly renewal basis.

The objective of the Swaps is to hedge the risk of the foreign currency denominated above mentioned borrowings (only the capital portion) attributable to changes in LKR/USD exchange rate.

A brief description of the Swaps is given below:

19.2 (a) Swap agreements 1

Details Description of the hedge

Hedge instrument Swap contract – 1 USD 183.425 Mn. agreement was expired on 12 September 2018

Hedge Item 5 years USD denominated Senior Note – USD 750 Mn. with interest payable semi annually Capital is fully paid on 18 September 2018.

The period when the cash flows are expected to occur Swap contract – 1 Expired

The amount recognised in Other Comprehensive Income during the year

Swap contract – 1

Swap contract – 1

Expired

Rs. 291.924 Mn. debited to the cash flow hedge reserve

Fair value of hedged item as at 31 December 2018 Nil

Fair value of hedged instrument as at 31 December 2018 Swap contract – 1 Nil

Any forecast transaction for which hedge accounting had previously been used but which is no longer expected to occur

None

The amount that was reclassified from equity to profit or loss during the year

None




19. Derivative financial instruments (contd.) 19.2 (b) Swap agreements 3

Details Description of the hedge

Hedge instrument Swap Contract Counter party – Central Bank of Sri Lanka Notional amount – USD 249.31 Mn. 99.72% of the total foreign borrowings.

The Bank has renewed the above agreement with Central Bank on 25 January 2018 for a Notional amount of USD 249.31 Mn. at a premium.

Hedge item 5 years USD denominated senior note – USD 250 Mn. with interest payable semi annually.

Capital is repayable on 10 September 2019 in full.

The period when the cash flows are expected to occur Annually

The amount recognised in Other Comprehensive Income during the year

None

Fair value of hedged item as at 31 December 2018 Rs. 45,677.1 Mn.

Fair value of hedged instrument as at 31 December 2018 None

Any forecast transaction for which hedge accounting had previously been used but which is no longer expected to occur

None

The amount that was reclassified from equity to profit or loss during the period

None

19.2 (c) Amount recognised in other comprehensive income relating to the currency swaps

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

Swap agreement – 01 (291,924) 290,074 (291,924) 290,074




20 Financial assets recognised through profit or loss

Accounting policy

Financial assets are classified as financial assets recognised through profit or loss if they are acquired principally for the purpose of selling or repurchasing in the near term or holds as a part of a portfolio that is managed together for short-term profit or position taking and recorded to fair value. This category also includes derivative financial instruments entered into by the Group that are not designated as hedging instruments in hedge relationships. Financial asset shall be measured at fair value through profit or loss unless it is measured at amortised cost or fair value through other comprehensive income as per SLFRS 9 – “Financial Instruments”.

Financial assets financial assets recognised through profit or loss are recorded in the Statement of Financial Position at fair value. Changes in fair value are recognised in “Net gain/(loss) from trading” while interest income and expenses are recorded in “Net interest income” according to the terms of the contract, or when the right to the payment has been established. Dividend income and Realised gain or losses are recorded in “Net Gain/(Loss) from Trading”.

The Group evaluates its financial assets recognised through profit or loss, other than derivatives, to determine whether the intention to sell them in the near term is still appropriate. When the Group is unable to trade these financial assets due to inactive markets and Management’s intention to sell them in the foreseeable future significantly changes, the Group may elect to reclassify these financial assets, in rare circumstances.

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

Measured at fair valueSri Lanka Government Securities

Treasury Bills – – 661,361 499,798Treasury Bonds 14,801,463 4,114,978 24,327,253 6,532,816

Equity securities [Note 20 (b)] 1,878,919 2,357,336 1,878,919 2,357,336

Subtotal 16,680,382 6,472,314 26,867,533 9,389,950Designated at fair value – – – –

Total 16,680,382 6,472,314 26,867,533 9,389,950

20. (a) Analysis

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

By collateralisationPledged as collateral – – 9,595,990 2,848,477Unencumbered 16,680,382 6,472,314 17,271,543 6,541,473

Gross total 16,680,382 6,472,314 26,867,533 9,389,950

By CurrencySri Lankan Rupee 16,680,382 6,472,314 26,867,533 9,389,950United States Dollar – – – –

Gross total 16,680,382 6,472,314 26,867,533 9,389,950




20. Financial assets recognised through profit or loss (contd.)

20. (b) Equity securities (quoted) – Bank and Group


Number of shares

CostRs. ’000


Number of shares

CostRs. ’000


1. Banks, finance and insuranceCommercial Bank of Ceylon PLC 991,418 139,295 114,013 485,180 76,303 65,245Commercial Bank of Ceylon PLC (NV) 273,294 33,862 25,963 268,731 33,862 27,901DFCC Bank 430,000 85,787 39,990 430,000 85,787 52,723Hatton National Bank PLC (NV) 287,649 49,599 48,469 284,964 49,599 54,946Lanka ORIX Leasing Co. Holding PLC 2,860 323 257 28,060 3,171 3,191LOLC Finance PLC 4,550,000 50,340 15,470 4,550,000 50,340 17,096Sampath Bank PLC 534,925 142,425 125,707 128,723 31,222 40,106Union Bank PLC 245,000 6,009 2,695 245,000 6,009 3,174

507,640 372,564 336,293 264,382

2. Beverage, food and tobaccoCargills (Ceylon) PLC – – – 114,320 21,003 22,608

21,003 22,608

3. Chemical and pharmaceuticalsCIC Holdings PLC 135,839 15,558 5,379 135,839 15,558 8,959CIC Holdings PLC (NV) 13,700 1,183 411 13,700 1,183 704Haycarb PLC 447,211 83,786 58,137 447,211 83,786 64,341

100,527 63,927 100,527 74,004

4. Construction and engineeringAccess Engineering PLC 3,470,023 132,692 48,927 3,470,023 132,692 80,975Colombo Dockyard PLC 1,234,706 275,603 68,650 1,234,706 275,603 107,193

408,295 117,577 408,295 188,168

5. Diversified holdingsAitken Spence PLC 2,493,516 294,681 119,190 2,593,516 306,499 138,738Browns Investments PLC 13,017,669 65,088 24,734 14,367,669 71,838 36,938C T Holdings PLC 10,133 802 1,728 74,585 13,073 13,282Hayleys PLC 123,026 41,512 23,006 123,026 41,512 29,196Hemas Holdings PLC 650,000 69,656 57,720 – – –John Keells Holdings PLC 1,039,610 174,244 166,026 2,660,190 465,818 391,140Richard Pieris & Company PLC 6,463,907 60,911 67,871 6,463,907 60,911 82,450Vallibel One PLC 3,269,832 75,511 55,587 3,143,693 72,975 55,020

782,405 515,862 1,032,626 746,764





20. (b) Equity securities (quoted) – Bank and Group (contd.)


Number of shares

CostRs. ’000


Number of shares

CostRs. ’000


6. Hotels and travelsAsian Hotels & Properties PLC 1,366,132 106,609 58,607 1,366,132 106,609 71,324Aitken Spence Hotel Holdings PLC 2,102,133 188,903 56,759 2,102,133 188,903 61,110Ceylon Hotels Corporation PLC 3,975,017 128,776 47,700 3,975,017 128,776 62,888John Keells Hotels PLC 5,541,205 103,475 43,221 5,541,205 103,475 48,216Lighthouse Hotels PLC 1,175,667 71,492 34,330 1,175,667 71,492 52,080Mahaweli Reach Hotels PLC 133,300 4,884 1,733 133,300 4,884 2,373Marawila Resorts PLC 699,556 5,915 1,259 1,900 16,063 3,569The Kingsbury PLC 2,871,666 65,038 43,649 4,669,876 105,764 62,337Jetwing Symphony Limited 1,300,000 19,500 15,600 1,300,000 19,500 19,500

694,592 302,858 745,466 383,397

7. Investment trustsRenuka Holdings PLC (NV) 466,438 11,307 6,857 466,438 11,307 8,302

11,307 6,857 11,307 8,302

8. Land and propertyOverseas Reality (Ceylon) PLC 943,473 23,777 15,567 943,473 23,777 16,419

23,777 15,567 23,777 16,419

9. ManufacturingTeejay Lanka PLC 425,429 14,110 13,826 40,095 1,480 1,348Lanka Ceramic PLC 89,191 12,069 11,675 89,191 12,069 13,229Royal Ceramics Lanka PLC 1,748,679 221,888 130,452 1,748,679 221,888 197,981Tokyo Cement Company (Lanka) PLC 688,992 29,030 17,363 688,992 29,029 44,964Tokyo Cement Company (Lanka) PLC (NV) 611,060 22,602 14,054 611,060 22,602 35,649

Alumex PLC 121,295 2,074 1,637 16,150 277 294

301,773 189,007 287,345 293,465

10. Power and energyResus Energy PLC – – – 203,341 4,653 3,639

LVL Energy Fund PLC 4,606,600 46,066 38,695 4,606,600 46,066 46,066

46,066 38,695 50,719 49,705





20. (b) Equity securities (quoted) – Bank and Group (contd.)


Number of shares

CostRs. ’000


Number of shares

CostRs. ’000


11. TelecommunicationDialog Axiata PLC 3,738,360 81,332 37,757 3,790,960 94,332 49,105

81,332 37,757 94,332 49,105

12. TradingBrowns & Company PLC 985,000 315,149 60,085 985,000 315,149 77,820

315,149 60,085 315,149 77,820

13. Unit trustComtrust Equity Fund 556,793 10,000 9,869 556,793 10,000 11,139Ceybank Unit Trust 7,604,797 85,110 148,294 7,604,797 85,110 172,058

95,110 158,163 95,110 183,197

Total 3,367,973 1,878,919 3,521,949 2,357,336

21 Financial assets at amortised cost – loans and advances

Accounting policy

Loans and receivables to banks include non derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than:

Those that the Group intends to sell immediately or in the near term and those that the Group, upon initial recognition, designates as at fair value through profit or loss

Those that the Group, upon initial recognition, designates financial assets measured at fair value through other comprehensive income

Those for which the Group may not recover substantially all of its initial investment, other than due to credit deterioration

“Loans and receivables to banks” include amounts due from banks. After initial measurement, loans and receivables are subsequently measured at amortised cost using the EIR, less allowance for impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees and costs that are an integral part of the EIR. The amortisation is included in “interest income” in the Income Statement. The losses arising from impairment are recognised in “impairment charge for loans and other losses” in the Income Statement.

From 1 January 2018, the Bank only measures loans and advances at amortised cost if both of the following conditions are met:

The financial asset is held within a business model with the objective to hold financial assets in order to collect contractual cash flows

The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest (SPPI) on the principal amount outstanding

Details of business model & SPPI test are given in Notes 2.5.1.4.1 and 2.5.1.4.2 on page 264.




21. Financial assets at amortised cost – loans and advances (contd.)

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

Gross loans and advancesNon-credit impaired 28,819,417 28,589,141 28,844,390 27,302,037Stage 1 385,683,843 340,653,973 385,683,843 340,653,973Stage 2 6,470,038 3,988,238 6,470,038 3,988,238Stage 3 6,405,157 5,207,152 6,405,157 5,207,152

Gross loan and advances 427,378,455 378,438,504 427,403,428 377,151,400

(Less): Accumulated impairment under:Stage 1 1,610,731 1,127,166 1,610,731 1,127,166Stage 2 272,348 128,432 272,348 128,432Stage 3 1,963,230 1,479,175 1,963,230 1,479,175

Total Impairment 3,846,309 2,734,773 3,846,309 2,734,773Net loans and advances 423,532,145 375,703,730 423,557,119 374,416,626

21. (a) Analysis by product

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

By product Trade finance – – – – Central Bank Treasury Bills – – – – Lease rental and receivable – – – – Pawning 30,530,726 23,874,051 30,530,726 23,874,051 Staff loans 6,103,442 5,057,767 6,103,442 5,057,767

Term loans Short term 6,080,407 1,458,560 6,080,407 1,458,560 Long term 380,231,640 340,380,153 380,231,640 340,380,153

Others Sri Lanka Government Securities – – – – Loan to Government 2,075,000 2,075,000 2,075,000 2,075,000 Securities purchased under resale agreements 2,357,240 5,592,973 2,382,213 4,305,869

Gross total 427,378,455 378,438,504 427,403,428 377,151,400





21. (b) Analysis by currency

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

By currency Sri Lankan Rupee 408,075,240 350,356,753 408,100,213 349,069,649 United States Dollar 19,303,215 28,081,751 19,303,215 28,081,751

Gross total 427,378,455 378,438,504 427,403,428 377,151,400

21. (c) Analysis by sector

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

By industryAgriculture and fishing 20,817,480 14,990,754 20,817,480 14,990,754Manufacturing – – – –Tourism 38,746 49,042 38,746 49,042Transport 1,356,593 1,040,305 1,356,593 1,040,305Construction/housing 116,223,402 107,478,175 116,223,402 107,478,175Traders – – – –New economy – – – –

OthersFinancial and business services 26,413,837 27,452,914 26,413,837 27,452,914Infrastructure 76,286,787 76,080,169 76,286,787 76,080,169Power and energy 6,801,197 8,525,567 6,801,197 8,525,567Education 36,362,632 31,844,099 36,362,632 31,844,099

Personal/pawning/other 143,077,781 110,977,478 143,102,754 109,690,374

Gross total 427,378,455 378,438,504 427,403,428 377,151,400

21. (d) Movements in impairment during the year

Accounting policy

Individual assessment of impairment

For financial assets carried at amortised cost (such as amounts due from banks, loans and advances to customers as well as financial assets at amortised cost – debt and other instruments), the Group first assesses individually whether objective evidence of impairment exists for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment.




Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognised are not included in a collective assessment of impairment.

If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the assets’ carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred). The carrying amount of the asset is reduced through the use of a provision account and the amount of the loss is recognised in the Income Statement. Interest income continues to be accrued on the reduced carrying amount at the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. The interest income is recorded as part of “Interest and similar income”.

The present value of the estimated future cash flows is discounted at the financial asset’s original EIR. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current EIR. If the Group has reclassified trading assets to loans and receivables, the discount rate for measuring any impairment loss is the new EIR determined at the reclassification date. The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable.

Loans together with the associated allowance are written off when there is no realistic prospect of future recovery and all collateral has been realised or has been transferred to the Group. If, in a subsequent year, the amount of the estimated impairment loss increased or decreased because of an event occurring after the impairment was recognised, the previously recognised impairment loss is increased or reduced by adjusting the allowance account. If a future write-off is later recovered, the recovery is credited to the “Credit loss expense”.

Collective Assessment of Impairment

If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment.

Future cash flows on a group of financial assets that are collectively evaluated for impairment are estimated on the basis of expected loss experience for assets with credit risk characteristics similar to those in the Group. Expected loss experience is adjusted on the basis of current observable date to reflect the effect of current conditions on which the historical loss experience is based and to remove the effect of conditions in the historical period that do not exist currently. Estimates of changes in future cash flows reflect, and are directionally consistent with, changes in related observable data from year to year (such as changes in unemployment rates, property prices, commodity prices, payment status, or other factors that are indicative of incurred losses in the Group and their magnitude). The methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience.

Write-off of loans and receivables

The Bank’s accounting policy under SLFRS 9 remains the same as it was under LKAS 39. Loans (and the related impairment allowance accounts) are normally written off, either partially or in entirety, when there is no realistic prospect of recovery and all possible steps have been exhausted in recovering dues. Where loans are secured, this is generally after receipt of any proceeds from the realisation of security. If the amount to be written off is greater than the accumulated loss allowance, the difference is first treated as an addition to the allowance that is then applied against the gross carrying amount. If a write-off is later recovered, the recovery is credited to “other operating income”.


21. (d) Movements in impairment during the year (contd.)




Collateral Valuation

The Group uses collateral where possible to mitigate the risk on financial assets. The collateral comes in various forms such as cash, gold, Government Securities. To the extent possible, the Bank uses active market data for valuing financial assets held as collaterals.

Detail of impairment policy are given in Note 2.5.2 on page 269.

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

Stage 1

Balance as at 1 January 1,127,166 1,025,110 1,127,166 1,025,110Charge/(Write back) to Income Statement 483,565 102,056 483,565 102,056Write-off during the year – – – –Other movements – – – –

Balance as at 31 December 1,610,731 1,127,166 1,610,731 1,127,166

Stage 2

Balance as at 1 January 128,432 111,702 128,432 111,702Charge/(Write back) to Income Statement 143,916 16,730 143,916 16,730Write-off during the year – – – –Other movements – – – –

Balance as at 31 December 272,348 128,432 272,348 128,432

Stage 3

Balance as at 1 January 1,479,175 968,868 1,479,175 968,868Charge/(Write back) to Income Statement 503,642 636,971 503,642 636,971Write-off during the year (19,587) (126,664) (19,587) (126,664)Other movements – – – –

Balance as at 31 December 1,963,230 1,479,175 1,963,230 1,479,175

21. (e) Lease rentals receivable No items to be disclosed under lease rental receivable.


21. (d) Movements in impairment during the year (contd.)




22 Financial assets at amortised cost – debt and other instruments

Accounting policy

Financial assets at amortised cost – debt and other instruments are non-derivative financial assets with fixed or determinable payments and fixed maturities, which the Group has the intention and ability to hold to maturity. After initial measurement, financial assets at amortised cost – debt and other instruments are subsequently measured at amortised cost using the EIR, less impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees that are an integral part of the EIR. The amortisation is included in “Interest and similar income” in the Income Statement. The losses arising from impairment of such investments are recognised in the Income Statement line “Impairment charges”.

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

Sri Lanka Government securitiesTreasury Bills 21,005,363 35,115,115 21,005,363 35,115,115Treasury Bonds 484,786,616 450,001,836 488,460,612 453,653,149Sri Lanka Development Bond (SLDB) 178,560 59,156,126 178,560 59,156,126

Corporate debt instruments 7,653,898 7,813,406 8,005,137 8,013,326Trust certificates 5,332,605 3,653,603 5,332,605 3,653,603

Gross total 518,957,041 555,740,085 522,982,276 559,591,319Less: Impairment (9,072) (271,467) (9,117) (271,567)

Net total 518,947,969 555,468,618 522,973,159 559,319,752

22. (a) Analysis

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

By collateralisationPledged as collateral 69,160,408 48,382,000 72,546,833 51,689,909 Unencumbered 449,796,633 507,358,085 450,435,443 507,901,410

Gross total 518,957,041 555,740,085 522,982,276 559,591,319

By currencySri Lankan Rupee 518,778,481 496,583,959 522,803,716 500,435,193 United States Dollar 178,560 59,156,126 178,560 59,156,126

Gross total 518,957,041 555,740,085 522,982,276 559,591,319




22. Financial assets at amortised cost – debt and other instruments (contd.)

22. (b) Movements in impairment during the year

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

Stage 1

Opening balance as at 1 January 271,467 261,818 271,567 261,907Charge/(Write back) to Income Statement (262,395) 9,649 (262,450) 9,660Write-off during the year – – – –Other movements – – – –

Closing balance at 31 December 9,072 271,467 9,117 271,567

No impairment movements for Stages 2 and 3.

23 Financial assets at fair value through other comprehensive income

Accounting policy

Available-for-sale investments include equity and debt securities. Equity investments classified as available for sale are those which are neither classified as held-for-trading nor designated at fair value through profit or loss. Debt securities in this category are those which are intended to be held for an indefinite period of time and which may be sold in response to needs for liquidity or in response to changes in the market conditions.

After initial measurement, available-for-sale financial investments are subsequently measured at fair value. Equity investments under AFS that do not have quoted market price and whose fair value cannot be reliably measured shall be measured at cost.

Unrealised gains and losses are recognised directly in equity (Other Comprehensive Income) in the “Available-for-sale reserve”. When the investment is disposed of, the cumulative gain or loss previously recognised in equity is recognised in the Income Statement in “Net gain/(loss) from financial investment”. Where the Group holds more than one investment in the same security they are deemed to be disposed of on a first-in first-out basis. Interest earned whilst holding available-for-sale financial investments is required as interest income using the EIR. Dividends earned whilst holding available-for-sale financial investments are recognised in the Income Statement as “Other Operating Income” when the right of the payment has been established. The losses arising from impairment of such investments are recognised in the Income Statement in “Impairment losses on financial investments” and removed from the “Available-for-sale reserve”.

Impairment of financial assets at fair value through other comprehensive income

For available-for-sale financial investments including debt securities, the Group assesses at each Reporting date whether there is objective evidence that an investment is impaired.

In the case of debt instruments classified as available-for-sale, the Group assesses individually whether there is objective evidence of impairment based on the same criteria as financial asset carried at amortised cost. However, the amount recorded for impairment is the cumulative loss measured as the difference between the amortised cost and the current fair value, less any impairment loss on that investment previously recognised in the Income Statement.

Future interest income is based on the reduced carrying amount and is accrued using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. The interest income is recorded as part of “Interest and similar income”. If, in a subsequent period, the fair value of a debt instrument increased and the increase can be objectively related to a credit event occurring after the impairment loss was recognised in the Income Statement, the impairment loss is reversed through the Income Statement.




In the case of equity investments classified as available for sale, objective evidence would also include a “significant” or “prolonged” decline in the fair value of the investment below its cost. The Group treats “significant” generally as 20% and “prolonged” generally as greater than six months. Where there is evidence of impairment, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that investment previously recognised in the Other Comprehensive Income is removed from equity and recognised in the Income Statement. Impairment losses on equity investments are not reversed through the Income Statement; increases in the fair value after impairment are recognised in Other Comprehensive Income.

Accounting policy (applicable after 1 January 2018)

Financial Assets at Fair Value through Other Comprehensive Income include equity and debt securities. Equity investments classified as Fair Value through Other Comprehensive Income are those which are hold as strategic investment. Debt securities in this category are those which are intended to be held for an indefinite period of time and which may be sold in response to needs for liquidity or in response to changes in the market conditions.

After initial measurement, Financial Assets at Fair Value through Other Comprehensive Income are subsequently measured at fair value. Financial Assets at Fair Value through Other Comprehensive Income can be divided into two category as follows:

i. Equity instruments fair value through other comprehensive income

Upon initial recognition, the Bank occasionally elects to classify irrevocably some of its equity investments as equity instruments at FVOCI when they meet the definition of definition of Equity under LKAS 32 Financial Instruments: Presentation and are not held for trading. Such classification is determined on an instrument-by instrument basis.

“Unrealized gains and losses are recognised directly in equity (Other Comprehensive Income) in the “OCI reserve”. Gains and losses on these equity instruments are never recycled to profit. Dividends are recognised in profit or loss as other operating income when the right of the payment has been established, except when the Bank benefits from such proceeds as a recovery of part of the cost of the instrument, in which case, such gains are recorded in OCI. Equity instruments at FVOCI are not subject to an impairment assessment”.

Equity investments under FVOCI that do not have quoted market price and whose fair value cannot be reliably measured shall be measured at cost.

ii. Debt instruments at fair value through other comprehensive income

The Bank applies the new category under SLFRS 9 of debt instruments measured at FVOCI when both of the following conditions are met:

The instrument is held within a business model, the objective of which is achieved by both collecting contractual cash flows and selling financial assets

The contractual terms of the financial asset meet the SPPI test

These instruments largely comprise assets that had previously been classified as financial investments available for sale under LKAS 39.

23. Financial assets at fair value through other comprehensive income (contd.)




Interest earned whilst holding financial asset at Fair Value through Other Comprehensive Income is recognised as interest income using the EIR. The losses arising from impairment of such investments are recognised in the Income Statement in “Impairment charges”.

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

Sri Lanka Government securitiesTreasury Bills [Note 23 (c)] – 1,171,488 – 1,171,488Treasury Bonds [Note 23 (d)] 2,433,915 81,390 4,037,045 1,900,493

Equity securitiesQuoted equity securities [Note 23 (e)] 3,447,888 3,876,570 3,447,888 3,876,570Unquoted equity securities [Note 23 (f)] 302,627 564,381 303,627 565,381

Corporate debt instruments – – – –(Less): Impairment – – – –

Net financial assets at fair value through other comprehensive income 6,184,430 5,693,829 7,788,560 7,513,932

23. (a) Analysis

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

By collateralisationPledged as collateral – – 1,524,097 1,690,832Unencumbered 6,184,430 5,693,829 6,264,463 5,823,100

Gross total 6,184,430 5,693,829 7,788,560 7,513,932

By CurrencySri Lankan Rupee 6,184,430 5,693,829 7,788,560 7,513,932United States Dollar – – – –

Gross total 6,184,430 5,693,829 7,788,560 7,513,932

23. (b) Movements in impairment during the year No impairment movement during the year.






23. (c) Sri Lanka Government Securities – Treasury Bills

2018 – Bank and Group 2017 – Bank and Group

Face value

Rs. ’000

Cost of investment

Rs. ’000

Fair value

Rs. ’000

Face value

Rs. ’000

Cost of investment

Rs. ’000

Fair value

Rs. ’000

Sri Lanka Government Securities – Treasury Bills – – – 1,200,000 1,164,059 1,171,488

1,164,059 1,171,488

23. (d) Sri Lanka Government Securities – Treasury Bonds

2018 – Bank 2017 – Bank

Face value

Rs. ’000

Cost of investment

Rs. ’000

Fair value

Rs. ’000

Face value

Rs. ’000

Cost of investment

Rs. ’000

Fair value

Rs. ’000

Sri Lanka Government Securities – Treasury Bonds 2,426,000 2,454,815 2,433,915 76,000 74,709 81,390

2,454,815 2,433,915 74,709 81,390

2018 – Group 2017 – Group

Face value

Rs. ’000

Cost of investment

Rs. ’000

Fair value

Rs. ’000

Face value

Rs. ’000

Cost of investment

Rs. ’000

Fair value

Rs. ’000

Sri Lanka Government Securities – Treasury Bonds 3,951,000 4,267,031 4,037,045 1,751,000 2,037,829 1,900,493

4,267,031 4,037,045 2,037,829 1,900,493

23. (e) Quoted investments – equity securities – Bank and Group

2018 2017

No. of shares

CostRs. ’000

Fair valueRs. ’000

No. of shares

CostRs. ’000


Hatton National Bank PLC 11,346,652 1,655,816 2,428,184 11,262,707 1,655,816 2,773,004Sri Lanka Telecom PLC 13,158,700 445,642 307,913 13,158,700 445,642 369,522People’s Leasing Company PLC 43,668,157 784,405 711,791 43,668,157 784,405 734,044

2,885,863 3,447,888 2,885,863 3,876,570





23. (f ) Unquoted investments – equity securities

2018 – Bank 2017 – Bank

Number of shares

CostRs. ’000

Cost/fair valueRs. ’000

Number of shares

CostRs. ’000


Investment – Credit Information Bureau 30,450 57,364 57,364 30,450 57,364 57,364Investment – Associated Newspapers Ceylon Limited 20,000 127 127 20,000 127 127Investment – Regional Development Bank (RDB) 16,452,126 164,521 245,136 16,452,126 164,521 506,890(Less): Impairment – – – –

222,012 302,627 222,012 564,381

2018 – Group 2017 – Group

Number of shares

CostRs. ’000


Number of shares

CostRs. ’000


Investment – Credit Information Bureau 30,450 57,364 57,364 30,450 57,364 57,364Investment – Associated Newspapers Ceylon Limited 20,000 127 127 20,000 127 127Investment – Regional Development Bank (RDB) 16,452,126 164,521 245,136 16,452,126 164,521 506,890Investment – Sri Lankan Financial Services Bureau 100,000 1,000 1,000 100,000 1,000 1,000(Less): Impairment – – – –

223,012 303,627 223,012 565,381

All unquoted equities in financial assets measured at Fair Value through Other Comprehensive Income (except RDB) are recorded at cost, since its fair value can not be reliably estimated. There is no active market for these investments and Bank intends to hold it for the long term. The investment in RDB shares have been fair valued using a valuation model based on observable data.




24 Investments in subsidiaries

Accounting policy

Investments in subsidiary companies are accounted at cost less allowance for impairment in Financial Statements of the Bank. The net assets of subsidiary company are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the recoverable amount of investment is estimated and the impairment loss is recognised to the extent of its loss in net assets.

2018 2017 2018 2017

As at 31 December

% %

Cost*

Rs. ’000

Directors' valuation**

Rs. ’000

Cost

Rs. ’000

Directors' valuation**

Rs. ’000

Unquoted equity investmentsNSB Fund Management Co. Ltd. 100 100 1,700,000 2,722,821 900,000 1,944,586(170,000,000 ordinary shares of Rs. 10.00 each.)(Less): Impairment – – – –Net total 1,700,000 2,722,821 900,000 1,944,586

* The subsidiary has issued Rs. 800 Mn. worth of shares during the year.** The Director's valuation of investments in subsidiary has been carried out on net asset basis as at 31 December 2018 based on audited Financial Statements.

24. (a) Movements in impairment during the year No impairment movements during the year 2018.

25 Investment in associates and joint venturesNo investment in associates and joint ventures.

26 Property, plant and equipment

Accounting policy

Basis of recognition

Property, plant and equipment are recognised if it is probable that future benefits associated with the asset will flow to the Group and cost of the asset can be reliably measured. Property, plant and equipment are initially measured at cost including costs directly attributable to the acquisition of the asset.

Basis of measurement

An item of property, plant and equipment that qualifies for recognition as an asset is initially measured at cost. Cost includes expenditure that is directly attributable to the acquisition of the asset and subsequent costs. The self constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bring the asset to a working condition for its intended use and the cost of dismantling and removing the items and restoring the site on which they are located and capitalised borrowing costs. Purchased software which is integral to the functionality of the related equipment is capitalised as part of computer equipment.

When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment.

Cost model

The Group applies cost model to property, plant and equipment except for freehold land and buildings and records at cost of purchase or construction together with any incidental expenses thereon less accumulated depreciation and any accumulated impairment losses.




Revaluation model

The Group applies the revaluation model to the entire class of freehold land and buildings. Such properties are carried at a revalued amount, being their fair value at the date of revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Freehold land and buildings of the Group are revalued every three years or more frequently, if the fair values are substantially different from their carrying amounts to ensure that the carrying amounts do not differ materially from the fair values at the reporting date.

On revaluation of an asset, any increase in the carrying amount is recognised in Other Comprehensive Income and accumulated in equity, under capital reserve or used to reverse a previous revaluation decrease relating to the same asset, which was charged to Income Statement. In this circumstance, the increase is recognised as income to the extent of the previous write down. Any decrease in the carrying amount is recognised as an expense in the Income Statement or debited in the Other Comprehensive Income to the extent of any credit balance existing in the capital reserve in respect of that asset. The decrease recognised in Other Comprehensive Income reduces the amount accumulated in equity under capital reserves. Any balance remaining in the Revaluation Reserve in respect of an asset is transferred directly to Retained Earnings on retirement or disposal of the asset.

Derecognition

Property, plant and equipment are derecognised on disposal or when no future economic benefits are expected from its use. Any gain or loss arising on de-recognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is recognised in “Other operating income” in the Income Statement in the year the asset is derecognised.

Capital work in progress

These are expenses of capital nature directly incurred in the construction of buildings, major plant and machinery and system development, awaiting capitalisation. These are stated in the Statement of Financial Position at cost less any accumulated impairment losses. Capital work in progress is transferred to the relevant asset when it is in the location and condition necessary for it to be capable of operating in the manner intended by Management.

Borrowing Costs

There were no capitalised borrowing costs related to the acquisition of property, plant and equipment by the Bank.

Depreciation

Depreciation is recognised in profit or loss on the straight-line method to write down the cost of property and equipment to their residual values over their estimated useful lives. Land is not depreciated. Depreciation rates for the identified classes of assets are as follows:

Improvement to rent/leasehold building

Effective from 1 January 2017 the Bank has decided to capitalised the improvement to rent/leasehold building. The improvement will be amortised over the lease period effective from same date.

Category of asset Depreciation rate per annum (%)

Leasehold properties, improvement to rent/leasehold Over the period of lease

Freehold buildings 2.5 p.a.

Office, sundry equipment and furniture and fittings 10 p.a.

Motor vehicles 20 p.a.

Computer hardware 20 p.a.

Computer software 25 p.a.

Effective from 1 January 2017 the rate of depreciation on computer hardware has been revised from 25% – 20% considering the useful life of the item.

The Group provides depreciation of an assets commence from the date when they are available for use to the date of disposal of the asset.

26. Property, plant and equipment (contd.)





26. (a) Property, plant and equipment – Bank – 2018

Land and buildings

Rs. ’000

Leasehold properties,

improvement to rent/

leasehold buildings*

Rs. ’000

Computer hardware

Rs. ’000

Computer software

Rs. ’000

Office sundry equipment,

furniture and

fittings**

Rs. ’000

Motor vehicle

Rs. ’000

Building work-in- progress

Rs. ’000

Total

Rs. ’000

Cost/fair valueOpening balance as at 1 January 2018 10,020,133 548,011 2,270,025 958,764 1,734,483 349,602 186,111 16,067,129Additions 346,816 125,447 382,245 390,052 349,027 16,068 457,471 2,067,126Disposals (132,650) (38,514) (33,354) (6,490) (122,695) (14) (134,735) (468,452)Closing balance as at 31 December 2018 10,234,299 634,944 2,618,916 1,342,326 1,960,815 365,656 508,847 17,665,803

(Less): Accumulated depreciationOpening balance as at 1 January 2018 – 77,296 1,659,278 578,456 1,079,467 276,948 – 3,671,444Charge for the year 52,203 18,781 208,131 187,796 136,893 34,992 – 638,795Disposals – – (32,061) – (78,116) (14) – (110,191)Closing balance as at 31 December 2018 52,203 96,077 1,835,348 766,251 1,138,244 311,926 – 4,200,048

(Less): Impairment – – – – – – – –Net book value as at 31 December 2018 10,182,095 538,867 783,568 576,075 822,571 53,730 508,847 13,465,755





26. (a) Property, plant and equipment – Bank – 2017

Land and buildings

Rs. ’000




Rs. ’000

Computer hardware

Rs. ’000

Computer software

Rs. ’000


furniture and

fittings**

Rs. ’000

Motor vehicle

Rs. ’000


Rs. ’000

Total

Rs. ’000

Cost/fair valueOpening balance as at 1 January 2017 5,565,220 488,317 2,061,817 639,336 1,650,968 344,735 77,280 10,827,673Adjustments (1,500) 1,500 (128) – – – (15,785) (15,913)Additions 43,065 58,194 393,032 319,428 122,621 4,878 167,681 1,108,899Revaluation 4,496,752 – – – – – – 4,496,752Depreciation adjustment for revalued assets (83,404) – – – – – – (83,404)Disposals – – (184,696) – (39,106) (11) (43,065) (266,878)Closing balance as at 31 December 2017 10,020,133 548,011 2,270,025 958,764 1,734,483 349,602 186,111 16,067,129

(Less): Accumulated depreciationOpening balance as at 1 January 2017 41,214 65,881 1,732,391 482,065 988,753 240,447 – 3,550,751Charge for the year 42,190 11,415 111,180 96,391 125,860 36,512 – 423,547Depreciation adjustment for revalued assets (83,404) – – – – – – (83,404)Disposals – – (184,293) – (35,146) (11) – (219,450)Closing balance as at 31 December 2017 – 77,296 1,659,278 578,456 1,079,467 276,948 – 3,671,444

(Less): Impairment – – – – – – – –

Net book value as at 31 December 2017 10,020,133 470,715 610,747 380,308 655,016 72,654 186,111 12,395,684





26. (b) Property, plant and equipment – Group – 2018

Land and buildings

Rs. ’000




Rs. ’000

Computer hardware

Rs. ’000

Computer software

Rs. ’000


furniture and

fittings**

Rs. ’000

Motor vehicle

Rs. ’000


Rs. ’000

Total

Rs. ’000

Cost/fair valueOpening balance as at 1 January 2018 10,020,133 548,011 2,275,565 961,134 1,736,518 349,601 186,111 16,077,074Additions 346,816 125,447 382,504 390,052 349,123 16,068 457,471 2,067,481Disposals (132,650) (38,514) (33,354) (6,490) (122,695) (14) (134,735) (468,452)

Closing balance as at 31 December 2018 10,234,299 634,944 2,624,715 1,344,696 1,962,946 365,655 508,847 17,676,103

(Less): Accumulated depreciationOpening balance as at 1 January 2018 – 77,296 1,662,384 580,479 1,080,633 276,948 – 3,677,740Charge for the year 52,203 18,781 208,890 187,875 137,038 34,992 – 639,779Disposals – – (32,061) – (78,116) (14) – (110,191)

Closing balance as at 31 December 2018 52,203 96,077 1,839,213 768,354 1,139,554 311,926 – 4,207,328

(Less): Impairment – – – – – – –






26. (b) Property, plant and equipment – Group – 2017

Land and buildings

Rs. ’000




Rs. ’000

Computer hardware

Rs. ’000

Computer software

Rs. ’000


furniture and

fittings**

Rs. ’000

Motor vehicle

Rs. ’000


Rs. ’000

Total

Rs. ’000

Cost/fair valueOpening balance as at 1 January 2017 5,565,220 488,317 2,065,843 641,306 1,652,758 344,734 77,444 10,835,623Adjustments (1,500) 1,500 (128) – – – (15,949) (16,077)Additions 43,065 58,194 394,787 319,828 122,914 4,878 167,681 1,111,347Revaluation 4,496,752 – – – – – – 4,496,752Depreciation adjustment for revalued assets (83,404) – – – – – – (83,404)Disposals – – (184,937) – (39,154) (11) (43,065) (267,167)

Closing balance as at 31 December 2017 10,020,133 548,011 2,275,565 961,134 1,736,518 349,601 186,111 16,077,074

(Less): Accumulated depreciationOpening balance as at 1 January 2017 41,214 65,881 1,735,142 484,035 989,810 240,447 – 3,556,529Charge for the year 42,190 11,415 111,776 96,444 126,015 36,512 – 424,352Depreciation adjustment for revalued assets (83,404) – – – – – – (83,404)Disposals – – (184,534) – (35,192) (11) – (219,737)

Closing balance as at 31 December 2017 – 77,296 1,662,384 580,479 1,080,633 276,948 – 3,677,740

(Less): Impairment – – – – – – – –


* Leasehold Properties, Improvement to Rent/Leasehold Buildings include working progress of improvement to rent/leasehold building amounting 54.2 Mn. as at 31 December 2018.

** Office, Sundry equipment and furniture & fittings include working progress of office equipment amounting Rs. 240,976 as at 31 December 2018.





26. (c) Revaluation/fair valuation The Bank has revalued its land and buildings, by professionally qualified independent valuers. The revaluation was carried out by taking into account the observable prices in active market or recent market transactions on arm’s length basis. Accordingly a revaluation surplus, amounting to Rs. 4,478.48 Mn. had been credited to the Revaluation Reserve Account in 2017 and Rs. 11.73 Mn. had been adjusted to the same in relation to the prior year.

26. (d) Land and buildings of the Bank Land and building balance include freehold land value of Rs. 8,076.4 Mn.

26. (e) Property, plant and equipment pledged as security for liabilities There were no items of property, plant and equipment pledged as securities for liabilities.

26. (f ) Fully-depreciated property, plant and equipment The initial cost of fully-depreciated property, plant and equipment, which are still in use as at reporting date is as follows:

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

Computer hardware 1,367,141 1,370,615 1,368,083 1,371,270Office equipment, furniture and fittings 310,827 271,677 311,475 271,975Intangible assets 470,562 433,977 472,531 435,946Others – sundry equipments 431,765 27,840 432,679 28,754

27 Investment propertiesThe Bank and Group do not have investment properties.

28 Goodwill and intangible assets

Accounting policy

The Group’s intangible assets consist of the value of purchased computer software.

Basis of recognition

An intangible asset is recognised only when its cost can be measured reliably and it is probable that the expected future economic benefits that are attributable to it will flow to the Group.

Basis of measurement

Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is their fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses.




Useful economic life and amortisation

The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortised over the useful economic life. The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at least at each financial year end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortisation period or method, as appropriate, and they are treated as changes in accounting estimates. The amortisation expense on intangible assets with finite lives is recognised in the Income Statement in the expense category consistent with the function of the intangible asset.

Derecognition

Intangible assets are derecognised on disposal or when no future economic benefits are expected from its use. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is recognised in “Other operating income” in the Income Statement in the year the asset is derecognised.

The Group does not possess intangible assets with indefinite useful economic life. The estimated economic life of the Group’s computer software is four years (25% per annum).

The Bank and Group do not have any intangible assets except computer software which has been disclosed under the property plant and equipment in Note 26.

29 Deferred tax assets/liabilities

Accounting policy

Detailed discussion on deferred tax is given in Note 13 on page 286.

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

29. (a) Deferred tax assets Opening balance – – (75) 588Charge for the year recognised in

– profit and loss – – 148 (588)– other comprehensive income – – – –

Closing balance – – 73 –

29. (b) Deferred tax liabilities Deferred tax liabilities 507,063 416,180 507,063 415,592Income Statement 75,400 90,883 75,400 91,546

Net deferred tax liabilities 582,463 507,063 582,463 507,138

28. Goodwill and intangible assets (contd.)




30 Other assets

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

CostNotional Tax/WHT receivable [refer Note 4 (d)] 5,761,291 7,184,079 5,769,803 7,212,333 Receivables 4,714,573 2,195,402 5,029,529 2,448,402 Receivable form treasury on interest (senior citizen) 12,066,623 8,150,352 12,066,623 8,150,352 Deposits and prepayments 273,541 363,458 273,541 363,458 Advance payment to treasury [refer Note (a)] 4,160,000 4,480,000 4,160,000 4,480,000 Advance payment made to pension II (refer Note 36) 260,021 46,384 260,021 46,384 Sundry debtors 17,633 27,436 17,633 27,436 Prepaid employee compensation 3,790,398 3,115,069 3,790,398 3,115,069 Other assets 165,136 133,509 165,136 133,509

Total 31,209,216 25,695,689 31,532,684 25,976,944

Note (a)At the request of Treasury, the Bank paid an advance of Rs. 6,000 Mn. in 2012 and Rs. 2,000 Mn. in 2013 as confirmed by the Treasury to be set off against the profit within a period of six years starting from 2014. Effective from 1 January 2016, Treasury has agreed to set off the balance amount of Rs. 5,333 Mn. against the profit within a period of 10 years. There after Treasury has agreed to set off the balance amount of Rs. 4,800 Mn. against the profit within a period of 15 years effective from 1 January 2017.

31 Due to banks

Accounting policy

Due to banks represents overdrafts, call money borrowings, borrowing from banks and Repos by the subsidiary. Subsequent to initial recognition deposits are measured at their amortised cost using EIR method. Interest paid/payable on these dues are recognised in the Income Statement under Interest Expense. Foreign currency borrowings as at the reporting date are translated to the functional currency at the middle exchange rate of the functional currency at that date. Foreign currency differences arising on retranslation at the reporting date are recognised in profit or loss.

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

Foreign currency borrowings (Note 31.1) 18,183,425 – 18,183,425 –Securities sold under repurchase (Repo) agreements 58,852,946 48,416,152 65,349,064 49,172,135Other facilities 82,775 180,439 82,775 180,439

Total 77,119,146 48,596,591 83,615,264 49,352,574




31. Due to banks (contd.)

31.1 Foreign currency borrowings

Name of lender Loan value

(USD) Date of

borrowing Date of

maturity

Commerzebank Finance and Covered Bond S.A. 100 Mn. 31.10.2018 31.10.2021

32 Derivative financial instruments

Bank and Group

As at 31 December Liabilities 2018

Rs. ’000

Notional amount 2018

Rs. ’000

Liabilities 2017

Rs. ’000

Notional amount 2017

Rs. ’000

Interest rate derivativesInterest rate swaps 1,533 2,000,000 – –

Foreign currency derivativesCurrency swaps – (Note 19.2) – – 817,737 38,201,771Forward foreign exchange contracts – – 139,200 3,064,600

Total 1,533 2,000,000 956,937 41,266,371

32.1 Swap agreement

Details Description of the swaps

Swap instrument Counter party – DFCC BankNotional amount – Rs. 2,000 Mn.

Swap item 2,000 Mn. Term Loan to Sri Lanka Telecom (SLT) by DFCCThe period when the cash flows are expected to occur Semi annual interest paymentTermination of agreement 20 February 2021Base interest rate 6 months AWPLR (Average Weighted Prime Lending Rate)

33 Financial liabilities recognised through profit or loss

Accounting policy

The Bank and Group do not have instruments under the financial liabilities recognised through profit or loss.




34 Financial liabilities at amortised cost

Accounting policy

Due to depositors include savings deposits and term deposits. Subsequent to initial recognition deposits are measured at their amortised cost using EIR method. Interest paid/payable on deposits are recognised in the Income Statement under Interest Expense.

Securities sold under repurchase agreements

Securities sold under agreements to repurchase at a specified future date are not derecognised from the Statement of Financial Position as the Group retains substantially all the risks and rewards of ownership. The corresponding cash received is recognised in the Consolidated Statement of Financial Position as financial liability reflecting as a loan received by the Group, including accrued interest as a liability within “Securities sold under repurchase agreements”, reflecting the transaction’s economic substance. The difference between the sale and repurchase prices is treated as interest expenses and is accrued over the life of agreement using the EIR.

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

Due to depositors 839,574,411 737,212,640 839,574,411 737,212,640Due to debt securities holders – – – –Due to other borrowers* 14,804,802 12,837,008 21,750,178 17,545,212

Total 854,379,213 750,049,648 861,324,589 754,757,852

* Due to other borrowers represent the securities sold under repurchase agreements.

34.1 Analysis of amount due to depositors

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

34.1 a By product Savings deposits 198,321,926 188,191,882 198,321,926 188,191,882Fixed deposits 641,252,485 549,020,758 641,252,485 549,020,758

Total 839,574,411 737,212,640 839,574,411 737,212,640

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

34.1 b By currency Sri Lankan Rupee 828,694,912 727,849,199 828,694,912 727,849,199United State Dollar 7,341,154 5,924,264 7,341,154 5,924,264Euro 1,314,681 1,211,334 1,314,681 1,211,334Great Britain Pound 1,195,739 1,207,599 1,195,739 1,207,599Australian Dollar 1,027,574 1,020,083 1,027,574 1,020,083Japanese Yen 351 161 351 161

Total 839,574,411 737,212,640 839,574,411 737,212,640




35 Debt securities issued

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

Issued by the bankSenior notes issued (Note 35.1) 46,382,722 156,702,616 46,382,722 156,702,616Subordinated liabilities (Note 35.2) 6,006,411 6,006,411 6,006,411 6,006,411

Issued by other subsidiaries – – – –

Total 52,389,133 162,709,027 52,389,133 162,709,027

Due within 1 year 46,389,133 118,401,527 46,389,133 118,401,527Due after 1 year 6,000,000 44,307,500 6,000,000 44,307,500

Total 52,389,133 162,709,027 52,389,133 162,709,027

35.1 Senior notes issued

Accounting policy

These represent the funds borrowed by the Bank for long-term funding requirement. It consists of borrowings through international bonds (USD denominated). Subsequent to initial recognition debt securities issued are measured at their amortised cost using EIR method. Interest paid/payable is recognised in profit or loss.

Foreign currency denominated debt securities as at the reporting date are translated to the functional currency at the middle exchange rate of the functional currency at that date. Foreign currency differences arising on retranslation at the reporting date are recognised in profit or loss.

Effective annual yield

Bank Group

Category Face value Issuedrate

%

Repaymentterms

Issue date Maturitydate

2018

%

2017

%

2018

Rs. ’000

2017

Rs. ’000

2018

Rs. ’000

2017

Rs. ’000

Issued by the Bank

750 Mn. US Dollar senior note

USD 750 Mn. 8.875 At maturity 18September

2013

18 September

2018

8.88 8.88 – 117,831,970 – 117,831,970

250 Mn. US Dollar senior note

USD 250 Mn. 5.150 At maturity 10September

2014

10September

2019

5.21 5.21 46,382,722 38,870,646 46,382,722 38,870,646

46,382,722 156,702,616 46,382,722 156,702,616




35. Debt securities issued (contd.)

35.2 Subordinated liabilities

Accounting policy

These represent the funds borrowed by the Group for long-term funding requirements. Subsequent to initial recognition these are measured at their amortised cost using the EIR method, except where the Group designates them at fair value through profit or loss. Interest paid/payable is recognised in profit or loss.

Primary objective of issuing debenture is to increase the capital of the Bank in order to enhance the capital adequacy ratio and reduce the maturity mismatch between the asset and liability portfolio of the Bank.

The Bank intends to utilise the entire proceeds of the issue to expand its asset base in the ordinary course of business.

Outstanding subordinated liabilities of the Bank as at 31 December 2018 consisted of Rs. 6,000,000,000.00 Rated, unsecured subordinated and redeemable debentures of Rs. 100.00 issued on 29 December 2016 as private placement under the provision of the NSB Act No. 30 of 1971. NSB Fund Management Co. Ltd. is act as Trustee for this debenture issue. The debenture carry AA+(lka) rating from the Fitch Rating Lanka.

Category Face value

Interest rate

Repayment terms

Issue date

Maturity date

Effective annual yield

Bank Group

2018%

2017%

2018Rs. ’000

2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

Issued by the BankFixed rate 13% 6,000,000 13% p.a. Semi-

annually29

December 2016

29 December

2021 13.42 13.42 6,000,000 6,000,000 6,000,000 6,000,000

6,000,000 6,000,000 6,000,000 6,000,000

In the event of the winding-up of the issuer, the above liabilities would be subordinated to the claims of depositors and all other creditors of the issuer.

36 Retirement benefit obligations

Accounting policy

The unfunded past service cost is recognised in other comprehensive Income immediately upon actuarial valuation.

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

Provision for pension scheme I [Note 36 (a) 1] 2,596,088 2,750,601 2,596,088 2,750,601Provision for pension scheme II [Note 36 (a) 2] – – – –Provision for medical assistance scheme [Note 36 (a) 3] 1,234,707 960,830 1,234,707 960,830Provision for gratuity [Note 36 (a) 4] – – 1,982 1,234

Total 3,830,795 3,711,431 3,832,777 3,712,665




36. Retirement benefit obligations (contd.)

36. (a) Defined benefit plans The Bank has two separate pension schemes established, Pension Scheme I for permanent employees joined before 1 October 1995 and Pension Scheme II for permanent employees joined on or after 1 October 1995 and a medical assistance scheme for retired employees.

The assets of these schemes are held independently of the Bank’s assets and administered by Boards of Trustees/Managers, representing the Management and the employees, as provided in the trust deed/rules of the respective funds.

All the funds are subject to annual audits independent to the audit of the Bank, by a firm of Chartered Accountants appointed by the members and actuarial valuations are carried out at least once in every two years, as per the rules governing these funds.

36. (a) 1 National savings bank employees’ pension scheme I

Pension Scheme I

An actuarial valuation was carried out by Mr Piyal S Goonetilleke, fellow of Society of Actuaries (USA) of Piyal S Goonetilleke & Associates, on 31 December 2018.

Projected Unit Credit Method was used to allocate the actuarial present value of the projected benefits earned by employees to date of 31 December 2018.

Bank Group

2018Rs. ’000

2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

(a) Net asset/(liability) recognised in Statement of Financial PositionPresent value of defined benefit obligation (16,184,005) (16,303,208) (16,184,005) (16,303,208)Fair value of plan assets 13,587,917 13,552,607 13,587,917 13,552,607

Total (2,596,088) (2,750,601) (2,596,088) (2,750,601)

(b) Amount recognised in income statementCurrent service cost 117,515 137,244 117,515 137,244Interest cost on benefit obligation 405,421 254,833 405,421 254,833Adjustments – – – –

Net benefit expense 522,936 392,077 522,936 392,077

(c) Amount recognised in other comprehensive income (OCI)Provision adjustment – – – –Experience (gain)/loss 801,418 526,139 801,418 526,139(Gain)/loss due to changes in assumptions (1,105,366) 1,062,775 (1,105,366) 1,062,775Actuarial gain/(loss) on plan assets 149,435 (90,866) 149,435 (90,866)Difference in interest income on plan assets – – – –

Total (154,513) 1,498,048 (154,513) 1,498,048





36. (a) Defined benefit plans (contd.) 36. (a) 1 National savings bank employees’ pension scheme I (contd.)

Bank Group

2018Rs. ’000

2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

(d) Changes in fair value of plan assets are as follows:Opening fair value of plan assets 13,552,607 13,198,392 13,552,607 13,198,392Expected return on plan assets 1,387,932 1,479,280 1,387,932 1,479,280Actual employer contribution 522,936 392,077 522,936 392,077Benefits paid (1,726,123) (1,608,008) (1,726,123) (1,608,008)Actuarial gain/(loss) on plan assets (149,435) 90,866 (149,435) 90,866

Closing fair value of plan assets 13,587,917 13,552,607 13,587,917 13,552,607

(e) Changes in present value of defined benefit obligation are as follows:Opening defined benefit obligation 16,303,208 14,450,945 16,303,208 14,450,945Interest cost 1,793,353 1,734,113 1,793,353 1,734,113Current service cost 117,515 137,243 117,515 137,243Benefits paid (1,726,123) (1,608,008) (1,726,123) (1,608,008)(Gain)/loss due to changes in assumptions (1,105,366) 1,062,775 (1,105,366) 1,062,775Actuarial (gain)/loss on obligation 801,418 526,140 801,418 526,140

Closing defined benefit obligation 16,184,005 16,303,208 16,184,005 16,303,208

(f) Plan assets consists of followings:Treasury Bonds 6,918,796 7,438,650 6,918,796 7,438,650Treasury Bills – 237,424 – 237,424Fixed deposits 501,333 267,939 501,333 267,939Securities purchased under resale agreements 139,087 242,285 139,087 242,285Debentures 5,816,455 4,699,545 5,816,455 4,699,545Trust certificate 103,063 100,000 103,063 100,000Cash at Bank 82 52 82 52

Other assets 109,101 566,712 109,101 566,712

Total 13,587,917 13,552,607 13,587,917 13,552,607

Pension Scheme I2018

Pension Scheme I2017

(g) Actuarial assumptionFuture salary increment rate (%) 6.50 6.50Discount rate (%) 12.00 11.00Increase in future Cost of Living Allowance (COLA) (%) 4.50 4.50Mortality GA 1983 Mortality table GA 1983 Mortality tableRetirement age 57 years 57 yearsNormal form of payment Monthly Monthly





36. (a) Defined benefit plans (contd.) 36. (a) 1 National savings bank employees’ pension scheme I (contd.)

Turnover rate

Age 2018 %

2017 %

20 2 2 25 1.5 1.5 30 1 1 35 1 1 40 1 1 45 1 1 50 1 1 55 – –

(h) Increase/decrease in the following assumptions will have an impact on the present value of defined benefit obligation as illustrated below:

Bank and Group 2018 Bank and Group 2017

Pension Scheme I Pension Scheme I

1% increase 1% decrease 1% increase 1% decrease

Future salary increment rate 16,239,064 16,131,138 16,333,406 16,274,156 Discount rate 15,206,625 17,289,679 15,240,433 17,513,994

36. (a) 2 National savings Bank employee’s pension scheme II

An actuarial valuation was carried out by Mr Piyal S Goonetilleke, Fellow of Society of Actuaries (USA) of Piyal S Goonetilleke & Associates, on 31 December 2018.


Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

(a) Net asset/(liability) recognised in Statement of Financial PositionPresent value of defined benefit obligation (1,918,831) (1,481,223) (1,918,831) (1,481,223)Fair value of plan assets 2,178,685 1,527,607 2,178,685 1,527,607Adjustment 167 – 167 –

Total 260,021 46,384 260,021 46,384

(b) Amount recognised in Income StatementCurrent service cost 172,533 106,574 172,533 106,906Interest cost on benefit obligation (4,747) (9,334) (4,747) (9,334)

Net benefit expense 167,786 97,240 167,786 97,572





36. (a) Defined benefit plans (contd.) 36. (a) 2 National savings Bank employee’s pension scheme II (contd.)

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

(c) Amount recognised in other comprehensive income (OCI)Provision adjustment – – – –Experience (gain)/loss 463,865 16,090 463,865 16,090(Gain)/loss due to changes in assumptions (355,768) 236,887 (355,768) 236,887Actuarial gain/(loss) on plan assets (15,379) 4,947 (15,379) 4,947Difference in interest income on plan assets – – – –

92,718 257,924 92,718 257,924

(d) Changes in fair value of plan assets are as follows:Opening fair value of plan assets 1,527,607 1,086,586 1,527,607 1,086,586Expected return on plan assets 167,682 130,046 167,682 130,046Actual employer contribution 473,974 321,223 473,974 321,223Benefits paid (5,957) (5,302) (5,957) (5,302)Actuarial gain/(loss) on plan assets 15,379 (4,947) 15,379 (4,947)

Closing fair value of plan assets 2,178,685 1,527,607 2,178,685 1,527,607

(e) Changes in present value of defined benefit obligation are as follows:Opening defined benefit obligation 1,481,223 1,005,930 1,481,223 1,005,930Interest cost 162,935 120,712 162,935 120,712Current service cost 172,533 106,906 172,533 106,906Benefits paid (5,957) (5,302) (5,957) (5,302)(Gain)/loss due to changes in assumptions (355,768) 236,887 (355,768) 236,887Actuarial (gain)/loss on obligation 463,865 16,090 463,865 16,090

Closing defined benefit obligation 1,918,831 1,481,223 1,918,831 1,481,223

(f) Plan assets consist of followings:Treasury Bonds 1,864,180 1,376,780 1,864,180 1,376,780Treasury Bills 37,418 – 37,418 –Fixed deposits 225,867 140,747 225,867 140,747Securities purchased under resale agreements 74,632 2,161 74,632 2,161Savings 56 1,006 56 1,006Other assets/(liabilities) (23,468) 6,913 (23,468) 6,913

Total 2,178,685 1,527,607 2,178,685 1,527,607





36. (a) Defined benefit plans (contd.) 36. (a) 2 National savings Bank employee’s pension scheme II (contd.)

Pension Scheme II2018

Pension Scheme II2017

(g) Actuarial assumptionFuture salary increment rate (%) 6.50 6.50Discount rate (%) 12.00 11.00Increase in future cost of living allowance (COLA) (%) 4.50 4.50Mortality GA 1983 mortality table GA 1983 mortality tableRetirement age 57 years 57 yearsNormal form of payment Monthly Monthly

Turnover rate

Age 2018 %

2017 %

20 2 2 25 1.5 1.5 30 1 1 35 1 1 40 1 1 45 1 1 50 1 1 55 – –

(h) Increase/decrease in the following assumptions will have an impact on the present value of defined benefit obligation as illustrated below:

Bank and Group

2018 2017


Future salary increment rate 2,153,504 1,718,957 1,666,712 1,323,749Discount rate 1,636,760 2,274,599 1,244,336 1,784,570

36. (a) 3 Medical assistance scheme for the retired employees of NSB

An actuarial valuation was carried out by Mr Piyal S Goonetilleke, Fellow of Society of Actuaries (USA) of Piyal S Goonetilleke & Associates, on 31 December 2018.






36. (a) Defined benefit plans (contd.) 36. (a) 3 Medical assistance scheme for the retired employees of NSB (contd.)


2017Rs. ’000

(a) Net asset/(liability) recognised in statement of financial positionPresent value of defined benefit obligation (1,523,918) (1,230,477)Fair value of plan assets 289,211 283,336

Less:Contribution from employees – (13,689)

Total (1,234,707) (960,830)

(b) Amount recognised in income statementCurrent service cost 24,475 9,393Interest cost on benefit obligation 111,195 86,715

Net benefit expense 135,670 96,108

(c) Amount recognised in other comprehensive income (OCI) Provision adjustment (28,608) –Experience (gain)/loss 467,826 235,163(Gain)/loss due to changes in assumptions (132,004) 94,023Actuarial gain/(loss) on plan assets (10,960) (12,733)

Total 296,254 316,452

(d) Changes in fair value of plan assets are as follows:Opening fair value of plan assets 283,336 300,986 Expected return on plan assets 21,010 25,820 Actual employer contribution 135,670 96,108 Actual participants’ contribution 8,688 6,114 Benefits paid (170,454) (158,425)Actuarial gain/(loss) on plan assets 10,960 12,733

Closing fair value of plan assets 289,211 283,336

(e) Changes in present value of defined benefit obligation are as follows:Opening defined benefit obligation 1,230,477 937,788Provision adjustment (28,608) –Interest cost 132,206 112,535Current service cost 24,475 9,393Benefits paid (170,454) (158,425)(Gain)/loss due to changes in assumptions (132,004) 94,023Actuarial (gain)/loss on obligation 467,826 235,163

Closing defined benefit obligation 1,523,918 1,230,477





36. (a) Defined benefit plans (contd.) 36. (a) 3 Medical assistance scheme for the retired employees of NSB (contd.)


2017Rs. ’000

(f) Plan assets consists of followings:Treasury Bonds 214,229 154,270Fixed deposits 73,275 99,224Securities purchased under resale agreements 10,075 7,615Trust certificate 31,666 83,342Savings 51 484Other payable (40,084) (61,599)

Total 289,211 283,336

(g) Actuarial assumptionMedical cost inflation rate (%) 5.00 5.00 Discount rate (%) 12.00 11.00

36. (a) 4 Gratuity plan – Bank and Group

Bank

With the establishment of Pension Scheme II, employees who joined the Bank on or after 1 October 1995 are become members of the Pension Scheme II, thus are not entitle to the rights and privileges under Service Gratuity Scheme. However, where there are payment of termination gratuity before the entitlement pension of Bank recognise the expense on cash basis.

Group

The staff members of the subsidiary company is not entitled for pension scheme and hence they are continue to the members of Gratuity plan as per the provision of Gratuity Act No. 12 of 1983.

Bank Group

2018Rs. ’000

2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

(a) Net benefit expense (recognised under personal expenses)Current service cost – – 202 119Interest cost on benefit obligation – – 149 125

Net benefit expense – – 351 244

(b) Provision for gratuityDefined benefit obligation as at 1 January – – 1,234 1,260Interest cost – – 149 125Current service cost – – 202 119Benefits paid – – – –Actuarial (gain)/loss on obligation (recognised in OCI) – – 397 (270)

Defined benefit obligation as at 31 December – – 1,982 1,234





36. (a) Defined benefit plans (contd.) 36. (a) 4 Gratuity plan – Bank and Group (contd.)

Group

2018%

2017%

(c) Actuarial assumptionFuture salary increment rate 8.33 6.59Discount rate 12.11 10.63Mortality 0 0

Staff turnover rate and average future working lifetimeAge group 30-34 35-39 >40Staff turnover rate 0% 0% 0%Average future working lifetime – Years 29 25 17

(d) Increase/decrease in the following assumptions will have an impact on the present value of defined benefit obligation as illustrated below:

Values appearing in the Financial Statements are very sensitive to the changes in financial and non-financial assumptions used.A sensitivity was carried out as follows:

Group

2018 2017


Future salary increment rate 349 (295) 219 (183) Discount rate (284) 296 (191) 226

AssumptionsFinancial Assumptions – Rate of discount, Salary increment rateDemographic Assumptions – Mortality, Staff turn over, Disability, Retirement age

37 Current tax liabilities

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

Balance as at 1 January – – 137,344 17,153 Charge for the year – – 2,991 175,692 Payment during the year – – (168,197) (55,501)

Balance as at 31 December – – (27,862) 137,344

Note: Current tax asset classified in other assets.




38 Other provisions

No value to be disclosed under Other Provisions.

39 Other liabilities

Accounting policy

Other liabilities include provisions made in account of interests, fees and expenses, pensions, leave encashment and other expenses. These liabilities are recorded at amounts expected to be payable at reporting date.

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

Sundry creditors 172,333 119,903 172,333 119,903Unamortised day one difference currency swap (refer Note 19.2) – 1,099,322 – 1,099,322Salary related payable 935,974 654,455 935,974 654,455Other tax payable 646,009 771,153 646,009 771,153Other payables 3,692,960 2,705,412 3,698,001 2,749,963

Total 5,447,277 5,350,244 5,452,317 5,394,795

40 Due to subsidiaries

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

Payable to FMC 750 750 – –

Total 750 750 – –

Note: Refer Note 47 (b) – Related party transactions on page 338.




41 Stated capital/Assigned capital

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

Authorised One billion ordinary share of Rs. 10.00 each as at 1 January 10,000,000 10,000,000 10,000,000 10,000,000

Balance as at 1 January (issued and fully paid)670 Mn. ordinary shares of Rs. 10.00 each 6,700,000 6,200,000 6,700,000 6,200,000

Issue of ordinary shares during the year270 Mn. ordinary shares of Rs. 10.00 each 2,700,000 500,000 2,700,000 500,000Total 9,400,000 6,700,000 9,400,000 6,700,000

As per section 47 of NSB Act sub section 3, bank has issued 270 Mn. ordinary shares of Rs. 10.00 using unclaimed deposit reserve to the secretary to the Treasury on 31 December 2018. (Refer Note 44.1 unclaimed deposit reserve page 334)

42 Statutory reserve fund The statutory reserve fund is maintained as per the requirements under Section 20 (1) of the Banking Act No. 30 of 1988. Accordingly, the fund is built up by allocating a sum equivalent to not less than 5% of the profit after tax, but before declaring any dividend or any profit that are transferred to elsewhere until the reserve is equal to 50% of the Bank’s stated capital and thereafter sum equivalent to 2% of such profit until the amount of said reserve fund is equal to the stated capital of the Bank.

The balance in the statutory reserve fund will be used only for the purposes specified in the Section 20 (2) of the Banking Act No. 30 of 1988.

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

Opening balance 3,002,952 2,522,467 3,002,952 2,522,467Transfer during the period – 5% of profit after tax 225,008 480,485 225,008 480,485

Closing balance 3,227,960 3,002,952 3,227,960 3,002,952




43 Retained earnings

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

Balance as at 1 January 1,102,798 2,379,307 1,679,540 3,708,614Impact of adopting SLFRS 9 – (1,232,348) – (1,232,437)Restated opening balance under SLFRS 9 1,102,798 1,146,959 1,679,540 2,476,177Profit for the year 4,500,151 9,715,961 4,500,187 9,156,396Other comprehensive income (210,861) (2,072,425) (211,258) (2,072,155)Transfers to other reserves (225,008) (2,480,485) (225,016) (2,571,184)Contribution to national insurance trust fund (45,002) (96,097) (45,002) (96,097)Withholding tax on dividend – – – (102,483)Dividend (500,000) (5,111,114) (500,000) (5,111,114)Balance as at 31 December 4,622,080 1,102,798 5,198,451 1,679,540

44 Other reserves

Bank 2018

Opening balance at 1 January 2018

Rs. ’000

Movement/transfers

Rs. ’000

Closing balance at31 December 2018

Rs. ’000

General reserve 17,740,879 – 17,740,879Revaluation reserve 7,793,317 – 7,793,317OCI reserve 1,345,237 (816,806) 528,430Cash flow hedging reserve 291,924 (291,924) –Foreign currency translation reserve – – –Other reserves (refer Notes 44.1 and 44.2) 1,118,586 (698,587) 419,999

Total 28,289,941 (1,807,316) 26,482,625

Bank 2017


Rs. ’000

Movement/transfersRs. ’000

Closing balance at 31 December 2017

Rs. ’000

General reserve 15,740,879 2,000,000 17,740,879Revaluation reserve 3,296,565 4,496,752 7,793,317OCI reserve 1,378,818 (33,581) 1,345,237Cash flow hedging reserve 1,850 290,074 291,924Foreign currency translation reserve – – –Other reserves (refer Notes 44.1 and 44.2) 725,695 392,891 1,118,586

Total 21,143,806 7,146,136 28,289,941




44. Other reserves (contd.)

Group 2018


Rs. ’000

Movement/transfers

Rs. ’000


Rs. ’000

General reserve 17,740,879 – 17,740,879Revaluation reserve 7,793,317 – 7,793,317OCI reserve 1,228,420 (838,210) 390,211Cash flow hedging reserve 291,924 (291,924) –Foreign currency translation reserve – – –Other reserves (refer Notes 44.1, 44.2 and 44.3) 1,703,246 (698,578) 1,004,668

Total 28,757,786 (1,828,712) 26,929,074

Group 2017


Rs. ’000

Movement/transfersRs. ’000


Rs. ’000

General reserve 15,740,879 2,000,000 17,740,879Revaluation reserve 3,296,565 4,496,752 7,793,317OCI reserve 1,096,758 131,662 1,228,420Cash flow hedging reserve 1,850 290,074 291,924Foreign currency translation reserve – – –Other reserves (refer Notes 44.1, 44.2 and 44.3) 1,219,656 483,590 1,703,246

Total 21,355,707 7,402,077 28,757,786

44.1 Unclaimed deposit reserve

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

Opening balance 1,116,401 723,509 1,116,401 723,509Transferred to share capital (2,700,000) (500,000) (2,700,000) (500,000)Transferred during the year 2,001,414 892,892 2,001,414 892,892

Closing balance 417,815 1,116,401 417,815 1,116,401

In terms of the Section 47 of the National Savings Bank Act No. 30 of 1971 as amended by the Section 30 of the National Savings Bank (Amendment) Act No. 28 of 1995, where an amount lain dormant in a savings or deposit account for a period of ten years, it should be transferred to Unclaimed Deposit Reserve. Accordingly amount transferred (net) to the reserve during the year 2018, was Rs. 2,001.4 Mn.




44. Other reserves (contd.)

44.2 Special reserve

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

Opening balance 2,185 2,186 2,185 2,186Transferred during the year (1) (1) (1) (1)

Closing balance 2,184 2,185 2,184 2,185

The special reserve represents the amount transferred from the dormant accounts of customers where the aggregate of the amount dormant is less than Rs. 10.00 (Ten rupees)

The whole or such part of the monies lying to the credit of “Special Reserve” and “Unclaimed Deposit Reserve” may be capitalised and shares to the value of money capitalised may be issued in the name of Secretary to the Treasury. The entirety of the issue and fully-paid share capital of Rs. 9,400 Mn. reflected in the Statement of Financial Position was issued by capitalising the unclaimed deposit reserve time to time.

44.3 Special risk reserve – (NSB Fund Management Company Limited)

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

Opening balance – – 584,660 493,961 Transferred during the year – 25% of profit after tax – – 9 90,699

Closing balance – – 584,669 584,660

In order to promote the safety, soundness and the stability of the primary dealer (PD) system and to build up PD capital base, primary dealers (PDs) are required to annually transfer a percentage of their profit after tax to a special risk reserve as follows, with effect from 1 July 2004.

I. 50% of the profit after tax annually by the PDs who maintain capital funds less than Rs. 400 Mn.

II. 25% of the profit after tax annually by the PDs who maintain capital funds in excess of Rs. 400 Mn.

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

Other reserves

Total other reserves 419,999 1,118,586 1,004,668 1,703,246




45 Non-controlling interest No values to be disclosed under non-controlling interest.

46 Contingent liabilities and commitments

Accounting policy

Contingent liabilities are possible obligations whose existence will be confirmed only by uncertain future event or present obligation where the transfer of economic benefit is not probable or cannot be reliably measured as defined in the Sri Lanka Accounting Standard – LKAS 37 on “Provisions, Contingent Liabilities and Contingent Assets”.

To meet the financial needs of customers, the Bank enters in to various irrevocable commitments and contingent liabilities. These consist of finance guarantees, letters of credit and other undrawn commitments to lend. Letters of credit and guarantees commit the Bank to make payments on behalf of customers in the event of a specific act, generally related to the import or export of goods. Guarantees and standby letters of credit carry a similar credit risk to loans.

Contingent liabilities are not recognised in the Statement of Financial Position but are disclosed unless its occurrence is remote.

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

Commitment for unutilised credit facilities 1,579,548 14,963,565 1,579,548 14,963,565Other commitments indirect credit facilities 57,525 78,648 57,525 78,648Capital commitments (Note 46.1) 678,624 1,260,213 678,624 1,260,213

2,315,697 16,302,426 2,315,697 16,302,426

Contingent liabilitiesDocumentary credit 277,937 276,003 277,937 276,003Guarantees 1,887,763 1,741,883 1,887,763 1,741,883

2,165,700 2,017,886 2,165,700 2,017,886

Total commitment and contingencies 4,481,397 18,320,312 4,481,397 18,320,312

46.1 Capital commitments Capital expenditure approved by the Board of Directors, for which provisions have not been made in the Financial Statements are detailed below:

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

Approved and contracted for 498,624 1,187,213 498,624 1,187,213Approved but not contracted for 180,000 73,000 180,000 73,000

678,624 1,260,213 678,624 1,260,213




47 Related party disclosures

Accounting policy

The Bank carried out transactions in the ordinary course of business on an arm’s length basis at commercial rates with parties who are defined as related parties as per the Sri Lanka Accounting Standard – LKAS 24 – “Related Party Disclosures”, other than, transactions that the Key Management Personnel (KMP) have availed under schemes uniformly applicable to all staff at concessionary rates.

47. (a) Transactions with state and state-controlled entities The financial dealings carried out with the Government of Sri Lanka and state-controlled entities for the year and as of the date of the Statement of Financial Position are disclosed below on a collective basis:

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

AssetsLoans to Government 2,075,000 2,075,000 2,075,000 2,075,000Investments made on Government Securities 523,205,915 550,064,186 538,670,193 556,857,496Investments on state and state-controlled entities 148,027,411 151,145,775 148,027,411 151,145,775Securities purchased under resale agreements 1,432,088 1,660,634 1,432,088 1,672,197Tax receivable (notional tax) 5,761,291 7,184,079 5,769,803 7,212,333Postmaster-General’s current account 376,392 351,107 376,392 351,107Advance payment to Government 4,160,000 4,480,000 4,160,000 4,480,000Other receivables from Government 14,942,050 8,426,009 14,942,050 8,426,009

699,980,147 725,386,790 715,452,937 732,219,917

LiabilitiesSecurities sold under repurchase agreements 60,456,305 21,708,120 60,456,305 27,297,637

Taxes paidIncome tax 3,441,213 4,419,019 3,444,056 4,595,065 Value added tax 2,577,657 3,082,619 2,584,220 3,168,299 Nation building tax 343,688 411,016 344,563 422,440 Debt repayment levy 308,371 – 308,371 – Contribution to consolidated fund – dividend/levy 500,000 5,111,114 500,000 5,111,114

7,170,929 13,023,768 7,181,210 13,296,918




47. Related party disclosures (contd.) 47. (b) Transactions with subsidiary company (NSB Fund Management Company limited) The Bank has contributed Rs. 800 Mn. towards the share capital of the Company. The Company invested its funds in Treasury Bills, Treasury Bonds and Repos during the year on a regular basis. All investment in Treasury Bills and Treasury Bonds of the Bank are being made through the NSB Fund Management Co. Ltd., on which a service charge of Rs. 39.4 Mn. has been made (Rs. 58.7 Mn. in 2017).

The Bank holds following balances with NSB Fund Management Company Ltd. at the reporting date.

Bank


2017Rs. ’000

AssetsInter-company current account 41 51Securities purchased under resale agreement – 1,564,600Interest receivable on securities purchased under resale agreement – 1,326Other receivable 164 955

LiabilitiesOther payable 750 750

Bank


2017Rs. ’000

IncomeRent income 1,874 1,874Interest income reverse repo 7,885 170,401

ExpensesService charges 39,421 58,747RTGS charges 992 695Custodian fee 6,000 6,000Trustee fee 500 500Interest expenses on repo 46,105 –




47. Related party disclosures (contd.) 47. (c) Transactions with post-employment benefit plans of the Bank Financial position transactions which were taken place between the Bank and Post-Employment Benefit Plans of the Bank as at the year end are summarised below:

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

National Savings Bank Employees’ Provident Fund

LiabilitiesFixed deposits 186,800 – 186,800 –Securities purchased under resale agreements – 36,637 – 36,637Debentures 125,000 125,000 125,000 125,000

AssetsRepo borrowings – 28,068 – 28,068

LiabilitiesNational Savings Bank Employees’ Pension Scheme IFixed deposits 394,810 394,810 394,810 263,813Securities purchased under resale agreements 139,087 139,087 139,087 242,643Debentures 1,700,000 1,700,000 1,700,000 1,700,000

National Savings Bank Employees’ Pension Scheme IIFixed deposits 106,617 140,373 106,617 140,373Securities purchased under resale agreements 74,548 3,137 74,548 3,137

Medical assistance scheme for the retired employees of NSBFixed deposits 61,619 101,405 61,619 101,405Securities purchased under resale agreements 10,075 8,253 10,075 8,253

Widows’/Widowers’ and Orphans Pension FundFixed deposits 24,147 19,763 24,147 19,763Securities purchased under resale agreements 11,100 5,078 11,100 5,078

Income Statement transactions which were taken place between the Bank and post-employment benefit plans of the Bank as at the year end are summarised below:

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

Interest IncomeNational Savings Bank Employees’ Provident Fund 27,468 8,508 27,468 8,508National Savings Bank Employees’ Pension Scheme I 13,628 29,084 13,628 29,084National Savings Bank Employees’ Pension Scheme II 62 – 62 –Medical assistance scheme for the retired employees of NSB 44 – 44 –

Interest ExpensesNational Savings Bank Employees’ Provident Fund 17,426 47,514 17,426 47,514National Savings Bank Employees’ Pension Scheme I 232,218 265,482 232,218 265,482National Savings Bank Employees’ Pension Scheme II 10,129 8,290 10,129 8,290Medical assistance scheme for the retired employees of NSB 5,210 8,429 5,210 8,429Widow’/Widowers’ and Orphans Pension Fund 1,011 1,864 1,011 1,864




47. Related party disclosures (contd.) 47. (d) Transactions with key managerial persons (i) Key managerial persons include members of the Board of Directors of the Bank and key employees of the Bank holding

directorships in subsidiary, NSB Fund Management Company Ltd.

(ii) Loans and advances in the names of key managerial persons are given below:

Bank


2017Rs. ’000

Loans and advances 80,358 82,294

(iii) Chairman’s, Directors’, GM/CEO’s and DGM’s emoluments and fees amounted to Rs. 94.84 Mn. in 2018. (Rs. 69.11 Mn. in 2017).

47. (e) Net accommodation granted to related parties (Disclosure under Rule 3 (8) (ii) (e) of the Governance Direction of No. 12 of 2007 issued by the Central Bank of Sri Lanka).

Bank and Group


2017Rs. ’000

Key Managerial PersonsLoan and advances 80,358 82,294 Total net accommodation 80,358 82,294 Regulatory capital 36,859,411 32,808,403

Net accommodation as a percentage of the Bank’s regulatory capital (%) 0.2 0.3

47. (f ) Due from other related parties

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

Securities purchased under resale agreements – Entrust Securities PLC 38,910 31,300 38,910 31,300Receivable from Entrust Securities PLC 153,596 96,068 153,596 96,068

Total 192,506 127,368 192,506 127,368




47. Related party disclosures (contd.) 47. (g) Due to other related parties

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

Other Payable – Entrust Securities PLC 716,608 633,133 716,608 633,133Securities sold under repurchase agreements – Entrust Securities PLC – – 208,790 142,824

Total 716,608 633,133 925,398 775,957

48 Net assets value per ordinary share

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

Amount used as the numeratorShareholders’ funds 43,732,665 39,095,691 44,755,484 40,140,278Number of ordinary share used as the denominatorTotal number of shares 940,000 670,000 940,000 670,000

Net assets value per ordinary share (Rs.) 46.52 58.35 47.61 59.91

49 Litigation against the Bank and the Group Litigation is a common occurrence in the banking industry due to the nature of the business. The Bank has an established protocol for dealing with such legal claims. Once professional advice has been obtained on the certainty of the outcome and the amount of damages reasonably estimated, the Bank makes adjustments to account for any adverse effects which the claims may have on its financial standing. The unresolved court cases against the Bank as at the year end for which adjustments to the Financial Statements have not been made due to the uncertainty of its outcome are as follows.

Bank

As at 31 December 2018Number

2017Number

Tribunal/CourtLabour Tribunal 11 5Labour Commission 0 0Industrial Court 2 0Magistrate’s Court 4 4District Court 53 30High Court/Civil Appellate High Court/Provincial High Court 3 4Court of Appeal 5 6Supreme Court 1 1




50 Events occurring after the reporting date

Accounting policy

Events occurring after the reporting date are those events, both favourable and unfavourable, that occur between the Reporting date and the date when the Financial Statements are authorised for issue.

Where necessary all material events after the reporting date have been considered and appropriate adjustments/disclosures have been made in the Financial Statements as per the LKAS 10 – “Events after the Reporting Period”.

No circumstances have arisen since the reporting date which would require adjustments to or disclosure in the Financial Statements other than the followings:

Merger with Sri Lanka Savings Bank In 2016 Budget proposals, Hon Minister of Finance has proposed that National Savings Bank to be merged with Sri Lanka Savings Bank and the Bank is in the process of evaluating the proposal as at the reporting date.

51 Comparative figures The comparative information is restated wherever necessary, to comply with the SLFRS 9 – “Financial Instrument” and Central Bank format issued.

52 Explanation of Transition to Sri Lanka Financial Reporting Standard (SLFRS 9) The following notes set out the impact of adopting Sri Lanka Accounting Standard – SLFRS 9 (“Financial Instruments”) at transition date, and the comparable figure for the year 2017 have been restated. The impact of adopting the SLFRS 9 i.e., (“Fist Day impact”), the effect of replacing incurred credit loss calculation under Sri Lanka Accounting Standard – LKAS 39, with expected credit loss calculation under SLFRS 9, has been adjusted to retain earnings (Shareholder’s equity).

Reclasification These adjustments reflect the movement of balances between categories on the Statement of Financial Position and with no impact to shareholders’ equity. There is no change to the carrying value of the balances as a result of the reclasificastion.

Remeasurement These adjustments, which include expected credit loss, result in a change to the carrying value of the item on the Statement of Financial Position with an impact to shareholders’ equity.




52. Explanation of Transition to Sri Lanka Financial Reporting Standard (SLFRS 9) (contd.) 52.1 Reconciliation of Income Statements

Bank Group

Reclassification Remeasurement Restated Reclassification Remeasurement Restated

For the year ended 31 December Explanatorynote

2017Rs. ’000

2017Rs. ’000

2017Rs. ’000

2017Rs. ’000

Income A 107,816,909 – 178,876 107,995,784 108,055,746 – 178,876 108,234,622Interest income 103,399,962 – 178,876 103,578,838 104,245,541 – 178,876 104,424,417Interest expenses 78,444,825 – – 78,444,825 78,987,596 – – 78,987,596

Net interest income 24,955,137 – – 25,134,013 25,257,944 – – 25,436,821Fee and commission income 782,776 – – 782,776 785,077 – – 785,077Fee and commission expenses 109,082 – – 109,082 113,037 – – 113,037

Net fee and commission income 673,694 – – 673,694 672,040 – – 672,040Net gain/(loss) from trading 1,206,408 – – 1,206,408 1,520,740 – – 1,520,740Net fair value gains/(losses) from financial instruments at fair value through profit or loss – – – – – – – –Net gain/(loss) from financial investments C 707,491 (707,491) – – 707,491 (707,491) – –Net gain/(loss) from financial instruments at fair value through profit or loss – – – – – – – –Net gain/(loss) on derecognition of financial assets measured at amortised cost – – – – – – – –Net gains/(losses) from derecognition of financial assets C – 707,491 – 707,491 – 707,491 707,491Other operating income (net) 1,720,272 – – 1,720,272 796,897 – – 796,897

Total operating income 29,263,002 – – 29,441,878 28,955,112 – – 29,133,988Impairment Charges B 693,233 – 72,614 765,847 693,233 – 72,625 765,858

Net operating income 28,569,769 – – 28,676,030 28,261,880 – – 28,368,130Personnel expenses 6,886,505 – – 6,886,505 6,918,813 – – 6,918,813Depreciation and amortisation C – 423,547 – 423,547 – 424,352 – 424,352Other expenses C 4,160,911 (423,547) – 3,737,364 4,107,116 (424,352) – 3,682,765Operating profit/(loss) before Value Added Tax (VAT) and Nation Building Tax (NBT) 17,522,354 – – 17,628,615 17,235,951 – – 17,342,200Value Added Tax on financial services 3,082,619 – – 3,082,619 3,168,299 – – 3,168,299Nation Building Tax on financial services 411,016 – – 411,016 422,440 – – 422,440

Operating profit/(loss) after Value Added Tax (VAT) and Nation Building Tax (NBT) 14,028,719 – – 14,134,980 13,645,212 – – 13,751,461Share of profits of associates and joint ventures – – – – – – – –Profit/(loss) before tax 14,028,719 – – 14,134,980 13,645,212 – – 13,751,461Income tax expenses 4,419,019 – – 4,419,019 4,595,065 – – 4,595,065Profit/(loss) for the period 9,609,700 – – 9,715,961 9,050,147 – – 9,156,396

Profit attributable to:

Equity holders of the Bank 9,609,700 – – 9,715,961 9,050,147 – – 9,156,396Non-controlling interests – – – – – – – –

Earnings per share on profit

Earnings per ordinary share – Basic (Rs.) 15.50 – – 15.67 14.60 – – 14.77Earnings per ordinary share – Diluted (Rs.) 15.50 – – 15.67 14.60 – – 14.77Profit for the period 9,609,700 – – 9,715,961 9,050,147 – – 9,156,396




52. Explanation of Transition to Sri Lanka Financial Reporting Standard (SLFRS 9) (contd.) 52.1 Reconciliation of Income Statements (contd.)

Bank Group

Reclassification Remeasurement Restated Reclassification Remeasurement Restated

For the year ended 31 December Explanatorynote

2017Rs. ’000

2017Rs. ’000

2017Rs. ’000

2017Rs. ’000

Profit for the period 9,609,700 – – 9,715,961 9,050,147 – – 9,156,396Other comprehensive income, net of taxes

Other comprehensive income to be reclassified to Income Statement

Net gains/(losses) on cash flow hedges C 290,074 – – 290,074 290,074 – – 290,074Debt instrument at fair value through other comprehensive income – 693,559 – 693,559 – 858,802 – 858,802Fair Value gains transferred to the income statement on disposal of Debt instrument at fair value through other comprehensive income C – (690,388) – (690,388) – (690,388) – (690,388)Gains/(losses) on remeasuring available-for-sale financial assets C 656,807 (656,807) – – 822,050 (822,050) – –Net gains/(losses) on investments in debt instruments measured at fair value through other comprehensive income – – – – – – – –Fair Value gains transferred to the income statement on disposal of available-for-sale financial assets C (690,388) 690,388 – – (690,388) 690,388 – –Total other comprehensive income to be reclassified to income statement D 256,492 36,752 – 293,245 421,735 36,752 – 458,488Other comprehensive income not to be reclassified to Income Statement

Changes in revaluation surplus 4,508,480 – – 4,508,480 4,508,480 – 4,508,480Change in fair value on investments in equity instruments designated at fair value through other comprehensive income – (36,752) – (36,752) – (36,752) – (36,752)Remeasurement of post-employment benefit obligations (2,072,425) – – (2,072,425) (2,072,155) – – (2,072,155)Total other comprehensive income not to be reclassified to income statement 2,436,055 (36,752) – 2,399,303 2,436,325 (36,752) – 2,399,573Other comprehensive income for the period, net of taxes 2,692,547 – – 2,692,547 2,858,060 – – 2,858,060Total comprehensive income for the period 12,302,247 – – 12,408,508 11,908,207 – – 12,014,456Attributable to: – – – –Equity holders 12,302,247 – – 12,408,508 11,908,207 – – 12,014,456

Explanatory note

A: With the adoption of SLFRS 9, the interest income recognised on impaired loan under LKAS 39 has been revised.B: As adoption of SLFRS 9, incurred credit loss under LKAS 39 replace with expected credit loss. C: Due to the change in the name of line item of the income statement.D: The fair value change in equity instrument classified on AFS under LKAS 39, need to be reclassified under item that will not be reclassified to income

statement upon the derecognision in SLFRS 9.




52. Explanation of Transition to Sri Lanka Financial Reporting Standard (SLFRS 9) (contd.) 52.2 Reconciliation of financial position – 2017

Bank

As at 31 December Note Explanatorynote

LKAS 39 Category

2017AuditedRs. ’000

Reclassification Remeasurement 2017 Restated Rs. ’000

SLFRS 9 Category

AssetsCash and cash equivalents 16 E L & R 3,849,627 – (97) 3,849,530 ACBalances with central banks 17 L & R – – – – –Placements with banks 18 F L & R 23,438,104 – (830) 23,437,274 ACDerivative financial instruments 19 Hedging 1,360,714 – – 1,360,714 FVOCIOther Financial assets held for trading HFT 6,472,314 (6,472,314) – –Financial assets recognised through profit or loss 20

– measured at fair value – 6,472,314 – 6,472,314 FVPL– designated at fair value – – – –

Loans and receivables to banks L & R 27,714,565 (27,714,565) – –Loans and receivables to other customers L & R 360,309,866 (360,309,866) – –Financial assets at amortised cost

– loans and advances 21 G – 376,557,423 (853,693) 375,703,730 AC– debt and other instruments 22 H – 555,740,085 (271,467) 555,468,618 AC

Financial assets measured at fair value through other comprehensive income 23 I – 5,693,829 – 5,693,829 FVOCIFinancial investments – Available for sale AFS 5,693,829 (5,693,829) – –Financial investments – Held to maturity HTM 544,273,077 (544,273,077) – –Investments in subsidiaries 24 n/a 900,000 – – 900,000 n/aProperty, plant and equipment 26 J n/a 12,015,376 380,308 – 12,395,684 n/aIntangible assets n/a 380,308 (380,308) – –Deferred tax assets – – – –Other assets 30 n/a 25,695,689 – – 25,695,689 n/a

Total assets 1,012,103,470 – (1,126,087) 1,010,977,382

LiabilitiesDue to banks 31 K AC 180,439 48,416,152 – 48,596,591 ACDerivative financial instruments 32 Hedging 956,937 – – 956,937 FVOCIFinancial liabilities recognised through profit or loss – – – –Financial liabilities at amortised cost 34 – – – –- due to depositors – 737,212,640 – 737,212,640 AC- due to debt securities holders – – – –- due to other borrowers L – 12,837,008 – 12,837,008 ACDue to other customers AC 737,212,640 (737,212,640) – –Other borrowings AC 217,955,777 (217,955,777) – –Debt securities issued 35 M – 162,709,027 – 162,709,027 ACRetirement benefit obligation 36 – 3,711,431 3,711,431 n/aCurrent tax liabilities – – – –Deferred tax liabilities 29 n/a 507,063 – – 507,063 n/aOther liabilities 39 N n/a 9,062,425 (3,712,181) – 5,350,244 n/aSubordinated liabilities n/a 6,006,411 (6,006,411) – –Due to subsidiaries 40 – 750 – 750 n/a

Total liabilities 971,881,691 – – 971,881,691





Bank


LKAS 39 Category


Reclassification Remeasurement 2017 Restated Rs. ’000

SLFRS 9 Category

EquityStated capital/assigned capital 41 n/a 6,700,000 – – 6,700,000 n/aStatutory reserve fund 42 n/a 3,002,952 – – 3,002,952 n/aRetained earnings 43 n/a 2,228,885 – (1,126,087) 1,102,798 n/aOther reserves 44 n/a 28,289,941 – – 28,289,941 n/aTotal shareholders’ equity 40,221,778 – (1,126,087) 39,095,691

Total equity 40,221,778 – (1,126,087) 39,095,691

Total equity and liabilities 1,012,103,470 – (1,126,087) 1,010,977,382

Group


LKAS 39 Category


Reclassification Remeasurement 2017Restated Rs. ’000

SLFRS 09 Category

AssetsCash and cash equivalents 16 E L & R 3,854,086 – (97) 3,853,989 ACBalances with central banks 17 L & R 94 – – 94 –Placements with banks 18 F L & R 23,438,104 – (830) 23,437,274 ACDerivative financial instruments 19 Hedging 1,360,714 – – 1,360,714 FVOCIOther Financial assets held for trading HFT 9,389,950 (9,389,950) – –Financial assets recognised through profit or loss 20



– loans and advances 21 G – 375,270,319 (853,693) 374,416,626 AC– debt and other instruments 22 H – 559,591,319 (271,567) 559,319,752 AC

Financial assets measured at fair value through other comprehensive income 23 I – 7,513,932 – 7,513,932 FVOCIFinancial investments – Available for sale AFS 7,713,852 (7,713,852) – –Financial investments – Held to maturity HTM 547,924,390 (547,924,390) – –Investments in subsidiaries 24 n/a – – – – n/aProperty, plant and equipment 26 J n/a 12,018,679 380,655 – 12,399,334 n/aIntangible assets n/a 380,655 (380,655) – –Deferred tax assets – – – –Other assets 30 n/a 25,976,944 – – 25,976,944 n/a

Total assets 1,018,794,797 – (1,126,186) 1,017,668,610





Group


LKAS 39 Category



SLFRS 9 Category

LiabilitiesDue to banks 31 K AC 828,433 48,524,141 – 49,352,574 ACDerivative financial instruments 32 Hedging 956,937 – – 956,937 FVOCIFinancial liabilities recognised through profit or loss – – – –Financial liabilities at amortised cost 34 –– due to depositors – 737,212,640 – 737,212,640 AC– due to debt securities holders – – – –– due to other borrowers L – 17,545,212 – 17,545,212 ACDue to other customers AC 737,212,640 (737,212,640) – –Other borrowings AC 222,771,969 (222,771,969) – –Debt securities issued 35 M – 162,709,027 – 162,709,027 ACRetirement benefit obligation 36 – 3,712,665 3,712,665 n/aCurrent tax liabilities 137,344 – – 137,344Deferred tax liabilities 29 n/a 507,138 – – 507,138 n/aOther liabilities 39 N n/a 9,107,460 (3,712,665) – 5,394,795 n/aSubordinated liabilities n/a 6,006,411 (6,006,411) – –Due to subsidiaries 40 – – – – n/a


EquityStated capital/assigned capital 41 n/a 6,700,000 – – 6,700,000 n/aStatutory reserve fund 42 n/a 3,002,952 – – 3,002,952 n/aRetained earnings 43 n/a 2,805,727 – (1,126,086) 1,679,540 n/aOther reserves 44 n/a 28,757,786 – – 28,757,786 n/aTotal shareholders’ equity 41,266,465 – (1,126,186) 40,140,278

Total equity 41,266,465 – (1,126,186) 40,140,278

Total equity and liabilities 1,018,794,797 – (1,126,186) 1,017,668,610

L&R – Loans and Receivables, HFT – Held for Trading, AFS – Available for Sale, HTM – Held to Maturity, FVPL – Fair Value through Profit or Loss, FVOCI – Fair Value through Other comprehensive income, n/a – Not Applicable





Bank

As at 31 December Explanatorynote

LKAS 39 Category



SLFRS 9 Category

AssetsCash and cash equivalents E L & R 4,619,699 – (125) 4,619,574 ACBalances with central banks L & R – – – –Placements with banks F L & R 19,013,572 – (361) 19,013,211 ACDerivative financial instruments Hedging 2,728,445 – – 2,728,445 FVOCIOther Financial assets held for trading HFT 20,290,588 (20,290,588) – –Financial assets recognised through profit or loss



– loans and advances G – 312,539,632 (970,044) 311,569,588 AC– debt and other instruments H – 517,095,780 (261,818) 516,833,962 AC

Financial assets measured at fair value through other comprehensive income I – 6,227,764 – 6,227,764 FVOCIFinancial investments – Available for sale AFS 6,227,764 (6,227,764) – –Financial investments – Held to maturity HTM 505,824,398 (505,824,398) – –Investments in subsidiaries n/a 150,000 – – 150,000 n/aInvestments in associates and joint ventures –Property, plant and equipment J n/a 7,119,651 157,271 – 7,276,922 n/aInvestment properties –Intangible assets n/a 157,271 (157,271) – –Deferred tax assets – – – –Other assets n/a 21,761,440 – – 21,761,440 n/a

Total assets 911,703,842 – (1,232,348) 910,471,495




52. Explanation of Transition to Sri Lanka Financial Reporting Standard (SLFRS 9) (contd.) 52.3 Reconciliation of financial position – 2016 (contd.)

Bank


LKAS 39 Category



SLFRS 9 Category

LiabilitiesDue to banks K AC 115,391 19,631,900 – 19,747,292 ACDerivative financial instruments Hedging – – – – FVOCIOther financial liabilities held-for-trading – –Financial liabilities recognised through profit or loss – – – –Financial liabilities at amortised cost

– due to depositors – 657,280,315 – 657,280,315 AC– due to debt securities holders – – – –– due to other borrowers L – 34,479,828 – 34,479,828 AC

Due to other customers AC 657,280,315 (657,280,315) – –Other borrowings AC 207,039,909 (207,039,909) – –Debt securities issued M – 158,934,592 – 158,934,592 ACRetirement benefit obligation – 1,896,930 – 1,896,930 n/aCurrent tax liabilities – – –Deferred tax liabilities n/a 416,180 – – 416,180 n/aSubordinated term debts – – – –Other liabilities N n/a 8,600,056 (1,896,930) – 6,703,126 n/aSubordinated liabilities n/a 6,006,411 (6,006,411) – –Due to subsidiaries – – – – n/a


EquityStated capital/assigned capital n/a 6,200,000 – – 6,200,000 n/aStatutory reserve fund n/a 2,522,467 – – 2,522,467 n/aRetained earnings n/a 2,379,307 – (1,232,348) 1,146,959 n/aOther reserves n/a 21,143,806 – – 21,143,806 n/aTotal shareholders’ equity 32,245,580 – (1,232,348) 31,013,232

Total equity 32,245,580 – (1,232,348) 31,013,232

Total equity and liabilities 911,703,842 – (1,232,348) 910,471,495





Group


LKAS 39 Category



SLFRS 9 Category

AssetsCash and cash equivalents E L & R 4,627,629 – (125) 4,627,504 ACBalances with central banks L & R 477 – – 477Placements with banks F L & R 19,013,572 – (361) 19,013,211 ACDerivative financial instruments Hedging 2,728,445 – – 2,728,445 FVOCIOther Financial assets held for trading HFT 27,303,207 (27,303,207) – –Financial assets recognised through profit or loss –



– loans and advances G – 311,740,811 (970,044) 310,770,767 AC– debt and other instruments H – 519,096,175 (261,907) 518,834,268 AC

Financial assets measured at fair value through other comprehensive income I – 7,922,677 – 7,922,677 FVOCIFinancial investments – Available for sale AFS 8,122,516 (8,122,516) – –Financial investments – Held to maturity HTM 507,624,954 (507,624,954) – –Investments in subsidiaries n/a – – – – n/aInvestments in associates and joint ventures – – – – n/aProperty, plant and equipment J n/a 7,121,823 157,271 – – n/aInvestment properties – – – – n/aIntangible assets n/a 157,271 (157,271) – 7,279,094 n/aDeferred tax assets n/a 588 – – 588 n/aOther assets n/a 21,890,777 – – 21,890,777 n/a

Total assets 921,603,453 – (1,232,437) 920,371,017





Group


LKAS 39 Category



SLFRS 9 Category

LiabilitiesDue to banks K AC 2,858,673 19,631,900 – 22,490,574 ACDerivative financial instruments Hedging – – – – FVOCIOther financial liabilities held-for-trading –Financial liabilities recognised through profit or loss – – – –Financial liabilities at amortised cost – – – –

– due to depositors – 657,280,315 – 657,280,315 AC– due to debt securities holders – – – –– due to other borrowers L – 40,069,345 – 40,069,345 AC

Due to other customers AC 657,280,315 (657,280,315) – –Other borrowings AC 212,629,427 (212,629,427) – –Debt securities issued M – 158,934,592 – 158,934,592 ACRetirement benefit obligation – 1,898,190 – 1,898,190 n/aCurrent tax liabilities 17,153 – – 17,153Deferred tax liabilities n/a 416,180 – – 416,180 n/aSubordinated term debts – – – –Other liabilities N n/a 8,608,506 (1,898,190) – 6,710,316 n/aSubordinated liabilities n/a 6,006,411 (6,006,411) – –Due to subsidiaries – – – – n/a


EquityStated capital/assigned capital n/a 6,200,000 – – 6,200,000 n/aStatutory reserve fund n/a 2,522,467 – – 2,522,467 n/aRetained earnings n/a 3,708,614 – (1,232,437) 2,476,177 n/aOther reserves n/a 21,355,707 – – 21,355,707 n/aTotal shareholders’ equity 33,786,788 – (1,232,437) 32,554,351

Total equity 33,786,788 – (1,232,437) 32,554,351

Total equity and liabilities 921,603,453 – (1,232,437) 920,371,017

Explanatory NoteE: Cash and cash equivalentsCash and cash equivalents is subjected to the expected credit loss provisioning under the SLFRS 9.

F: Placements with banksPlacements with banks is subjected to the expected credit loss provisioning under the SLFRS 9.

G: Financial assets at amortised cost – loans and advancesAs at 1 January 2018, financial assets previously classified as loan and receivable to bank/other customers have been reclassified as financial assets at amortised cost – loans and advances. These assets met the “Solely Payments of Principal and Interest” (SPPI) criterion. They were not actively traded and held with the intention to collect cash flows and without the intention to sell.

K: Due to banksSecurities sold under repurchase (repo) agreement – Bank has been reclassified under “due to bank” which was previously classified under other borrowing.

L: Financial liabilities at amortised cost – due to other borrowersSecurities sold under repurchase (repo) agreement has been reclassified under “due to other borrowers” which was previously classified under other borrowing.

M: Debt securities issuedSubordinated liabilities and senior note issued have been reclassified as “Debt securities issued” which were previously classified under subordinated liabilities and other borrowing.

N: Other liabilitiesRetirement benefit obligation and due to subsidiary have been separately disclosed on the face of financial position wherever this was previously disclosed under other liabilities.

H: Financial assets at amortised cost – debt and other instrumentsAs at 1 January 2018, financial assets previously classified as financial investments – Held-to-maturity has been reclassified as financial assets at amortised cost – debt and other instruments. These assets met the “Solely Payments of Principal and Interest” (SPPI) criterion. They were not actively traded and held with the intention to collect cash flows and without the intention to sell.

I: Financial assets measured at fair value through other comprehensive incomeFinancial assets previously classified under available for sale category have been reclassified as financial assets measured at fair value through other comprehensive income.

J: Property, plant and equipmentThe intangible assets represent only the computer software and this has been reclassified under property, plant and equipment which was previously classified under intangible assets.




52. Explanation of Transition to Sri Lanka Financial Reporting Standard (SLFRS 9) (contd.) 52.4 Reconciliation of impairment allowance – Bank

Impairment provision

As at 31 December 2017Audited

Rs. ’000

Reclassification

Rs. ’000

2017Restated (Except

impairment impact)Rs. ’000

As per LKAS 39

Rs. ’000

As perSLFRS 9

Rs. ’000

Net impact on remeasurement

Rs. ’000

2017Restated

Rs. ’000

Assets

Cash and cash equivalents 3,849,627 – 3,849,627 – 97 97 3,849,530Balances with central banks – – – – – – –Placements with banks 23,438,104 – 23,438,104 – 830 830 23,437,274Derivative financial instruments 1,360,714 – 1,360,714 – – – 1,360,714Other Financial assets held for trading 6,472,314 (6,472,314) – – – – –Financial assets recognised through profit or loss

– measured at fair value – 6,472,314 6,472,314 – – – 6,472,314– designated at fair value – – – – – – –

Loans and receivables to banks 27,714,565 (27,714,565) – – – – –Loans and receivables to other customers 360,309,866 (360,309,866) – – – – –Financial assets at amortised cost

– loans and advances – 376,557,423 376,557,423 2,298,341 2,734,773 436,432 376,120,990– debt and other instruments – 555,740,085 555,740,085 – 271,467 271,467 555,468,618

Financial assets measured at fair value through other comprehensive income – 5,693,829 5,693,829 – – – 5,693,829Financial investments – Available for sale 5,693,829 (5,693,829) – – – – –Financial investments – Held to maturity 544,273,077 (544,273,077) – – – – –

973,112,096 – 973,112,096 2,298,341 3,007,167 708,826 972,403,270


2018

3,85

9

2017

3.00

72,

298

2016

2,36

81,

732

Rs. Mn.

4,000

3,200

2,400

1,600

800

0

LKAS 39 SLFRS 9

Impairment provision – Financial assets 2017 – LKAS 39 vs SLFRS 9

Debt and other

instruments

Loans and

advances

Placements with banks

Cash and cash

equivalents

271,

467

2,73

4,77

32,

298,

341

830

97

Rs. ’000

3,000,000

2,400,000

1,800,000

1,200,000

600,000

0

LKAS 39 SLFRS 9




52. Explanation of Transition to Sri Lanka Financial Reporting Standard (SLFRS 9) (contd.) 52.5 The impact on retained earnings by transition to SLFRS 9 is as follows:

BankRs. ’000

GroupRs. ’000

Closing balance under LKAS 39 as at 31 December 2017 2,228,885 2,805,727

Remeasurement adjustments on adoption of SLFRS 9Recognition of SLFRS 9 ECLs for loans and investments (Note 52.6 ) (1,126,087) (1,126,186)Opening balance under SLFRS 9 as at 1 January 2018 1,102,798 1,679,541

52.6 Day 1 impact on equity

Bank

As per SLFRS 9

As at 31 December As per LKAS 39impairment

provision

Rs. ’000


Rs. ’000

Adjustment on accrued interest on

impaired loanRs. ’000

Total

Rs. ’000

Day 1 impact as at

1 January 2018

Rs. ’000

Cash and cash equivalents – 97 – 97 97Placements with banks – 830 – 830 830Financial assets at amortised cost

– loans and advances 2,298,341 2,734,773 417,260 3,152,034 853,693 – debt and other instruments – 271,467 – 271,467 271,467

Total 2,298,341 3,007,167 417,260 3,424,428 1,126,087

Group

As per SLFRS 9

As at 31 December As per LKAS 39impairment

provision

Rs. ’000


Rs. ’000

Adjustment on accrued interest on

impaired loanRs. ’000

Total

Rs. ’000

Day 1 impact as at

1 January 2018

Rs. ’000

Cash and cash equivalents – 97 – 97 97Placements with banks – 830 – 830 830Financial assets at amortised cost

– loans and advances 2,298,341 2,734,773 417,260 3,152,034 853,693 – debt and other instruments – 271,566 – 271,566 271,566

Total 2,298,341 3,007,266 417,260 3,424,527 1,126,186




52. Explanation of Transition to Sri Lanka Financial Reporting Standard (SLFRS 9) (contd.) 52.6 Day 1 impact on equity (contd.) Impact on capital adequacy ratio – Bank

As per the Directive No. 4 of 2018 issued by Central Bank of Sri Lanka on “Adoption of Sri Lanka Accounting Standard – SLFRS 9: Financial Instruments”, for the purpose of calculating capital adequacy ratio, Banks shall stagger additional credit loss provision arising from SLFRS 9 at the transition date 1 January 2018. Accordingly, Bank has charged only 25% of the 1st Day impact (Rs. 281.5 Mn.) against the Retained Earnings of the Bank for the purpose of calculating capital adequacy ratio as at 31 December 2018. Due to this adjustment, the Tier I capital adequacy ratio and total capital adequacy ratio were decreased by 0.13%.

Composition of SLFRS 9 Impairment provision and accrued interest on impaired loans

Day 1 Impact

63%Rs. 709 Mn.Day 1 Impact from Impairment

33%Rs. 1,126 Mn.

Day 1 Impact

37%Rs. 417 Mn.

Day 1 Impact from Interest

67%Rs. 2,298 Mn.LKAS 39 Impairment Provision

53 Financial risk management

Risk management framework Integrated risk management framework of NSB encompasses policies and procedures covering various risks, mechanism to identify such risks, and effective measures to manage and mitigate risks.

Risk Management Framework of the Bank begins with the oversight of the Board of Directors. It has set-up Board Integrated Risk Management Committee (BIRMC) to assist the Board of Directors in discharging its risk management responsibility. The Risk Management Division (RMD) independently reports to the Board through BIRMC. These Management Committees review regular reports from respective Business Divisions and RMD, to ensure adequacy and effectiveness of Bank’s risk management with meticulous focus.




The following Management Committees, are responsible for the coordination of risk matters for each of the areas of risk management with meticulous focus:

Corporate Management Committee Asset and Liability Management Committee Credit Committee Investment Committee Performance Review Committee Branch Operations Steering Committee IT Steering Committee Marketing Committee Operational Risk Management Committee Human Resource Committee Corporate Procurement Committee

Internal Audit Division engages both regular and ad hoc reviews of risk management controls and procedures and the results are reported to the Board Audit Committee (BAC).

Broad risk categories in focus The Bank is exposed to the following key risks from financial instruments:

53.1 Credit risk53.1.1 Credit quality analysis53.1.1 (a) Net exposure to credit risk by class

of financial assets53.1.1 (b) Management of the credit portfolio53.1.1 (c) Credit quality (past due) by classes

of financial assets53.1.1 (d) Credit quality by classes of financial asset –

stage-wise

53.2 Liquidity risk53.2.1 Concentration of liquid assets53.2.2 Remaining contractual period to maturity 53.2.3 Financial assets available to support

future funding

53.3 Market risk53.3.1 Market risk – trading and non-trading exposure53.3.2 Foreign exchange risk53.3.3 Equity risk53.3.4 Interest rate risk

53.4 Operational risk

53.1 Credit risk Credit risk is the risk of losses resulting from the failure of a borrower or counterparty to honour its financial or contractual obligations to the Bank which could materialise from the banking book and both on or off-balance sheet. The on-balance sheet credit risk arises mainly from notional value of financial products such as retail loans, corporate loans, loans to banks and financial institutions, loans to State-Owned Enterprises (SOEs) and loans to the Government. The off-balance sheet credit risk arises from undrawn loan commitments.

Credit risk exposures of the Bank

The total credit exposure which is 40.8% of the Bank’s total assets is the second major line of business (the investment in risk free securities is 50.6% of total assets). Hence the magnitude of credit risk is comparatively moderate to the Bank, albeit the fact that the Bank considers credit risk as a major type of risk.

The credit exposure of the Bank is created from two main categories i.e., “lending to banks” and “lending to other customers” such as corporate and retail borrowers, Government and Government institutions.

53.1.1 Credit quality analysis

53.1.1 (a) Net exposure to credit risk by class of financial assets

The following tables show the maximum exposure and net exposure (fair value of any collateral held, value of risk-free investments, Government guarantees and impairment provision made were deducted in arriving the net exposure) to credit risk by class of financial assets.

53. Financial risk management (contd.) Risk management framework (contd.)




53. Financial risk management (contd.)53.1 Credit risk (contd.)53.1.1 Credit quality analysis (contd.) 53.1.1. (a) Net exposure to credit risk by class of financial assets (contd.)


Note Maximum exposure to

credit riskRs. ’000

Net exposure

Rs. ’000

Maximum exposure to


Netexposure

Rs. ’000

BankCash and cash equivalents 16 3,434,524 2,735,123 3,849,530 2,904,771Balances with central banks 17 – – – –Placements with banks 18 17,588,445 17,588,445 23,437,274 23,437,274Derivative financial instruments 19 4,740,106 4,740,106 1,360,714 1,360,714Financial assets recognised through profit or loss 20

– measured at fair value 16,680,382 1,878,919 6,472,314 2,357,336– designated at fair value – – – –

Financial assets at amortised cost– loans and advances 21 423,532,145 159,585,358 375,703,730 120,925,759– debt and other instruments 22 518,947,969 12,978,764 555,468,618 11,461,687

Financial assets measured at fair value through other Comprehensive income 23 6,184,430 3,750,515 5,693,829 4,440,951

Gross total 991,108,001 203,257,231 971,986,009 166,888,492

2018 2017

Net exposure to credit risk – Bank

A B C D E F G

%

100

80

60

40

20

0

A B C D E F G

%

100

80

60

40

20

0

A Financial assets measured at FV OCI

B Debt and other instruments

C Loans and advances

D Financial assets measured at FVPL

E Derivative financial instruments

F Placements with banks

G Cash and cash equivalents

Non-exposure to credit risk Net exposure




53. Financial risk management (contd.)53.1 Credit risk (contd.)53.1.1 Credit quality analysis (contd.) 53.1.1 (a) Net exposure to credit risk by class of financial assets (contd.)


Note Maximum exposure to


Net exposure

Rs. ’000

Maximum exposure to


Netexposure

Rs. ’000

GroupCash and cash equivalents 16 3,436,929 2,737,518 3,853,989 2,909,220Balances with central banks 17 177 177 94 94Placements with banks 18 17,588,445 17,588,445 23,437,274 23,437,274Derivative financial instruments 19 4,740,106 4,740,106 1,360,714 1,360,714Financial assets recognised through profit or loss 20

– measured at fair value 26,867,533 1,878,919 9,389,950 2,357,336– designated at fair value – – – –

Financial assets at amortised cost– loans and advances 21 423,557,119 159,585,358 374,416,626 120,925,759– debt and other instruments 22 522,973,159 13,329,958 559,319,752 11,661,509

Financial assets measured at fair value through other Comprehensive income 23 7,788,560 3,751,515 7,513,932 4,441,951

Gross total 1,006,952,028 203,611,997 979,292,331 167,093,857

53.1.1 (b) Management of the credit portfolio

Collateral and other credit enhancement

The amount and type of collateral required depends as an assessment of the credit risk of the counterparty. Guidelines are in place covering the accessibility and valuation of each type of collateral.

The main type of collateral obtained are as follows:

a. for corporate lending – Government guarantees, mortgages over immovable and movable fixed assets, inventory, corporate and personal guarantees

b. for retail lending – mortgage over residential property, gold, personal guarantees, vehicles.




53. Financial risk management (contd.)53.1 Credit risk (contd.)53.1.1 Credit quality analysis (contd.) 53.1.1 (b) Management of the credit portfolio (contd.)

Concentration of credit risk by product and sector

The Bank monitors the concentration of credit risk by product and sectors. An analysis of concentration risk of the Bank portfolio (Loans and receivables to other customers) is given below:

Concentration by product

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

Loans and advancesPawning 30,530,726 23,874,051 30,530,726 23,874,051Staff loans 6,103,442 5,057,767 6,103,442 5,057,767

Term loans –Short term 6,080,407 1,458,560 6,080,407 1,458,560Long term 380,231,640 340,380,153 380,231,640 340,380,153

Others –Sri Lanka Government Securities – – – –Loan to Government 2,075,000 2,075,000 2,075,000 2,075,000Securities purchased under resale agreement 2,357,240 5,592,973 2,382,213 4,305,869

Gross total 427,378,455 378,438,504 427,403,428 377,151,400

Concentration by sector

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

Loans and advancesAgriculture and fishing 20,817,480 14,990,754 20,817,480 14,990,754Manufacturing – – – –Tourism 38,746 49,042 38,746 49,042Transport 1,356,593 1,040,305 1,356,593 1,040,305Construction/housing 116,223,402 107,478,175 116,223,402 107,478,175Traders – – – –New economy – – – –

OthersFinancial and business services 26,413,837 27,452,914 26,413,837 27,452,914Infrastructure 76,286,787 76,080,169 76,286,787 76,080,169Power and energy 6,801,197 8,525,567 6,801,197 8,525,567Education 36,362,632 31,844,099 36,362,632 31,844,099

Personal/pawning/other 143,077,781 110,977,478 143,102,754 109,690,374

Gross total 427,378,455 378,438,504 427,403,428 377,151,400




53. Financial risk management (contd.)53.1 Credit risk (contd.)53.1.1 Credit quality analysis (contd.) 53.1.1 (b) Management of the credit portfolio (contd.)

Sector classification of loan and advances – Bank

4.87%Agriculture and

fishing

0.01%Tourism

0.32%Transport

27.19%Construction/

housing

6.18%Financial and business services

33.48%Personal/ Pawning/Other

8.51%Education

1.59%Power and energy

17.85%Infrastructure

2018

3.96%Agriculture and

fishing

0.01%Tourism

0.27%Transport

17.79%Construction/

housing

7.26%Financial and business services

39.95%Personal/ Pawning/Other

8.41%Education


20.10%Infrastructure

2017

53.1.1 (c) Credit quality (past due) by classes of financial assets – Bank

As at 31 December 2018 Note Neither past duenor impaired

Rs. ’000

Past due butnot impaired

Rs. ’000

Individuallyimpaired

Rs. ’000

Total

Rs. ’000

AssetsCash and cash equivalents (gross)* 16 3,434,750 – – 3,434,750Balances with central banks 17 – – – –Placements with banks (Gross)* 18 17,591,466 – – 17,591,466Derivative financial instruments 19 4,740,106 – – 4,740,106Financial assets recognised through profit or loss

– measured at fair value 20 16,680,382 – – 16,680,382– designated at fair value – – – –

Financial assets at amortised cost– loans and advances (gross)* 21 388,425,969 38,952,486 – 427,378,455– debt and other instruments (gross)* 22 518,957,041 – – 518,957,041

Financial assets measured at fair value through other Comprehensive income 23 6,184,430 – – 6,184,430

Total 956,014,144 38,952,486 – 994,966,630

* Collectively assessed for the impairment.




53. Financial risk management (contd.)53.1 Credit risk (contd.)53.1.1 Credit quality analysis (contd.) 53.1.1 (c) Credit quality (past due) by classes of financial assets – Bank (contd.)

Aging analysis of past due (i.e., facilities in arrears of 1 day and above) but not impaired loans, by class of financial assets.

Past due but not impaired

As at 31 December 2018 1 to 30 daysRs. ’000

31 to 60 daysRs. ’000

61 to 89 daysRs. ’000

More than 90 daysRs. ’000

TotalRs. ’000

Financial assets at amortised cost – loans and advances (gross)* 27,606,474 4,528,089 412,766 6,405,157 38,952,486

71% 12% 1% 16% 100%

Facilities in area’s of 1 day and above considered as “past due”.

As at 31 December 2017 Note Neither past duenor impaired

Rs. ’000

Past due butnot impaired

Rs. ’000

Individuallyimpaired

Rs. ’000

Total

Rs. ’000

AssetsCash and cash equivalents (gross)* 16 3,849,627 – – 3,849,627Balances with central banks 17 – – – –Placements with banks (gross)* 18 23,438,104 – – 23,438,104Derivative financial instruments 19 1,360,714 – – 1,360,714Financial assets recognised through profit or loss

– measured at fair value 20 6,472,314 – – 6,472,314– designated at fair value – – – –

Financial assets at amortised cost– loans and advances (gross)* 21 348,000,812 30,437,692 – 378,438,504– debt and other instruments (gross)* 22 555,740,085 – – 555,740,085

Financial assets measured at fair value through Other comprehensive income 23 5,693,829 – – 5,693,829

Total 944,555,485 30,437,692 – 974,993,177

* Collectively assessed for the impairment.

Aging analysis of past due (i.e., facilities in arrears of 1 day and above) but not impaired loans, by class of financial assets.

Past due but not impaired

As at 31 December 2017 1 to 30 daysRs. ’000

31 to 60 daysRs. ’000

61 to 90 daysRs. ’000

More than 90 daysRs. ’000

TotalRs. ’000

Financial assets at amortised cost – loans and advances (gross)* 21,234,233 3,656,028 339,814 5,207,617 30,437,692

70% 12% 1% 17% 100%

Facilities in area’s of 1 day and above considered as “past due”.




53. Financial risk management (contd.)53.1 Credit risk (contd.)53.1.1 Credit quality analysis (contd.) 53.1.1 (d) Credit quality by classes of financial asset – stage wise – Bank

Amortised cost Impairment provision

As at 31 December 2018 Note Non-credit Impaired

Rs. ’000

Stage 1

Rs. ’000

Stage 2

Rs. ’000

Stage 3

Rs. ’000

Total

Rs. ’000

Stage 1

Rs. ’000

Stage 2

Rs. ’000

Stage 3

Rs. ’000

Total

Rs. ’000

As per financial positionRs. ’000

Assets

Cash and cash equivalents 16 893,804 2,540,946 – – 3,434,750 227 – – 227 3,434,524

Balances with central banks 17 – – – – – – – – – –

Placements with banks 18 – 17,591,466 – – 17,591,466 3,021 – – 3,021 17,588,445

Derivative financial instruments 19 4,740,106 – – – 4,740,106 – – – – 4,740,106

Financial assets recognised through profit or loss 20

– measured at fair value 16,680,382 – – – 16,680,382 – – – – 16,680,382

– designated at fair value – – – – – – – – – –


– loans and advances 21 28,819,417 385,683,843 6,470,038 6,405,157 427,378,454 1,610,731 272,348 1,963,230 3,846,310 423,532,145

– debt and other instruments 22 505,791,978 13,165,063 – – 518,957,041 9,072 – – 9,072 518,947,969

Financial assets measured at fair value through other comprehensive income 23 6,184,430 – – – 6,184,430 – – – – 6,184,430

Total 563,110,118 418,981,317 6,470,038 6,405,157 994,966,630 1,623,051 272,348 1,963,230 3,858,630 991,108,000

Credit quality by classes of financial asset – stage wise – Bank

Amortised cost Impairment provision

As at 31 December 2017 Note Non-credit impaired

Rs. ’000

Stage 1

Rs. ’000

Stage 2

Rs. ’000

Stage 3

Rs. ’000

Total

Rs. ’000

Stage 1

Rs. ’000

Stage 2

Rs. ’000

Stage 3

Rs. ’000

Total

Rs. ’000

As per financial positionRs. ’000

Assets

Cash and cash equivalents 16 1,163,604 2,686,022 – – 3,849,626 97 – – 97 3,849,530

Balances with central banks 17 – – – – – – – – – –

Placements with banks 18 – 23,438,104 – – 23,438,104 830 – – 830 23,437,274

Derivative financial instruments 19 1,360,714 – – – 1,360,714 – – – – 1,360,714


– measured at fair value 6,472,314 – – – 6,472,314 – – – – 6,472,314



– loans and advances 21 28,589,141 340,653,973 3,988,238 5,207,152 378,438,504 1,127,166 128,432 1,479,175 2,734,773 375,703,730

– debt and other instruments 22 485,116,951 70,623,134 – – 555,740,085 271,467 – – 271,467 555,468,618

Financial assets measured at fair value through other comprehensive income 23 5,693,829 – – – 5,693,829 – – – – 5,693,829

Total 528,396,553 437,401,233 3,988,238 5,207,152 974,993,176 1,399,560 128,432 1,479,175 3,007,167 971,986,009




53. Financial risk management (contd.)

53.2 Liquidity risk Liquidity risk is the Bank’s inability to meet “on” or “off ” balance sheet contractual and contingent financial obligations as they fall due, without incurring material losses.

53.2.1 Concentration of liquid assets

The Bank’s regulatory requirement to invest 60% of its deposits in Government Securities forces the Bank to maintain a high statutory liquid assets ratio. Currently, the Bank maintains a liquidity ratio at 54.9% which is well above the statutory requirement of 20%. The investment in Government Securities represents 94.7% from the total liquid assets of the Bank.

Bank Group


2017Rs. ’000

2018Rs. ’000

2017Rs. ’000

Liquidly assets ratio –Year end 54.9 73.4 – –30 June 71.7 74.1 – –Year beginning 73.4 72.6 – –

Gross loans and advances to deposit 50.9 52.9 50.9 52.8Net loans and advances to total assets 40.8 38.3 40.3 38.0

Liquidity assets and liabilities of the Bank

Domestic business unit

2018Rs. ’000

2017Rs. ’000

Total liquid assetsCash 1,026,726 1,006,187 Balances with licensed commercial bank 20,372,364 26,584,690 Money at call in Sri Lanka – 643 Treasury bills and securities issued or guaranteed by the Government of Sri Lanka 25,230,190 28,055,179 Cash item in the process of collection 271,129 277,031 Balances with banks aboard 685,650 272,007 Treasury Bonds 376,736,980 395,209,012 Sri Lanka development bonds 167,067 57,674,658 Total liquid assets (Daily average statutory liquid assets during the month of December) 424,490,106 509,079,407 Total liability based subject to minimum liquid assets requirement 773,498,104 693,235,258 Liquidity asset ratio (%) 54.88 73.44

53.2.2 Remaining contractual period to maturity – Bank and the Group

Disclosures are given in the Note 54 on pages 372 to 374.





53.2 Liquidity risk (contd.)

53.2.3 Financial assets available to support future funding

The table below sets out the availability of the bank's financial assets to support future funding:

Bank Group

Encumbered Unencumbered Total * Encumbered Unencumbered Total *

As at 31 December 2018 Note Pledge as collateral

Rs. ’000

Other

Rs. ’000

Available as collateral

Rs. ’000

Other

Rs. ’000 Rs. ’000

Pledge as collateral

Rs. ’000

Other

Rs. ’000


Rs. ’000

Other

Rs. ’000 Rs. ’000

Cash and cash equivalents 16 – – 3,434,750 – 3,434,750 – – 3,437,155 – 3,437,155

Balances with central banks 17 – – – – – – 177 – 177

Placements with banks 18 – – 17,591,466 17,591,466 – – 17,591,466 – 17,591,466

Derivative financial instruments 19 – – – 4,740,106 4,740,106 – – – 4,740,106 4,740,106


– measured at fair value – – 16,680,382 – 16,680,382 9,595,990 17,271,543 – 26,867,533



– loans and advances 21 – – 427,378,455 – 427,378,455 – – 427,403,428 – 427,403,428

– debt and other instruments 22 69,160,408 – 449,796,633 – 518,957,041 72,546,833 450,435,443 – 522,982,276

Financial assets measured at fair value through other comprehensive income 23 – – 6,184,430 – 6,184,430 1,524,097 – 6,264,463 – 7,788,560

Total 69,160,408 – 921,066,116 4,740,106 994,966,630 83,666,920 177 922,403,498 4,740,106 1,010,810,702

Bank Group

Encumbered Unencumbered Total * Encumbered Unencumbered Total *

As at 31 December 2017 Note Pledge as collateral

Rs. ’000

Other

Rs. ’000


Rs. ’000

Other

Rs. ’000 Rs. ’000

Pledge as collateral

Rs. ’000

Other

Rs. ’000


Rs. ’000

Other

Rs. ’000 Rs. ’000

Cash and cash equivalents 16 – – 3,849,627 – 3,849,627 – – 3,854,086 – 3,854,086

Balances with central banks 17 – – – – - – 94 - 94

Placements with banks 18 – – 23,438,104 23,438,104 – – 23,438,104 – 23,438,104

Derivative financial instruments 19 – – – 1,360,714 1,360,714 – – – 1,360,714 1,360,714


– measured at fair value – – 6,472,314 – 6,472,314 2,848,477 6,541,473 – 9,389,950



– loans and advances 21 – – 378,438,504 – 378,438,504 – – 377,151,400 – 377,151,400

– debt and other instruments 22 48,382,000 – 507,358,085 – 555,740,085 51,689,909 507,901,410 – 559,591,319

Financial assets measured at fair value through other comprehensive income 23 – – 5,693,829 – 5,693,829 1,690,832 – 5,823,100 – 7,513,932

Total 48,382,000 – 925,250,463 1,360,714 974,993,177 56,229,218 94 924,709,573 1,360,714 982,299,598

* Figures are stated before the impairment provisions.





53.3 Market risk Market risk to the Bank stems from movements in market prices, in particular, changes in interest rates, foreign exchange rates and equity prices. Market risk is often propagated by other forms of financial risk such as credit and market liquidity risk. The risk of losses would arise from on-balance sheet as well as off-balance sheet activities.

Sources of market risk to NSB

The exposure to market risk arises to National Savings Bank from the following sources:

Treasury securities portfolio (Government Securities and other permitted fixed income securities)

Repo and reverse repo transaction

Bank’s operations in foreign currency

Equity investments

Derivatives

Rate sensitive assets liabilities mismatch

53.3.1 Market risk – trading and non-trading exposure

Following table present the assets and liabilities subject to market risk between fair value through profit or loss and other than fair value through profit or loss:

Bank Group

As at 31 December 2018 Note Carrying amount

Rs. ’000

Amount exposure

to trading Rs. ’000

Non-trading exposure

Rs. ’000

Carrying amount

Rs. ’000

Amount exposure to

trading Rs. ’000


Rs. ’000

Assets subject to market riskCash and cash equivalents 16 3,434,524 – 3,434,524 3,436,929 – 3,436,929Balances with central banks 17 – – – 177 – 177Placements with banks 18 17,588,445 – 17,588,445 17,588,445 – 17,588,445Derivative financial instruments 19 4,740,106 – 4,740,106 4,740,106 – 4,740,106Financial assets recognised through profit or loss 20

– measured at fair value 16,680,382 16,680,382 – 26,867,533 26,867,533 – – designated at fair value – – – – – –

Financial assets at amortised cost – loans and advances 21 423,532,145 – 423,532,145 423,557,119 – 423,557,119 – debt and other instruments 22 518,947,969 – 518,947,969 522,973,159 – 522,973,159

Financial assets measured at fair value through other comprehensive income 23 6,184,430 – 6,184,430 7,788,560 – 7,788,560

Total 991,108,001 16,680,382 974,427,619 1,006,952,028 26,867,533 980,084,495





53.3 Market risk (contd.)

53.3.1 Market risk – trading and non-trading exposure (contd.)

Bank Group


Rs. ’000

Amount exposure



Rs. ’000

Carrying amount

Rs. ’000

Amount exposure to

trading Rs. ’000


Rs. ’000

Liabilities subject to market riskDue to banks 31 77,119,146 – 77,119,146 83,615,264 – 83,615,264Derivative financial instruments 32 1,533 1,533 – 1,533 1,533 –Financial liabilities recognised through profit or loss 33 – – – – – –Financial liabilities at amortised cost 34

– due to depositors 839,574,411 – 839,574,411 839,574,411 – 839,574,411– due to debt securities holders – – – – –– due to other borrowers 14,804,802 – 14,804,802 21,750,178 – 21,750,178

Debt securities issued 35 52,389,133 – 52,389,133 52,389,133 – 52,389,133

Total 983,889,024 1,533 983,887,491 997,330,518 1,533 997,328,986

Bank Group


Rs. ’000

Amount exposure



Rs. ’000

Carrying amount

Rs. ’000

Amount exposure to

trading Rs. ’000


Rs. ’000

Assets subject to market riskCash and cash equivalents 16 3,849,530 – 3,849,530 3,853,989 – 3,853,989Balances with central banks 17 – – – 177 – 177Placements with banks 18 23,437,274 – 23,437,274 23,437,274 – 23,437,274Derivative financial instruments 19 1,360,714 – 1,360,714 1,360,714 – 1,360,714Financial assets recognised through profit or loss 20

– measured at fair value 6,472,314 6,472,314 – 9,389,950 9,389,950 – – designated at fair value – – – – –

Financial assets at amortised cost – loans and advances 21 375,703,730 – 375,703,730 374,416,626 – 374,416,626 – debt and other instruments 22 555,468,618 – 555,468,618 559,319,752 – 559,319,752

Financial assets measured at fair value through other comprehensive income 23 5,693,829 – 5,693,829 7,513,932 – 7,513,932

Total 971,986,009 6,472,314 965,513,695 979,292,415 9,389,950 969,902,465




53. Financial risk management (contd.)53.3 Market risk (contd.) 53.3.1 Market risk – trading and non-trading exposure (contd.)

Bank Group


Rs. ’000

Amount exposure to

trading Rs. ’000


Rs. ’000

Carrying amount

Rs. ’000

Amount exposure to

trading Rs. ’000


Rs. ’000

Liabilities subject to market riskDue to banks 31 48,596,591 – 48,596,591 49,352,574 – 49,352,574Derivative financial instruments 32 956,937 – 956,937 956,937 – 956,937Financial liabilities recognised through profit or loss 33 – – – – – –Financial liabilities at amortised cost 34 –

– due to depositors 737,212,640 – 737,212,640 737,212,640 – 737,212,640– due to debt securities holders – – – – – –– due to other borrowers 12,837,008 – 12,837,008 17,545,212 – 17,545,212

Debt securities issued 35 162,709,027 – 162,709,027 162,709,027 – 162,709,027

Total 962,312,204 – 962,312,204 967,776,390 – 967,776,390

53.3.2 Foreign exchange risk Foreign exchange rate risk arises from the movement of the rate of exchange of one currency against another, leading to an adverse impact on the Bank’s earnings or equity. The Bank is exposed to foreign exchange rate risk that the value of a financial instrument or the investment in its foreign assets, may fluctuate due to changes in foreign exchange rates.

An impact analysis of the foreign currency Net Open Position (NOP) was carried out applying shock levels of 5%, 10% and 15%, for depreciation on the current exchange rate and the impact on the currency-wise NOP and the impact on Income Statement is shown in the tables below as at 31 December 2018:

USD ’000 Rs. ’000 GBP ’000 Rs. ’000

Net open position 864 157,818 503 116,581

Stress level Effect on income statement

Rs. ’000

Revised rupee positionRs. ’000

Effect on income statement

Rs. ’000


Shock of 5% on exchange rate (rupee depreciation) 7,891 165,709 5,829 122,410Shock of 10% on exchange rate (rupee depreciation) 15,782 173,600 11,658 128,239Shock of 15% on exchange rate (rupee depreciation) 23,673 181,491 17,487 134,068

JPY ’000 Rs. ’000 EUR ’000 Rs. ’000

Net open position (165,415) (272,935) 4,307 900,431

Stress level Effect on income statement

Rs. ’000


Effect on income statement

Rs. ’000


Shock of 5% on exchange rate (rupee depreciation) (13,647) (286,582) 45,022 945,453 Shock of 10% on exchange rate (rupee depreciation) (27,294) (300,229) 90,043 990,474 Shock of 15% on exchange rate (rupee depreciation) (40,940) (313,875) 135,065 1,035,496

The Bank has entered in to swap and forward foreign exchange contract to minimise the foreign exchange risk (refer Note 19 on pages 293 to 295).




53. Financial risk management (contd.)53.3 Market risk (contd.) 53.3.3 Equity risk

Equity risk is the risk that one’s investments will depreciate because of stock market dynamic causing one to lose money.

The investment in equity represents 0.54% of the total assets while investments in quoted and unquoted equity are 0.5% and 0.04% respectively. Hence, the Bank does not have a major exposure to equity risk. However, the adverse movements in the stock market affected the return on equity investments. The investment in unquoted companies are made due to policy decisions on market and economic development and strategic reasons.

The Bank conducts mark-to-market calculations on a monthly, quarterly and on a need basis to identify the impact due to changes in equity prices.

Equity price shock

The table below summarises the impact (both to the Income Statement and to the equity).

Bank and Group

2018 2017

Note Financial assets recognised

through profit or loss

Rs. ’000

Financial assets

measured at FVOCI

Rs. ’000

Total

Rs. ’000

Financial assets recognised

through profit or loss

Rs. ’000

Financial assets

measured at FVOCI

Rs. ’000

Total

Rs. ’000

Market value of equity securities as at 31 December

20 and 22 1,878,919 3,447,888 5,326,807 2,357,336 3,876,570 6,233,907

Stress Level Impact to P&LRs. ’000

Impact to OCIRs. ’000

Impact to equityRs. ’000

Impact to P&LRs. ’000

Impact to OCIRs. ’000

Impact to equityRs. ’000

Shock of 5% on equity prices (upward) 93,946 172,394 266,340 117,867 193,829 311,695 Shock of 5% on equity prices (downward) (93,946) (172,394) (266,340) (117,867) (193,829) (311,695)Shock of 10% on equity prices (upward) 187,892 344,789 532,681 235,734 387,657 623,391 Shock of 10% on equity prices (downward) (187,892) (344,789) (532,681) (235,734) (387,657) (623,391)Shock of 15% on equity prices (upward) 281,838 517,183 799,021 353,600 581,486 935,086 Shock of 15% on equity prices (downward) (281,838) (517,183) (799,021) (353,600) (581,486) (935,086)Shock of 20% on equity prices (upward) 375,784 689,578 1,065,361 471,467 775,314 1,246,781 Shock of 20% on equity prices (downward) (375,784) (689,578) (1,065,361) (471,467) (775,314) (1,246,781)




53. Financial risk management (contd.)53.3 Market risk (contd.) 53.3.3 Equity risk (contd.) Investment in equity shares by sector

Following table presents the bank diversification of trading portfolio to minimise the risk associate with particular sector:


Cost

Rs. ’000

As % of total cost

%

Market value

Rs. ’000

As % of total market value

%

Cost

Rs. ’000

As % of total cost

%

Market value

Rs. ’000

As % of total market value

%

1. Banks, finance and insurance 507,640 15.5 372,564 21.7 336,293 9.8 264,382 12.22. Beverage, Food and Tobacco – 0.0 – 0.0 21,003 0.6 22,608 1.03. Chemical and pharmaceuticals 100,527 3.1 63,927 3.7 100,527 2.9 74,004 3.44. Construction and engineering 408,295 12.5 117,577 6.8 408,295 11.9 188,168 8.75. Diversified holdings 782,405 23.9 515,862 30.0 1,032,626 30.1 746,764 34.36. Hotels and Travels 694,592 21.2 302,858 17.6 745,466 21.8 383,397 17.67. Investment trusts 11,307 0.3 6,857 0.4 11,307 0.3 8,302 0.48. Land and property 23,777 0.7 15,567 0.9 23,777 0.7 16,419 0.89. Manufacturing 301,773 9.2 189,007 11.0 287,345 8.4 293,465 13.410. Power and energy 46,066 1.4 38,695 2.2 50,719 1.5 49,705 2.311. Telecommunication 81,332 2.5 37,757 2.2 94,332 2.8 49,105 2.312. Trading 315,149 9.6 60,085 3.5 315,149 9.2 77,820 3.6

Subtotal 3,272,863 100 1,720,756 100 3,426,839 100 2,174,139 100

13. Unit trust 95,110 2.8 158,163 8.4 95,110 2.7 183,197 7.8

Total 3,367,973 1,878,919 3,521,949 2,357,336

Market value of investment in equity shares by industry – Bank and Group

12.2%Banks, finance and

insurance

1.0%Beverage, Food and

Tobacco

3.4%Chemical and

pharmaceuticals

8.7%Construction and

engineering

34.3%Diversified

holdings

17.6%Hotels and Travels

2.3%Telecommunication


13.4%Manufacturing

0.8%Land and property

0.4%Investment trusts

3.6%Trading

2017

21.7%Banks, finance and

insurance

0.0%Beverage, Food and

Tobacco

3.7%Chemical and

pharmaceuticals

6.8%Construction and

engineering

30.0%Diversified

holdings

17.6%Hotels and Travels

2.2%Telecommunication


11.0%Manufacturing

0.9%Land and property

0.4%Investment trusts

3.5%Trading

Trading equity portfolio

2018




53. Financial risk management (contd.)53.3 Market risk (contd.) 53.3.4 Interest rate risk

Interest rate risk is the risk that an investment’s value will change in the absolute level of interest rates, in the spread between two rates, in the shape of the yield curve or in any other interest rate relationships. The Bank’s major source of funding is deposits which represent 80.93% of total on balance sheet liabilities. of this, 23.62% represent savings deposits where 76.38% represent term deposits.

53.3.4 (a) Interest rate risk – sensitivity analysis

Bank’s interest rate sensitivity report as at 31 December 2018 is presented below:

Bank 0-1 monthRs. ’000




Interest-bearing assets 37,126,827 71,149,238 104,526,636 216,552,684

Bank balances and placements 749,722 8,975,812 12,068,111 17,601,973Financial assets recognised through profit or loss

– measured at fair value 190,318 526,079 570,635 571,242Financial assets at amortised cost

– loans and advances 14,642,598 24,859,047 41,533,244 101,172,738– debt and other instruments 21,455,536 36,694,607 50,258,536 97,110,621

Financial assets measured at fair value through Other comprehensive income 88,653 93,693 96,110 96,110

Interest-bearing liabilities 225,453,233 498,851,396 659,431,869 947,717,986

Due to banks 53,842,968 58,368,770 61,920,449 65,087,313Financial liabilities at amortised cost

– due to depositors 158,160,107 425,141,386 582,029,005 821,436,738– due to debt securities holders – – – –– due to other borrowers 13,450,158 14,619,083 14,762,981 14,804,802

Debt securities issued – 722,157 719,434 46,389,133

Net rate sensitive assets (liabilities) (188,326,406) (427,702,158) (554,905,233) (731,165,302)

Interest rate sensitivity ratio (%) 16 14 16 23




53. Financial risk management (contd.)53.3 Market risk (contd.) 53.3.4 Interest rate risk (contd.) 53.3.4 (a) Interest rate risk – sensitivity analysis (contd.) Group’s interest rate sensitivity report as at 31 December 2018 is presented below:

Group 0-1 monthRs. ’000





Bank balances and placements 749,722 8,975,812 12,068,111 17,601,973Financial assets recognised through profit or loss

– measured at fair value 361,118 1,038,479 1,280,540 1,676,158Financial assets at amortised cost


Financial assets measured at fair value through other comprehensive income 113,852 169,290 363,290 746,457




Debt securities issued – 722,157 719,434 46,389,133



Bank’s interest rate sensitivity report as at 31 December 2017 is presented below:

Bank 0-1 monthRs. ’000





Bank balances and placements 1,008,750 5,089,145 11,196,173 23,820,037Financial assets recognised through profit or loss



Financial assets measured at fair value through Other comprehensive income – 942 1,173,177 1,173,177




Debt securities issued – 3,565,034 3,538,408 118,422,673






53. Financial risk management (contd.)53.3 Market risk (contd.) 53.3.4 Interest rate risk (contd.) 53.3.4 (a) Interest rate risk – sensitivity analysis (contd.) Group’s interest rate sensitivity report as at 31 December 2017 is presented below:

Group 0-1 monthRs. ’000





Bank balances and placements 1,008,750 5,089,145 11,196,173 23,820,037Financial assets recognised through profit or loss



Financial assets measured at fair value Through other comprehensive income – 942 1,241,217 1,377,299




Debt securities issued – 3,565,034 3,538,408 118,422,673



53.3.4. (b) Exposure to interest rate risk

The management of interest rate risk against interest rate gap limits is supplemented by monitoring the sensitivity of the Bank’s financial assets and financial liabilities to various interest rate scenarios.

The following table demonstrates the sensitivity of the Bank’s Income Statement as at the reporting date, due to change in interest rates with all other variables held constant in less than one year maturity bucket.

Sensitivity of projected net interest income

2018

Net Interest Income (NII)Parallel increase

Rs. ’000Parallel decrease

Rs. ’000

Change in 25 bps (1,267,530) 1,267,530 Change in 50 bps (2,535,061) 2,535,061 Change in 100 bps (5,070,121) 5,070,121




53. Financial risk management (contd.)53.4 Operational risk The BASEL Committee on Banking Supervision defines operational risk as “the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events”.

Operational risk management framework

Bank has a conducive Operational Risk Management (ORM) framework to achieve more efficient, transparent, profitable and sustainable business operations. It comprises with well-structured governance, policy framework and risk management processes. The operational risk of the Bank is reported to the ORMC, BIRMC and the Board by Operational Risk Management Unit of the Risk Management Division.

54 Maturity analysis

Bank Up to 3 months

Rs. ’000

3-12 months

Rs. ’000

1-3 years

Rs. ’000

3-5 years

Rs. ’000

More than 5 years

Rs. ’000

Total as at 31.12.2018

Rs. ’000


Rs. ’000

Assets with contractual maturity (interest-bearing asset)Cash and cash equivalents 13,528 – – – – 13,528 382,763Placements with banks 8,962,285 8,626,160 – – – 17,588,445 23,437,274Financial assets recognised through profit or loss – measured at fair value 526,079 45,164 1,562,229 5,587,752 7,080,240 14,801,463 4,114,978Financial assets at amortised cost – loans and advances 24,859,047 76,313,691 116,389,323 75,402,639 130,567,445 423,532,145 375,703,730 – debt and other instruments 36,694,607 60,416,015 100,748,159 124,717,849 196,371,339 518,947,969 555,468,618Financial assets measured at fair value through other comprehensive income 93,693 2,417 574,676 1,614,189 148,939 2,433,915 1,252,878

71,149,238 145,403,447 219,274,387 207,322,429 334,167,963 977,317,466 960,360,241

Other assets (non-interest-bearing assets)Cash and cash equivalents 3,420,996 – – – – 3,420,996 3,466,767Derivative financial instruments 4,740,106 – – – – 4,740,106 1,360,714Financial assets recognised through profit or loss – measured at fair value 469,730 1,409,189 – – – 1,878,919 2,357,336Financial assets measured at fair value through other comprehensive income – – – – 3,750,515 3,750,515 4,440,951Investments in subsidiaries – – – – 1,700,000 1,700,000 900,000Property, plant and equipment – – – – 13,465,755 13,465,755 12,395,684Other assets 845,513 9,129,458 8,887,211 6,541,719 5,805,314 31,209,216 25,695,689

9,476,345 10,538,647 8,887,211 6,541,719 24,721,584 60,165,507 50,617,141

Total assets 80,625,583 155,942,094 228,161,598 213,864,148 358,889,547 1,037,482,973 1,010,977,382




54. Maturity analysis (contd.)

Bank Up to 3 months

Rs. ’000

3-12 months

Rs. ’000

1-3 years

Rs. ’000

3-5 years

Rs. ’000

More than 5 years

Rs. ’000


Rs. ’000


Rs. ’000

Liabilities with contractual maturity (interest-bearing liabilities)Due to banks 58,368,770 6,718,543 12,031,832 – – 77,119,146 48,596,591Financial liabilities at amortised cost – due to depositors 425,141,386 396,295,352 13,301,606 4,836,068 – 839,574,411 737,212,640 – due to other borrowers 14,619,083 185,718 – – – 14,804,802 12,837,008Debt securities issued – 46,389,133 – 6,000,000 – 52,389,133 162,709,027

498,129,239 449,588,746 25,333,438 10,836,068 – 983,887,491 961,355,266

Other liabilities (non-interest-bearing liability)Derivative financial instruments – – 1,533 – – 1,533 956,937Retirement benefit obligations – – – – 3,830,795 3,830,795 3,711,431Deferred tax liabilities – – – – 582,463 582,463 507,063Other liabilities 2,750,829 875,249 794,715 779,046 247,437 5,447,277 5,350,244Due to subsidiaries 750 – – – – 750 750Stated capital/Assigned capital – – – – 9,400,000 9,400,000 6,700,000Statutory reserve fund – – – – 3,227,960 3,227,960 3,002,952Retained earnings – – – – 4,622,080 4,622,080 1,102,798Other reserves – – – – 26,482,625 26,482,625 28,289,941

2,751,579 875,249 796,248 779,046 48,393,360 53,595,482 49,622,116

Total liabilities 500,880,818 450,463,995 26,129,686 11,615,114 48,393,360 1,037,482,973 1,010,977,382

*Represents the aggregate of the contractual maturities based on undiscounted cash flows.

Group Up to 3 months

Rs. ’000

3-12 months

Rs. ’000

1-3 years

Rs. ’000

3-5 years

Rs. ’000

More than 5 years

Rs. ’000


Rs. ’000


Rs. ’000

Assets with contractual maturity (interest-bearing assets)Cash and cash equivalents 13,528 – – – – 13,528 382,763Placements with banks 8,962,285 8,626,160 – – – 17,588,445 23,437,274Financial assets recognised through profit or loss – Measured at fair value 1,038,479 637,679 5,879,126 9,246,811 8,186,519 24,988,614 7,032,614Financial assets at amortised cost – Loans and advances 24,869,651 76,328,059 116,389,323 75,402,639 130,567,447 423,557,119 374,416,626 – Debt and other instruments 36,800,040 60,510,511 102,279,439 126,269,686 197,113,482 522,973,159 559,319,752Financial assets measured at fair value through other comprehensive income 169,290 577,167 574,676 2,566,972 149,939 4,038,045 3,072,981

71,853,273 146,679,576 225,122,564 213,486,108 336,017,387 993,158,910 967,662,011




54. Maturity analysis (contd.)

Group Up to 3 months

Rs. ’000

3-12 months

Rs. ’000

1-3 years

Rs. ’000

3-5 years

Rs. ’000

More than 5 years

Rs. ’000


Rs. ’000


Rs. ’000

Other assets (non-interest-bearing assets)Cash and cash equivalents 3,423,401 – – – – 3,423,401 3,471,226Balances with central banks 177 – – – – 177 94Derivative financial instruments 4,740,106 – – – – 4,740,106 1,360,714Financial assets recognised through profit or loss – Measured at fair value 469,730 1,409,189 – –– – 1,878,919 2,357,336Financial assets measured at fair value through other comprehensive income – – – – 3,750,515 3,750,515 4,440,951Investments in subsidiaries – – – –– – – –Property, plant and equipment – – – – 13,468,776 13,468,776 12,399,334Deferred tax assets – – – – 73 73 –Current tax assets – – – – – – –Other assets 872,671 9,420,776 8,889,208 6,543,717 5,806,312 31,532,684 25,976,944

9,506,085 10,829,965 8,889,208 6,543,717 23,025,676 58,794,650 50,006,600

Total assets 81,359,358 157,509,541 234,011,772 220,029,825 359,043,063 1,051,953,560 1,017,668,610

Liabilities with contractual maturity (interest-bearing liabilities)Due to banks 63,557,454 8,025,978 12,031,832 – – 83,615,264 49,352,574Financial liabilities at amortised cost – due to depositors 425,141,386 396,295,352 13,301,606 4,836,068 – 839,574,411 737,212,640 – due to other borrowers 20,166,606 1,583,572 – – – 21,750,178 17,545,212Debt securities issued – 46,389,133 – 6,000,000 – 52,389,133 162,709,027

508,865,446 452,294,035 25,333,438 10,836,068 – 997,328,986 966,819,453

Other liabilities (non-interest-bearing liabilities)Derivative financial instruments – – 1,533 – – 1,533 956,937Retirement benefit obligations – – – – 3,832,777 3,832,777 3,712,665Current tax liabilities – – – – – – 137,344Deferred tax liabilities – – – – 582,463 582,463 507,138Other liabilities 2,755,455 875,303 794,859 779,190 247,509 5,452,317 5,394,795Due to subsidiaries – – – – – – –Stated capital/Assigned capital – – – – 9,400,000 9,400,000 6,700,000Statutory reserve fund – – – – 3,227,960 3,227,960 3,002,952Retained earnings – – – – 5,198,451 5,198,451 1,679,540Other reserves – – – – 26,929,073 26,929,073 28,757,786

2,755,455 875,303 796,392 779,190 49,418,233 54,624,574 50,849,157

Total liabilities 511,620,901 453,169,338 26,129,830 11,615,258 49,418,233 1,051,953,560 1,017,668,610




55 Fair value of financial instruments

55.1 Financial instruments recorded at fair value

Accounting policy

The following is a description of how fair values are determined for financial instruments that are recorded at fair value using valuation techniques. These incorporate the Group’s estimate of assumptions that a market participant would make when valuing the instruments.

Derivatives

i. Forward exchange purchasesBank value the forward exchange purchase contracts using the quoted prices available for similar contract for the market.

ii. Foreign currency swapsDerivative products (Foreign Currency swaps/Cash flow hedges) valued using valuation techniques incorporating various inputs such as foreign exchange spot rates and foreign exchange forward rates.

Financial assets held for trading

i. Government Treasury Bills and BondsFinancial assets held for trading are valued using a valuation technique consists of Government Treasury Bills and Treasury Bonds. The Bank values the securities using discounted cash flow valuation models which incorporate observable data. Observable inputs include assumptions regarding current rates of interest, broker statements and market data publishing by Central Bank of Sri Lanka.

ii. Equity securitiesThe Bank values the equity securities using the quoted prices available for the identical securities in active market.

Financial assets available for sales

The Bank values the quoted equity securities using the quoted prices available for the identical securities in active market.

The unquoted equity securities have been fair valued using a valuation model based on observable data.

55.2 Determination of fair value and fair value hierarchy Level 1 : Quoted (unadjusted) price in active markets for identical assets or liabilities.

Level 2 : Other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly.

Level 3 : Techniques which use inputs that have a significant effect on the recorded fair value that are not based on observable market data.




55. Fair value of financial instruments (contd.) 55.2 Determination of fair value and fair value hierarchy (contd.) The following table shown an analysis of financial instruments recorded at fair value by level of the fair value hierarchy:

Bank

As at 31 December 2018 Note Level 1Rs. ’000

Level 2Rs. ’000

Level 3Rs. ’000

TotalRs. ’000

AssetsDerivative financial instruments

Forward exchange purchases 19 – – – – Foreign currency swaps 19 – 4,740,106 – 4,740,106

Financial assets recognised through profit or lossGovernment Treasury Bills and Bonds 20 14,801,463 – – 14,801,463 Equity securities 20 1,878,919 – – 1,878,919

Financial assets at fair value through other comprehensive income

Equity securities – quoted 22 3,447,888 – – 3,447,888 Other investments – Government securities 22 2,433,915 – – 2,433,915 Equity securities – unquoted 22 – 245,136 – 245,136

Total 22,562,185 4,985,243 – 27,547,427

LiabilitiesDerivative financial instruments 32 – – 1,533 1,533

Bank


Level 2Rs. ’000

Level 3Rs. ’000

TotalRs. ’000


Forward exchange purchases 19 650 – – 650 Foreign currency swaps 19 – – 1,360,064 1,360,064



Equity securities – quoted 22 3,876,570 – – 3,876,570 Other investments – Government securities 22 1,252,878 – – 1,252,878 Equity securities – unquoted 22 – 506,890 – 506,890

Total 11,602,413 506,890 1,360,064 13,469,367

LiabilitiesDerivative financial instruments 32 – 956,937 – 956,937




55. Fair value of financial instruments (contd.) 55.2 Determination of fair value and fair value hierarchy (contd.)

Group


Level 2Rs. ’000

Level 3Rs. ’000

TotalRs. ’000


Forward exchange purchases 19 – – – – Foreign currency swaps 19 – 4,740,106 – 4,740,106



Equity securities – quoted 22 3,447,888 – – 3,447,888 Other investments – Government Securities 22 4,037,045 – – 4,037,045 Equity securities – unquoted 22 – 245,136 – 245,136

Total 34,352,465 4,985,243 – 39,337,709

LiabilitiesDerivative financial instruments 32 – – 1,533 1,533

Group


Level 2Rs. ’000

Level 3Rs. ’000

TotalRs. ’000


Forward exchange purchases 19 650 – – 650 Foreign currency swaps 19 – – 1,360,064 1,360,064



Equity securities – quoted 22 3,876,570 – – 3,876,570 Other investments – Government Securities 22 3,071,981 – – 3,071,981 Equity securities – unquoted 22 – 506,890 – 506,890

Total 16,339,150 506,890 1,360,064 18,206,105

LiabilitiesDerivative financial instruments 32 – 956,937 – 956,937




55. Fair value of financial instruments (contd.) 55.3 Reconciliation of movements between levels of fair value measurement hierarchy Bank and the Group do not have movements between level of hierarchy during the year. Bank and the Group use Level 3 in fair value hierarchy to calculate fair value of derivative instruments and detail of those instruments are given in the Note 19 and 32 on pages 293 and 319.

55.4 Fair value of financial instruments

Bank


Note Carrying amountRs. ’000


Carrying amountRs. ’000


Financial assetsCash and cash equivalents 16 3,434,524 3,434,524 3,849,530 3,849,530 Balances with central banks 17 – – – – Placement with banks 18 17,588,445 17,588,445 23,437,274 23,437,274 Derivative financial instruments 19 4,740,106 4,740,106 1,360,714 1,360,714

Financial assets recognised through profit or loss 20– measured at fair value 16,680,382 16,680,382 6,472,314 6,472,314 – designated at fair value – – – –

Financial assets at amortised cost– loans and advances 21 423,532,145 423,532,145 375,703,730 375,703,730 – debt and other instruments 22 518,947,969 492,759,226 555,468,618 554,756,727

Financial assets measured at fair value through other comprehensive income 23 6,184,430 6,184,430 5,693,829 5,693,829


Financial liabilitiesDue to banks 31 77,119,146 77,119,146 48,596,591 48,596,591 Derivative financial instruments 32 1,533 1,533 956,937 956,937 Financial liabilities recognised through profit or loss 33 – – – –Financial liabilities at amortised cost 34 – due to depositors 839,574,411 838,307,567 737,212,640 735,574,071 – due to debt securities holders – – – – – due to other borrowers 14,804,802 14,804,802 12,837,008 12,837,008 Debt securities issued 35 52,389,133 52,389,133 162,709,027 162,709,027

Total financial liabilities 983,889,024 982,622,180 962,312,204 960,673,635




55. Fair value of financial instruments (contd.) 55.4 Fair value of financial instruments (contd.)

Group


Note Carrying amountRs. ’000


Carrying amountRs. ’000


Financial assetsCash and cash equivalents 16 3,436,929 3,436,929 3,853,989 3,853,989 Balances with central banks 17 177 177 94 94 Placement with banks 18 17,588,445 17,588,445 23,437,274 23,437,274 Derivative financial instruments 19 4,740,106 4,740,106 1,360,714 1,360,714

Financial assets recognised through profit or loss 20– measured at fair value 26,867,533 26,867,533 9,389,950 9,389,950 – designated at fair value – – – –

Financial assets at amortised cost– loans and advances 21 423,557,119 423,557,119 374,416,626 374,416,626 – debt and other instruments 22 522,973,159 496,656,654 559,319,752 558,686,437

Financial assets measured at fair value through other comprehensive income 23 7,788,560 7,788,560 7,513,932 7,513,932

Total financial assets 1,006,952,028 980,635,523 979,292,331 978,659,017

Financial liabilitiesDue to banks 31 83,615,264 83,615,264 49,352,574 49,352,574 Derivative financial instruments 32 1,533 1,533 956,937 956,937 Financial liabilities recognised through profit or loss 33 – – – – Financial liabilities at amortised cost 34 – due to depositors 839,574,411 838,307,567 737,212,640 735,574,071 – due to debt securities holders – – – – – due to other borrowers 21,750,178 21,750,178 17,545,212 17,545,212 Debt securities issued 35 52,389,133 52,389,133 162,709,027 162,709,027

Total financial liabilities 997,330,518 996,063,674 967,776,390 966,137,822

55.5 Determination of fair value Fair value of financial assets and liabilities not carried at fair value

The following describes the methodologies and assumptions used to determine the fair values for those financial instruments which are not recorded at faire value in the Financial Statements.

Assets for which fair value approximates carrying value

For financial assets and financial liabilities that have a short-term maturity (original maturities less than a year). It is assumed that the carrying amount approximate their fair values. This assumption is also applied to savings deposits without specific maturity.

Long-term deposits accepted from customers for which periodical interest is paid and loan and receivables granted to customers with a variable rate are also considered to be carried at fair value in the books.




55. Fair value of financial instruments (contd.) 55.5 Determination of fair value (contd.)

Fixed rate financial instruments

Carrying amounts are considered as fair values for short-term credit facilities. In fair valuing held-to maturity securities, rates published by the CBSL for similar trading securities were used. Loans and receivables with fixed interest rates were fair valued using market rates at which fresh loans were granted during the fourth quarter of the reporting year. Conversely, fixed deposits with original tenure above one year and interest paid at maturity were discounted using current market rates offered to customers during the fourth quarter of the reporting year.

Unquoted equities in financial assets

All unquoted equities in financial assets measured at fair value through other comprehensive income (except RDB) are recorded at cost, since its fair value can not be reliably estimated. There is no active market for these investments and Group intends to hold it for the long term. The investment in RDB shares have been fair valued using a valuation model based on observable data. Refer Note 23 (f) on page 309.

56 Capital management (as per regulatory reporting)

Objective The Bank is required to manage its capital in order to meet the regulatory requirements and hold sufficient capital buffers to meet the strategic objectives which are aligned with the risk appetite of the Bank.

Regulatory capital Central Bank of Sri Lanka sets and monitors regulatory capital requirement on both consolidated and solo basis. Basel II guidelines were revoked and with effect from 1 July 2017, the Bank is required to comply with the provisions of the Basel III Direction in respect of regulatory capital and capital to cover any additional risk. The Basel III capital regulations, which are planned to be implemented on a staggered basis by 2019 starting from mid-2017, will continue to be based on the three-mutually reinforcing Pillars introduced under Basel II, i.e., minimum capital requirement, supervisory review process and market discipline.

The Bank currently uses the standardised approach for credit risk, standardised measurement approach for market risk and basic indicator approach for operational risk. Basel III emphasis on increasing the quality and quantity of capital especially the Core Capital, through redefining the common equity capital and introducing new capital buffers such as the Capital Conservation Buffer and a capital surcharge on Domestic Systemically Important Banks (D-SIBs). As per the CBSL Basel III Directive, all D-SIBs are required to maintain a minimum Total Capital Ratio of 14% by year 2019.

Regulatory capital comprises Tier 1 capital and Tier 2 capital. The Bank and the Group have always complied with the minimum capital requirements imposed by the Central Bank of Sri Lanka.

Regulatory capital ratios

Bank Group

As at 31 December 2018Basel III

2017Basel III

2018Basel III

2017Basel III

Common equity Tier 1 capital ratio (minimum requirement – 2018 – 7.375%, 2017 – 6.25%) 13.325 11.931 14.140 12.651

Tier 1 capital ratio (minimum requirement – 2018 – 8.875%, 2017 – 7.75%) 13.325 11.931 14.140 12.651

Total capital ratio (minimum requirement – 2018 – 12.875%, 2017 – 11.75%) 16.138 15.311 16.882 15.996



SupplementaryInformation

382 386 387Products and Services



388 389 402Statement of Financial Position in US Dollars



409 411 412Statistical Indicators 2009-2018


Correspondent Banks

413 415 416Exchange Companies

Eurogiro Members





Products and Services

Savings Products

Ordinary savings account The Bank offers ordinary savings accounts to anyone aged over seven years, with a minimum deposit of Rs. 100.00. Account holder can make deposits or withdrawals at NSB branch or through SMS/Internet-banking facility.

“Hapan” children’s savings account The “Hapan” and “Punchi Hapan” are children’s savings accounts designed for those between the ages of 8 and 12 and 1 and 7 years, respectively. Deposits in both the said accounts are paid an 1% more interest than what the Bank pays to their other savings accounts.

Neo Savings Account Neo is a specially designed account for the teens between 13 and 19. Neo offers a 4.5% interest rate for normal Neo accounts and extra 1% will be provided for accounts which are operated only through online. Account holders are entitled to an international debit card which allows a maximum withdrawal limit of Rs. 2,000.00 per day. Also, they enjoy special discounts from selected merchants when purchase goods by using this debit card. Neo account holders will be eligible for scholarship upon selecting for university.

I’M Savings Account The I’M Savings Account is designed for the purpose of fostering the habit of saving in youth aged between 19 and 30 years, and the Bank offers 0.5% more interest than what it pays for an ordinary savings accounts. I’M account holders enjoy this higher interest rate up until they reach the age of 35. They also enjoy special gifts on the 21st Birthday, Birth of the first child and scholarships upon selecting for University.

“Sthree” Savings Account The “Sthree” Savings Account is designed specifically for women who play different roles in life aged over 16 years with more privileges to celebrate the achievements of life and lend a hand and to shoulder their responsibilities to transform them as heiress to a better tomorrow. Sthree account holders entitle to many gifts up to Rs. 50,000.00 upon celebrating special milestones in life such as Graduation, Wedding, Child Birth and 25th Wedding Anniversary. Also, they enjoy a 0.5% interest rate reduction on pawning advances.

NSB Pension+ Account The “NSB Pension+” is a contributory pension scheme that allows holders to invest any amount into the account over a period of time, or make a lump sum investment. With a minimum balance of Rs. 100,000.00 in the account, account holder will start receiving a pension, upon reaching the age of 55 years.

Happy Savings Account With a Happy Savings Account, the more you save; the higher the interest you will be paid, up to a maximum of 6.25% interest offers with absolutely no restrictions on withdrawals. This account can be opened by anyone aged over 16 years, with a minimum initial deposit of Rs. 1,000.00.

Smile Savings Account Any person above the age of 16 years can open and operate a Smile account either individually or jointly. This account can be opened with an initial deposit of Rs. 100.00. Deposits and withdrawals can be made at any NSB branch or Post/Sub-post Office, island-wide.

Pas Avurudu Savings Account This is a high interest-bearing NSB savings scheme for customers of all ages who prefer long-term saving plans. A customer has to continually make a monthly deposit of Rs. 100.00/200.00/300.00/400.00/500.00 or any multiple of Rs. 1,000.00, over a 60-month period, on any convenient day in a given calendar month.

Reality Savings Plan This is a specially designed savings plan for the Sri Lankan Migrant Community. Can be opened as an individual, joint or minor savings account and should be maintained only in Sri Lankan Rupees. The maturity period of the plan can be 2,3,4 or 5 years and can have the maturity values as minimum of Rs. 500,000.00 or as multiples of Rs. 500,000.00. Account holders enjoy benefits of insurance cover up to Rs. 1,000,000.00 and personal loans with relaxed terms.

Term deposits The Bank also accepts tenure-based deposits of fixed amounts for different maturity periods. A term deposit customer may withdraw his/her money before the expiry of the relevant maturity period in accordance with the applicable premature rates. Tenures range from three months to five years, and they indeed are targeted at children, senior citizens, societies and corporates.

GRI 102-2




Fixed Deposits (FDs) Any person of over 16 years of age can open a NSB Fixed Deposit Account, either individually or jointly with someone, while parents/guardians can open and operate an account, on behalf of a child, provided the child concerned is below 16 years of age. The minimum amount required to open a 12-month FD is Rs. 1,000.00, and if one wants to open a monthly interest earning 12-month FD, then, the minimum amount is Rs. 25,000.00. Fixed deposit accounts can be opened for 3/6/12/24/36/60 months maturity periods. FD customer can raise a loan against the deposit.

Prarthana Children’s Savings Certificate A long-term deposit scheme for kids with attractive interest rates paid in upfront. The “Prarthana” Savings Certificate matures when the account holder reaches 16 years of age.

Gaurawa FD Account Any senior citizen aged over 55 years can open a Gaurawa Fixed Deposit Account, which will earn for the customer a monthly interest, which will always be 0.5% above the rate paid to the Bank’s normal FD customer. The minimum deposit, a senior citizen can deposit in a Gaurawa FD a/c is Rs. 25,000.00, while the maximum is Rs. 20 Mn.

Senior Citizens’ Special Fixed Deposit It is a fixed deposit for senior citizens aged over 60 years. The Maximum amount that can be deposited in a Senior Citizen’s Special Fixed Deposit is Rs. 1.5 Mn., while a holder of this deposit will earn 15% as interest, upon maturity.

Foreign Currency Products

Foreign Currency Savings Accounts/ Term deposits The Bank also offers foreign currency savings deposits or term deposits to both resident and non-resident Sri Lankans. A Personal Foreign Currency Accounts (NR) can be opened by any Sri Lankan national employed abroad, while a Personal Foreign Currency Accounts (R) can be opened by any resident citizen who is either in possession of foreign currency or is receiving foreign currency remittances. Then, Special Inward Investment Accounts (IIA) are on offer for foreign nationals, Sri Lankan citizens resident abroad, Non-nationals of Sri Lankan origin resident abroad, corporate entities incorporated outside Sri Lanka and foreign institutional investors.

Retail Lending Products

Home/Property Loans The Bank offers home loans to people who intent to construct, renovate, purchase, or repair a home, to purchase a land to build a house on as well as to pay off a home loan obtained from another financial institution. The following are the home loan products which are available for different customer segments.

Ge Dora Alankara Vikasitha Home loans for government employees

Personal loans The Bank offers personal loans to its customers for meeting the costs; associated with the purchase of consumer goods, healthcare, travel abroad, solar panels and education. The Bank obtains the security interest over properties such as primary mortgage of the borrower’s property, item purchased, surrender value of the borrowers’ life insurance policy or Government Securities they own. This loan is also available with personal guarantors. The repayment period and the amount of a loan are dependent on the nature of the collateral provided and the prospective borrower’s circumstances. The following personal loans are available:

Normal personal loan; Buddhi loan; Special pension loan; Charika loan; Eco loan. Sonduru Piyasa loan

Auto Loan Auto loans are granted to cover up to 75% of the purchase price of an unregistered vehicle, and up to 60% of the price of a registered vehicle. This loan can also be raised to pay off an auto loan obtained from another legitimate source. An auto loan will be released within two or three days of making an application.

Loans against deposits – Speed loans Speed loans are loans granted against the deposits of an account holder. The Bank offers speed loans of up to 90% of a customer’s deposits with the Bank, while the deposits will serve as security.




ECO loan NSB Eco loan is designed to provide financial assistance to those who are interested having a solar power generation system installed in their homes, enabling them to go green and save on their electricity bills, at the same time.

Enterprise Sri Lanka loan scheme Bank grant below loan schemes under the Enterprise Sri Lanka programme introduced by the Government.

Ran Aswenna – Granted for small scale farmers and farming societies, flower gardeners and fisheries. Can obtain credit facility up to Rs. 5,000,000.00

Govi Navoda – The facility is granted to small scale farmers and farming societies to purchase agricultural equipment. Can obtain up to Rs. 500,000.00

Haritha Naya – The maximum amount can be granted is Rs. 5,000,000.00 and this is offered to small scale hotel owners providing tourism services who have registered under Sri Lanka Tourist Development Authority (SLTDA)

Jaya Isura – This credit facility is granted for medium scale entrepreneurs in the field of agriculture, fishery, gardening, printing, tourism, hand craft and information technology. Maximum loan amount can be granted will differ according to the size of the company and the annual turnover.

Corporate LendingThe Bank is also engaged in corporate lending for long-term infrastructure or other development projects, in the areas of power generation, telecommunication, healthcare, highway and irrigation etc. Such loans will be granted in the form of direct loans to a bank/ financial institution, either as part of a syndicated loan or to private corporate entities/State Owned Enterprises (SOE), as a direct loan.

Card Services

Shopping + ATM Card The Bank issues “Shopping + ATM Cards’’ connected to customers’ savings accounts which provides easy access to cash by enabling the customers to make ATMs withdrawals and pay for their purchases.

NSB Easy Card The “NSB Easy Card” is a mastercard that is issued against the balance in customer’s fixed deposit account, with credit limit of up to 80% of the deposit balance. Additionally cardholders can also withdraw cash with their NSB Easy card from any ATM with Mastercard logo, including all NSB ATMs.

Other Services

Trade Finance Services The Bank facilitates import trade transactions targeting the retail sector; especially importation of motor vehicles. Issuance of Letters of Credit (LC), handling import bills under LC, issuance of shipping and air freight guarantees, collection of bills and forward exchange bookings are the services offered at all the branches under trade financing.

Treasury Services This services include money market activities, trading in Government Securities and derivative transactions.

NSB U-Trust “NSB U-Trust” is the Bank’s foreign currency remittance service. Through this service, Sri Lankans working abroad can remit their earnings to their families back home. In fact, money can be sent either to a NSB account or to an account elsewhere. A beneficiary can also collect his/her remittance, over the counter, at any NSB branch or main Post Office.

Money Changing Business With the approval of Central Bank of Sri Lanka to engage in Money Changing Business, NSB offers the service to the customers who possess foreign currency notes to convert them and also customers who travel abroad could purchase foreign currency notes at the selected branches at competitive exchange rates.

NSB Reach “NSB Reach” is the Bank’s POS device-based savings mobilisation programme, which has enabled mostly underbanked people to save from where they are, without going through the hassle of visiting a branch, as its tagline “Your Address is Our Address” says.




NSB iSaver NSB iSaver is a digital innovation which is expected to provide customer convenience through Mobitel standalone and all franchisee outlets at any time during the day. This innovative service is expected to further inculcate the habit of savings amongst Sri Lanka’s populace, thus resulting in wealth creation and mobility of funds for investment.

Now from anywhere and at anytime you can deposit to your NSB savings account through your nearest mCash retailers island-wide from the NSB iSaver Service.

Advantages of NSB iSaver

Extended operational hours Weekend and holiday banking. Real-time transaction process. Hassle-free customer convenience Low cost on deposits mobilisation

No fee will be charged from the savings account holders or third party depositor.

Guarantees This is an instrument, which amounts to an unconditional undertaking by the Bank, to discharge the liability of a depositor; in the event of his/her failing to discharge the obligation. The following types of guarantees can be issued against deposits on the request of the customer: Performance Bonds, Bid Bonds, Retention Bonds, Retention Guarantees, Tender Bonds, Advance Payment Guarantees.

Standing Order A standing order will enable you to authorise the Bank to make a series of payments on your behalf to a names payee or beneficiary by debiting your savings account with a fixed payment amount. Standing order within the NSB accounts are free of charge.

Safety Deposit Locker NSB provides you with a safe and trusted place for safekeeping of your valued belongings. You will receive the facility to store your valuable belongings and documents under safe custody at a nominal annual rental at selected branches. Safety Lockers are available in three sizes as Small, Medium and Large.

Nomination An account holder can nominate a person who shall be entitled to the money of the stated account in the event of the nominator’s demise. You, as the account holder, have the authority to change the nominee/nominees at your discretion.

Utility Bill Payments Utility Bill Payment Services are available at NSB and you can pay utility bills at any of our branches island-wide. Bills will be updated online as soon as you pay your bill.

SMS Banking SMS Banking service is available to any NSB savings account holder. With SMS Banking, customers can pay their utility bills and transfers funds between NSB accounts.

Internet Banking The Bank also provides the Internet banking facility to its customers. Indeed, Internet banking allows NSB customers to check their account balances, transfer funds from their accounts to any account, no matter which bank the transferee’s account is, on top of reloading facility and paying utility bills, online.

Collection centers of schools NSB was involved in establishing School Banks, where school children learn the habit of savings and get used to leadership role within the school.

NSB Call Centre

The NSB Call Centre provides assistance to customers to contact the Bank and Inquire about the Bank’s activities. Indeed, any person can come to the Call Centre on +94 11 237 9379 and get information related to any NSB product or service. As well, they can reach it via email, Skype too. What’s more, web-chatting too is possible, if they so wish to.




Bank Group

For the year ended 31 December 2018USD ’000

2017USD ’000

Change%

2018USD ’000

2017USD ’000

Change%

Gross income 612,463 704,795 (13) 617,161 706,354 (13)

Interest income 604,827 675,970 (11) 611,460 681,488 (10)Less: Interest expenses 468,628 511,942 (8) 473,215 515,484 (8)

Net interest income 136,199 164,028 (17) 138,246 166,004 (17)Fee and commission income 5,502 5,109 8 5,520 5,124 8 Less: Fee and commission expenses 773 712 9 792 738 7

Net fee and commission income 4,729 4,397 8 4,728 4,386 8 Net gain/(loss) from trading (3,872) 7,873 (149) (5,815) 9,925 (159)Net fair value gains/(losses) from financial instruments at fair value through profit or loss – – – – – – Net gains/(losses) from derecognition of financial assets 38 4,617 (99) 38 4,617 (99)Net other operating income 5,968 11,227 (47) 5,958 5,201 15

Total operating income 143,062 192,142 (26) 143,154 190,132 (25)Less: Impairment charges 4,767 4,998 (5) 4,767 4,998 (5)

Net operating income 138,295 187,144 (26) 138,387 185,134 (25)

Less: ExpensesPersonnel expenses 50,697 44,942 13 50,915 45,153 13 Depreciation and amortisation expenses 3,496 2,764 26 3,502 2,769 26 Other expenses 22,960 24,391 (6) 22,773 24,034 (5)

Operating profit before VAT, NBT and DRL on financial services 61,142 115,047 (47) 61,198 113,178 (46)Less: Value added tax (VAT) on financial services 14,108 20,118 (30) 14,144 20,677 (32)Nation Building Tax (NBT) on financial services 1,881 2,682 (30) 1,886 2,757 (32)Debt Repayment Levy (DRL) on financial services 1,688 – 100 1,688 – 100

Operating profit after VAT, NBT and DRL on financial services 43,465 92,247 (53) 43,480 89,744 (52)


Profit before income tax 43,465 92,247 (53) 43,480 89,744 (52)Less: Income tax expenses 18,835 28,839 (35) 18,850 29,988 (37)

Profit for the year 24,630 63,408 (61) 24,630 59,756 (59)

Profit attributable to:Equity holders of the Bank 24,630 63,408 (61) 24,630 59,756 (59)Non-controlling interests – – – – – –


Earnings per share on profitBasic earnings per ordinary share (USD) 0.04 0.10 (60) 0.04 0.10 (60)Diluted earnings per ordinary share (USD) 0.04 0.10 (60) 0.04 0.10 (60)





Bank Group

For the year ended 31 December 2018USD ’000

2017USD ’000

Change%

2018USD ’000

2017USD ’000

Change%


Items that will be reclassified to income statementExchange differences on translation of foreign operations – – – – – – Net gains/(losses) on cash flow hedges (1,598) 1,893 (184) (1,598) 1,893 (184)Net gains/(losses) on investments in debt instruments measured at fair value through other comprehensive income – – – – – – Share of profits of associates and joint ventures – – – – – – Debt instruments at fair value through other comprehensive income (699) 4,526 (115) (816) 5,605 (115)Less: Fair value gains/(losses) transferred to income statement on disposal of debt instrument at fair value through other comprehensive income 7 (4,506) (100) 7 (4,506) (100)Less: Tax expense relating to items that will be reclassified to income statement – – – – – –


Items that will not be reclassified to income statementChange in fair value on investments in equity instruments designated at fair value through other comprehensive income (3,779) (240) 1,475 (3,779) (240) 1,475 Change in fair value attributable to change in the Bank's own credit risk on financial liabilities designated at fair value through profit or loss – – – – – – Remeasurement of post-employment benefit obligations (1,154) (13,525) (91) (1,156) (13,523) (91)Changes in revaluation surplus – 29,423 (100) – 29,423 (100)Share of profits of associates and joint ventures – – – – – – Less: Tax expense relating to items that will not be reclassified to income statement – – – – – –

Total items that will not be reclassified to income statement (4,933) 15,658 (132) (4,935) 15,660 (132)Other comprehensive income for the year, net of taxes (7,222) 17,572 (141) (7,342) 18,652 (139)

Total comprehensive income for the year 17,408 80,980 (79) 17,289 78,408 (78)

Attributable to:Equity holders of the Bank 17,408 80,980 (79) 17,289 78,408 (78)Non-controlling interests – – – – – –

Total comprehensive income for the year 17,408 80,980 (79) 17,289 78,408 (78)

US Dollars conversion rate (Rs.) 182.7084 153.2300 182.7084 153.2300



Statement of Financial Position in US Dollars

Bank Group

As at 31 December 2018USD ’000

2017USD ’000

Change%

2018USD ’000

2017USD ’000

Change%

AssetsCash and cash equivalents 18,798 25,123 (25) 18,811 25,152 (25)Balances with central banks – – – 1 1 – Placements with banks 96,265 152,955 (37) 96,265 152,955 (37)Derivative financial instruments 25,944 8,880 192 25,944 8,880 192 Financial assets recognised through profit or loss – measured at fair value 91,295 42,239 116 147,051 61,280 140 – designated at fair value – – – – – – Financial assets at amortised cost – loans and advances 2,318,077 2,451,894 (5) 2,318,214 2,443,494 (5) – debt and other instruments 2,840,307 3,625,064 (22) 2,862,338 3,650,197 (22)Financial assets measured at fair value through other comprehensive income 33,849 37,159 (9) 42,628 49,037 (13)Investments in subsidiaries 9,304 5,874 58 – – – Investments in associates and joint ventures – – – – – – Property, plant and equipment 73,701 80,896 (9) 73,717 80,920 (9)Investment properties – – – – – – Goodwill and intangible assets – – – – – – Deferred tax assets – – – – – – Other assets 170,814 167,694 2 172,585 169,529 2 Total assets 5,678,354 6,597,777 (14) 5,757,554 6,641,445 (13)

LiabilitiesDue to banks 422,089 317,148 33 457,643 322,082 42 Derivative financial instruments 8 6,245 (100) 8 6,245 (100)Financial liabilities recognised through profit or loss – – – – – – Financial liabilities at amortised cost – due to depositors 4,595,160 4,811,151 (4) 4,595,160 4,811,151 (4) – due to debt securities holders – – – – – – – due to other borrowers 81,030 83,776 (3) 119,043 114,502 4 Debt securities issued 286,736 1,061,861 (73) 286,736 1,061,861 (73)Retirement benefit obligations 20,967 24,221 (13) 20,978 24,229 (13)Current tax liabilities – – – – 896 (100)Deferred tax liabilities 3,188 3,309 (4) 3,188 3,310 (4)Other provisions – – – – – – Other liabilities 29,814 34,916 (15) 29,842 35,207 (15)Due to subsidiaries 4 5 (20) – – – Total liabilities 5,438,996 6,342,633 (14) 5,512,599 6,379,484 (14)

EquityStated capital/assigned capital 51,448 43,725 18 51,448 43,725 18 Statutory reserve fund 17,667 19,598 (10) 17,667 19,598 (10)Retained earnings 25,298 7,197 252 28,452 10,961 160 Other reserves 144,945 184,624 (21) 147,388 187,677 (21)Total shareholders’ equity 239,358 255,144 (6) 244,955 261,961 (6)Non-controlling interests – – – – – –

Total equity 239,358 255,144 (6) 244,955 261,961 (6)

Total equity and liabilities 5,678,354 6,597,777 (14) 5,757,554 6,641,445 (13)

Contingent liabilities and commitments 24,528 119,561 (79) 24,528 119,561 (79)US Dollars conversion rate (Rs.) 182.7084 153.2300 182.7084 153.2300




Basel III – Minimum Disclosure Requirements under Pillar III

Key Regulatory Ratios – Capital and Liquidity

Item Bank Group

31.12.2018 31.12.2017 31.12.2018 31.12.2017

Regulatory capital (Rs. ’000)Common equity Tier 1 30,434,481 25,564,909 32,750,842 27,370,741 Tier 1 capital 30,434,481 25,564,909 32,750,842 27,370,741 Total capital 36,859,411 32,808,403 39,102,064 34,605,855

Regulatory capital ratios (%)Common Equity Tier 1 capital ratio (minimum requirement: 2018 – 7.375% , 2017 – 6.25%) 13.325 11.931 14.140 12.651 Tier 1 Capital Ratio (minimum requirement: 2018 – 8.875%, 2017 – 7.75%) 13.325 11.931 14.140 12.651 Total Capital Ratio (minimum requirement: 2018 – 12.875%, 2017 – 11.75%) 16.138 15.311 16.882 15.996 Leverage ratio (minimum requirement: 3%)* 4.86 – 5.00 –

Regulatory liquidityStatutory liquid assets (Rs. ’000) 424,490,106 509,079,407 N/A N/AStatutory liquid assets ratio (minimum requirement – 20%) N/A N/ADomestic banking unit (%) 54.88 73.44 N/A N/AOff-shore banking unit (%) – – N/A N/ALiquidity coverage ratio (%) – rupee (minimum requirement – 2018 – 90%, 2017 – 80%) 245.06 377.57 N/A N/A

Liquidity coverage ratio (%) – all currency (minimum requirement – 2018 – 90%, 2017 – 80%) 321.29 376.18 N/A N/A

* Implementation date for regulatory reporting will be with effect from 1 January 2019.



Basel III – Computation of Capital Ratios

Item Bank Group

31.12.2018Rs. ’000

31.12.2017Rs. ’000

31.12.2018Rs. ’000

31.12.2017Rs. ’000

Common Equity Tier 1 (CET1) Capital after adjustments 30,434,481 25,564,909 32,750,842 27,370,741 Total Common Equity Tier 1 (CET1) Capital 35,721,269 30,655,010 36,653,467 31,654,889 Equity capital (stated capital)/Assigned capital 9,400,000 6,700,000 9,400,000 6,700,000 Reserve fund 3,227,960 3,002,952 3,227,960 3,002,952 Published retained earnings/(Accumulated retained losses) 115,634 (3,122,124) 692,093 (2,545,305)Published accumulated other comprehensive income (OCI) (114,210) 982,297 (252,431) 912,206 General and other disclosed reserves 23,091,885 23,091,885 23,585,844 23,585,036 Unpublished current year’s profit/(losses) and gains reflected in OCI – – – – Ordinary shares issued by consolidated banking and financial subsidiaries of the Bank and held by third parties – – – – Total adjustments to CET1 Capital 5,286,788 5,090,100 3,902,624 4,284,148 Goodwill (net) – – – – Intangible assets (net) 576,075 380,308 576,341 380,655 Revaluation losses of property, plant and equipment 19,183 19,183 19,183 19,183 Deferred tax assets (net) – – 73 – Cash flow hedge reserve – 291,924 – 291,924 Investments in the capital of banking and financial institutions where the Bank does not own more than 10% of the issued ordinary share capital of the entity 3,309,693 3,597,821 3,307,027 3,592,386 Significant investments in the capital of financial institutions where the Bank owns more than 10% of the issued ordinary share capital of the entity 1,381,837 800,864 – – Additional Tier 1 (AT1) Capital after adjustments – – – – Total Additional Tier 1 (AT1) Capital – – – – Qualifying Additional Tier 1 capital instruments – – – – Instruments issued by consolidated banking and financial subsidiaries of the Bank and held by third parties – – – – Total adjustments to AT1 Capital – – – – Investment in own shares – – – – Tier 2 Capital after adjustments 6,424,930 7,243,494 6,351,222 7,235,114 Total Tier 2 Capital 8,846,497 9,855,227 8,846,497 9,855,227 Qualifying Tier 2 Capital instruments 3,600,000 4,800,000 3,600,000 4,800,000 Revaluation gains 3,565,866 3,565,866 3,565,866 3,565,866 Loan loss provisions 1,680,631 1,489,362 1,680,631 1,489,362 Instruments issued by consolidated banking and financial subsidiaries of the Bank and held by third parties – – – –




Item Bank Group

31.12.2018Rs. ’000

31.12.2017Rs. ’000

31.12.2018Rs. ’000

31.12.2017Rs. ’000

Total adjustments to Tier 2 Capital 2,421,567 2,611,733 2,495,275 2,620,113 Investment in own shares – – – – Investments in the capital of financial institutions and where the Bank does not own more than 10% of the issued capital carrying voting rights of the issuing entity 2,421,567 2,611,733 2,495,275 2,620,113 CET 1 Capital 30,434,481 25,564,909 32,750,842 27,370,741 Total Tier 1 Capital 30,434,481 25,564,909 32,750,842 27,370,741 Total Capital 36,859,411 32,808,403 39,102,064 34,605,855 Total Risk Weighted Assets (RWA) 228,405,468 214,281,753 231,620,561 216,344,080RWAs for Credit Risk 185,794,966 157,267,128 185,358,837 157,555,103RWAs for Market Risk 11,400,132 22,109,583 14,831,899 23,537,259RWAs for Operational Risk 31,210,369 34,905,043 31,429,825 35,251,718

CET 1 Capital Ratio (including Capital Conservation Buffer, Countercyclical Capital Buffer and Surcharge on D-SIBs (%) 13.325 11.931 14.140 12.651of which: Capital Conservation Buffer (%) 1.875 1.250 1.875 1.250of which: Countercyclical Buffer (%) 0.000 0.000 0.000 0.000of which: Capital Surcharge on D-SIBs (%) 1.000 0.500 1.000 0.500Total Tier 1 Capital Ratio (%) 13.325 11.931 14.140 12.651

Total Capital Ratio (including Capital Conservation Buffer, Countercyclical Capital Buffer and Surcharge on D-SIBs) (%) 16.138 15.311 16.882 15.996of which: Capital Conservation Buffer (%) 1.875 1.250 1.875 1.250of which: Countercyclical Buffer (%) 0.000 0.000 0.000 0.000of which: Capital Surcharge on D-SIBs (%) 1.000 0.500 1.000 0.500

The difference arises between the retained earnings balance in Basel III capital adequacy computation and the financial reporting are due to the following:

(1) The Bank’s practice was to transfer the current year retained earnings to the general reserve until end of 2015 and it was changed to maintain part of the current year retained earnings to a separately maintained Retained Earnings Reserve with effect from 31 December 2016. Therefore one of the differences between the retained earnings balance in the financial reporting and the Basel III capital adequacy computation is the accumulated actuarial loss of Rs. 5.351 Bn. on retirement benefit plan which has been adjusted to the general reserve prior to 2016.

(2) Further, with the adoption of the SLFRS 9, only 25% of the first day impact of Rs. 1.126 Bn. considered in Basel III capital adequacy computation as the Bank is allowed to stagger the first day impact throughout a transitional period of four years by CBSL, whereas first day impact in full is considered in the financial reporting.




Computation of Leverage Ratio

Item Bank Group

Rs. ’000 Rs. ’000

Tier 1 Capital 30,434,481 32,750,842 Total Exposures 625,952,845 655,042,559 On-Balance Sheet Items (excluding derivatives, and securities financing transactions, but including collateral) 543,269,728 559,100,363 Derivative Exposures 454,442 454,442 Securities Financing Transaction Exposures 79,981,972 93,241,051 Other Off-Balance Sheet Exposures 2,246,703 2,246,703 Basel III Leverage Ratio (%) (Tier 1/Total Exposure) 4.86% 5.00%

* Implementation date for regulatory reporting will be with effect from 1 January 2019.

Basel III – Computation of Liquidity Coverage Ratio (Bank) – All Currency

Item 2018 2017

Total unweighted

valueRs. ’000

Total weighted

valueRs. ’000

Total unweighted

valueRs. ’000

Total weighted

valueRs. ’000

Total Stock of high-quality liquid assets (HQLA) 422,527,455 419,793,574 430,221,226 426,508,743 Total adjusted Level 1A assets 423,926,486 423,926,486 431,889,252 431,889,252Level 1 assets 416,569,693 416,569,693 422,446,260 422,446,260 Total adjusted Level 2A assets 700,000 595,000 500,000 425,000 Level 2A assets 700,000 595,000 500,000 425,000 Total adjusted Level 2B assets 5,257,763 2,628,881 7,274,966 3,637,483 Level 2B assets 5,257,763 2,628,881 7,274,966 3,637,483 Total cash outflows 942,681,904 185,180,897 812,037,851 126,236,382 Deposits 686,030,059 68,603,006 611,264,221 61,126,422 Unsecured wholesale funding 140,398,948 72,159,192 114,458,122 58,912,164 Secured funding transactions 66,860,079 – 57,193,088 – Undrawn portion of committed (irrevocable) facilities and other contingent funding obligations 5,198,560 238,338 24,722,883 1,812,059 Additional requirements 44,194,258 44,194,258 4,399,536 4,399,536 Total cash inflows 23,871,472 54,523,804 25,850,376 12,858,107 Maturing secured lending transactions backed by collateral 4,801,432 2,450,006 7,704,695 2,115,566 Committed facilities – – – – Other inflows by counterparty which are maturing within 30 days 16,118,248 11,262,873 15,514,164 10,742,542 Operational deposits 2,951,791 – 2,631,518 – Other cash inflows 40,810,925 40,810,925 – – Liquidity Coverage Ratio (%) (stock of high quality liquid assets/total net cash outflow over the next 30 calendar days)*100 – 321.29 – 376.18




Main Features of Regulatory Capital Instruments

Description of the capital instrument

Issuer National Savings BankUnique identifierGoverning law(s) of the instrument Sri LankaOriginal date of issuance 29 December 2016Par value of instrument 100Perpetual or dated DatedOriginal maturity date 29 December 2021Amount recognised in regulatory capital (Rs. ’000) 3,600,000 Accounting classification (equity/liability) Liability

Issuer call subject to prior supervisory approvalOptional call date, contingent call dates and redemption amount (Rs. ’000) N/ASubsequent call dates N/A

Coupons/dividendsFixed or floating dividend/coupon FixedCoupon rate and any related index 13%Non-cumulative or cumulative Non-cumulative

Convertible or non-convertibleIf convertible, conversion trigger(s) N/AIf convertible, fully or partially N/AIf convertible, mandatory or optional N/AIf convertible, conversion rate N/A

Summary discussion on adequacy/meeting current and future capital requirementsFor summary discussion on adequacy/meeting current and future capital requirements, refer risk management report on pages 223 to 226.




Credit Risk under Standardised Approach (Bank)

Credit Risk Exposures and Credit Risk Mitigation (CRM) Effects

As at 31 December 2018 Exposures before Credit conversion factor (CCF)

and CRM

Exposures post CCF and CRM

RWA and RWA density

Asset class

On-balance sheet amountRs. ’000

Off-balance sheet amountRs. ’000



RWA

Rs. ’000

RWA density (ii)

(%)

Claims on Central Government and CBSL 541,037,145 40,809,393 538,679,906 816,188 35,712 0.0 Claims on foreign sovereigns and their central banks – – – – – – Claims on public sector entities 130,743,609 460,596 57,491 – 57,491 100.0 Claims on official entities and multilateral development banks – – – – – – Claims on banks exposures 44,965,188 – 44,965,188 – 21,067,423 46.9 Claims on financial institutions 12,758,192 186,386 12,758,192 93,193 6,442,190 50.1 Claims on corporates 12,249,702 131,550 12,249,702 65,775 4,253,912 34.5 Retail claims 182,085,576 2,165,701 154,935,080 134,890 94,043,642 60.6 Claims secured by residential property 65,899,139 801,015 65,899,139 400,508 33,387,867 50.4 Claims secured by commercial real estate – – – – – – Non-performing assets (NPAs)(i) 5,203,492 – 5,203,492 – 6,391,586 122.8 Higher risk categories 318,163 – 318,163 – 795,408 250.0

Cash items and other assets 19,417,844 736,149 19,417,844 736,149 19,319,736 95.9

Total 1,014,678,049 45,290,790 854,484,197 2,246,703 185,794,966 21.7

Note:(i) NPAs – As per Banking Act Directions on classification of loans and advances, income recognition and provisioning.(ii) RWA Density – Total RWA/exposures post CCF and CRM.




Credit Risk under Standardised Approach (Group)

Credit Risk Exposures and Credit Risk Mitigation (CRM) Effects

As at 31 December 2018 Exposures before Credit conversion factor (CCF)

and CRM

Exposures post CCF and CRM

RWA and RWA density

Asset class





RWA

Rs. ’000

RWA density (ii)

(%)

Claims on Central Government and CBSL 545,158,807 40,809,393 542,776,595 816,188 35,712 0.0 Claims on foreign sovereigns and their central banks – – – – – – Claims on public sector entities 130,743,609 460,596 57,491 – 57,491 100.0 Claims on official entities and multilateral development banks – – – – – – Claims on banks exposures 45,017,575 – 45,017,575 – 21,090,299 46.8 Claims on financial institutions 12,854,155 186,386 12,854,155 93,193 6,461,440 49.9 Claims on corporates 12,382,231 131,550 12,382,231 65,775 4,281,218 34.4 Retail claims 182,085,576 2,165,701 154,935,080 134,890 94,043,642 60.6 Claims secured by residential property 65,899,139 801,015 65,899,139 400,508 33,387,867 50.4 Claims secured by commercial real estate – – – – – – Non-performing assets (NPAs)(i) 5,203,492 – 5,203,492 – 6,391,586 122.8 Higher risk categories – – – – – –

Cash items and other assets 19,707,702 736,149 19,707,702 736,149 19,609,584 95.9

Total 1,019,052,285 45,290,790 858,833,459 2,246,703 185,358,837 21.5

Note:(i) NPAs – As per Banking Act Directions on classification of loans and advances, income recognition and provisioning.(ii) RWA Density – Total RWA/Exposures post CCF and CRM.




Credit Risk under Standardised Approach: Exposures by Asset Classes and Risk Weights (Bank)

As at 31 December 2018Description (Post CCF and CRM)

Risk weight

Asset classes

0%

Rs. ’000

20%

Rs. ’000

50%

Rs. ’000

75%

Rs. ’000

100%

Rs. ’000

150%

Rs. ’000

>150%

Rs. ’000

Total credit exposures

amountRs. ’000

Claims on Central Government and CBSL 539,317,534 178,560 – – – – – 539,496,093

Claims on foreign sovereigns and their central banks – – – – – – – –

Claims on public sector entities – – – – 57,491 – – 57,491

Claims on official entities and multilateral development banks – – – – – – – –

Claims on banks exposures – 15,222,979 23,438,768 – 6,303,442 – – 44,965,189

Claims on financial institutions – 1,923,086 9,741,454 – 1,186,845 – – 12,851,385

Claims on corporates – 9,465,626 978,128 – 1,871,723 – – 12,315,477

Retail claims 29,675,178 4,457 – 125,390,334 – – – 155,069,970

Claims secured by residential property – – 65,823,559 – 476,088 – – 66,299,647

Claims secured by commercial real estate – – – – – – – –

Non-performing assets (NPAS) – – 34,575 – 2,758,149 2,410,766 – 5,203,491

Higher risk categories – – – – – – 318,163 318,163

Cash items and other assets 687,687 183,213 – – 19,283,093 – – 20,153,992

Total 569,680,399 26,977,920 100,016,484 125,390,334 31,936,831 2,410,766 318,163 856,730,900




Credit Risk under Standardised Approach: Exposures by Asset Classes and Risk Weights (Group)

As at 31 December 2018Description (Post CCF and CRM)

Risk weight

Asset classes

0%

Rs. ’000

20%

Rs. ’000

50%

Rs. ’000

75%

Rs. ’000

100%

Rs. ’000

150%

Rs. ’000

>150%

Rs. ’000

Total credit exposures

amountRs. ’000

Claims on Central Government and CBSL 543,414,224 178,560 – – – – – 543,592,783

Claims on foreign sovereigns and their central banks – – – – – – – –

Claims on public sector entities – – – – 57,491 – – 57,491

Claims on official entities and multilateral development banks – – – – – – – –

Claims on banks exposures – 15,234,038 23,480,097 – 6,303,442 – – 45,017,577

Claims on financial institutions – 2,018,860 9,741,643 – 1,186,845 – – 12,947,349

Claims on corporates – 9,597,155 978,128 – 1,872,723 – – 12,448,006

Retail claims 29,675,178 4,457 – 125,390,334 – – – 155,069,970

Claims secured by residential property – – 65,823,559 – 476,088 – – 66,299,647

Claims secured by commercial real estate – – – – – – – –

Non-performing assets (NPAS) – – 34,575 – 2,758,149 2,410,766 – 5,203,491

Higher risk categories – – – – – – – –

Cash items and other assets 687,697 183,213 – – 19,572,941 – – 20,443,850

Total 573,777,099 27,216,283 100,058,003 125,390,334 32,227,679 2,410,766 – 861,080,161




Market Risk under Standardised Measurement Method

Bank Group

Item RWAAmount as at

31.12.2018Rs. ’000

RWAAmount as at

31.12.2018Rs. ’000

(a) RWA for interest rate risk 6,490,904 9,918,163General Interest Rate Risk 6,490,904 9,918,163(i) Net long or short position 6,490,904 9,918,163(ii) Horizontal disallowance – – (iii) Vertical disallowance – – (iv) Options – – Specific interest rate risk – –

(b) RWA for equity 3,659,542 3,664,051(i) General Equity Risk 1,954,061 1,956,728(ii) Specific Equity Risk 1,705,481 1,707,323

(c) RWA for Foreign Exchange and Gold 1,249,687 1,249,687Capital charge for market risk [(a)+(b)+(c)] *CAR 1,467,767 1,909,607

Operational Risk under Basic Indicator Approach

Bank

Capital Charge Factor

%

Gross income as at 31.12.2018

Rs. ’000Capital Charge 1st year

Rs. ’000 2nd year

Rs. ’000 3rd yearRs. ’000

The basic indicator approach 15 26,227,552 27,981,561 26,157,586Capital charge – – – – 4,018,335Risk weighted amount for operational risk – – – – 31,210,369

Group

Capital Charge Factor

%

Gross income as at 31.12.2018

Rs. ’000Capital Charge 1st year

Rs. ’000 2nd year

Rs. ’000 3rd yearRs. ’000

The basic indicator approach 15 26,333,652 28,423,674 26,174,478Capital charge – – – – 4,046,590Risk weighted amount for operational risk – – – – 31,429,825




Differences between Accounting and Regulatory Scopes and Mapping of Financial Statement Categories with Regulatory Risk Categories

Bank As at 31 December 2018 a b c d e

Carrying values as reported

in Published Financial

Statements

Rs. ’000

Carrying values under Scope

of Regulatory Reporting

Rs. ’000

Subject to Credit Risk Framework

Rs. ’000

Subject to Market Risk Framework

Rs. ’000

Not subject to Capital

Requirements or subject to

Deduction from Capital

Rs. ’000

Assets 1,037,482,973 1,039,232,187 852,803,563 18,545,598 167,883,025 Cash and cash equivalents 3,434,524 5,786,129 3,405,984 22,905 2,357,240 Balances with Central Bank – – – – – Placements with banks 17,588,445 17,151,588 17,151,588 – – Derivative financial instruments 4,740,106 – – – – Financial assets recognised through profit or loss measured at fair value/ other financial assets held for trading 16,680,382 21,832,386 – 18,522,693 3,309,693 Financial assets designated at fair value through profit or loss – – – – –

Financial assets at amortised cost:Loans and receivables to banks 24,326,293 22,805,186 22,805,186 – – Loans and receivables to other customers 399,205,852 401,317,886 243,481,272 – 157,836,614 Debt and other instruments/financial investments held to maturity 518,947,969 503,953,872 501,532,305 – 2,421,567

Financial assets measured at fair value through OCI/financial investments available for sale 6,184,430 – – – – Investments in subsidiaries 1,700,000 1,700,000 318,163 – 1,381,837 Investments in associates and joint ventures – – – – – Property, plant and equipment 13,465,755 12,889,681 12,889,681 – – Investment properties – – – – – Intangible assets – 576,075 – – 576,075 Deferred tax assets – – – – – Other assets 31,209,216 51,219,384 51,219,384 – –




Differences between Accounting and Regulatory Scopes and Mapping of Financial Statement Categories with Regulatory Risk Categories (Contd.)

Bank (Contd.) As at 31 December 2018 a b c d e

Carrying values as reported

in Published Financial

Statements

Rs. ’000

Carrying values under Scope

of Regulatory Reporting

Rs. ’000

Subject to Credit Risk Framework

Rs. ’000

Subject to Market Risk Framework

Rs. ’000

Not subject to Capital

Requirements or subject to

Deduction from Capital

Rs. ’000

Liabilities 993,750,308 990,648,134 – – – Due to banks 77,119,146 76,883,763 – – – Derivative financial instruments 1,533 – – – – Financial liabilities recognised through profit – – – – – Financial liabilities at amortised cost:– Due to other customers 839,574,411 813,905,714 – – – – Due to debt securities holders – – – – – – Due to other borrowers 14,804,802 14,592,473 – – – Debt securities issued 46,382,722 45,651,444 – – – Retirement benefit obligations 3,830,795 – – – – Current tax liabilities – – – – – Deferred tax liabilities 582,463 582,463 – – – Other provisions – – – – – Other liabilities 5,447,277 33,032,277 – – – Due to subsidiaries 750 750 – – – Subordinated term debt 6,006,411 6,000,000 – – –

Off-balance sheet liabilities 4,481,398 45,290,790 2,246,703 – – Guarantees 1,887,763 1,887,763 – – – Performance bonds – – – – – Letters of credit 277,937 277,937 134,890 – – Other contingent items – – – – – Undrawn loan commitments 1,579,548 1,579,548 559,476 – – Other commitments 736,149 41,545,541 1,552,337 – –

Shareholders’ equity 9,400,000 9,400,000 – – – Equity capital (stated capital)/ assigned capital – – – – – of which amount eligible for CET 1 9,400,000 9,400,000 – – – of which amount eligible for AT 1 – – – – – Retained earnings 4,622,080 – – – – Accumulated other comprehensive income 528,430 – – – – Other reserves 29,182,155 39,184,053 – – – Total shareholders’ equity 43,732,665 48,584,053 – – –




Explanations of Differences between Accounting and Regulatory Exposure Amounts (Bank)

The carrying value of loans and advances in the published Financial Statements has been subject to impairment provisions based on the principles of “expected credit loss” as per SLFRS 9 (Refer Note 21 of the Financial Statements for details) while the carrying value of regulatory reporting is as per the Banking Act Direction No. 4 of 2008 on "Classification of Loans and Advances, Income Recognition and Provisioning" issued by the CBSL are “time/delinquency based”. Bank assess the impairment of loans and advances individually or collectively. The impairment allowance is based on the credit losses expected to arise by considering the change in the risk of default occurring over the remaining life of the financial instrument. As per the Banking Act Direction on the prudential norms for classification, valuation and operation of the Bank’s investment portfolio, Financial assets recognised through profit or loss – measured at fair value and Financial assets measured at fair value through OCI are classified as Held for trading under regulatory reporting and accrued interest classified under other assets category. Financial assets at amortised cost – debt and other instruments are classified as Held to maturity investments (Banking Book) under regulatory reporting and accrued interest classified under other assets category. The “Fair value” is defined as the best estimate of the price that would be received to sell an asset or be paid to transfer a liability in an orderly transaction between market participants at the measurement date. A variety of valuation techniques combined with the range of plausible market parameters as at a given point in time may still generate unexpected uncertainty beyond fair value. Refer Note 55 of the Financial Statements for details on valuation methodologies.

Further, all financial instruments except equity considered in regulatory reporting differs with the published Financial Statements since impairment allowances based on expected losses under SLFRS 9 were netted off for publication purposes.

A “Day 1 difference” is recognised as per SLFRS 9 in contrary to regulatory reporting, when the transaction price differs from the fair value of other observable current market transactions in the same instrument E.g. Employee loans below market rates. Derivatives are financial instruments which derive values in response to changes in interest rates, financial instrument prices, commodity prices, foreign exchange rates, credit risk and indices. The fair value of these derivative financial instruments is determined using forward pricing models. The positive fair value changes of these financial instruments as at reporting date are reported as assets while the negative fair value changes are reported as liabilities. The details of derivative financial instruments have been disclosed in Note 19 to the Financial Statements. Derivatives are disclosed under off-balance sheet in the regulatory reporting.

Bank’s Risk Management Approach and Risk Management Related to Key Risk Exposures

Bank’s Risk Management Approach and Risk Management Related to Key Risk Exposures are explained in Risk Management Report on page 194 to 226.




Disclosure requirements DescriptionPage

number/s

Disclosure requirements under the prescribed format issued by the Central Bank of Sri Lanka for preparation of Annual Financial Statements of licensed specialised banks.


1. Information about the significance of financial instruments for financial position and performance

1.1 Statement of financial position

1.1.1 Disclosures on categories of financial assets and financial liabilities. Notes to the Financial Statements:Note 15 – Analysis of financial instruments by measurement basis

289-291

1.1.2 Other disclosures

i. Special disclosures about financial assets and financial liabilities designated to be measured at fair value through profit or loss, including disclosures about credit risk and market risk, changes in fair values attributable to these risks and the methods of measurement.

Significant accounting policies:Note 2.5.1.4.5 Financial assets measured at fair value through profit or loss (FVPL)Note 2.5.1.5.1 Financial liabilities at fair value through profit or loss (FVPL)

265

266

ii. Reclassifications of financial instruments from one category to another.

Significant accounting policies:Note 2.5.1.7 Reclassification of financial assets and liabilities

267-268

iii. Information about financial assets pledged as collateral and about financial or non-financial assets held as collateral.

Notes to the Financial Statements:Note 22 – Financial assets at amortised cost – Debt and other instruments

304-305

iv. Reconciliation of the allowance account for credit losses by class of financial assets.

Note 16 – Cash and cash equivalentNote 18 – Placement with banksNote 21 (d) – Movement in impairment during the year (Loan and advances)Note 22 (b) – Movement in impairment during the year (debt and other instruments)

292292301

305

v. Information about compound financial instruments with multiple embedded derivatives.

The Bank does not have financial instruments with multiple embedded derivatives

vi. Breaches of terms of loan agreements. None

1.2 Statement of comprehensive income

1.2.1 Disclosures on items of income, expense, gains and losses Notes to the Financial Statements:Notes 3-13 to the Financial Statements 277-287

1.2.2 Other disclosures

i. Total interest income and total interest expense for those financial instruments that are not measured at fair value through profit and loss.

Notes to the Financial Statements:Note 4 – Net interest income 277-279

ii. Fee income and expense. Notes to the Financial Statements:Note 5 – Net fee and commission income 279-280





number/s

iii. Amount of impairment losses by class of financial assets. Notes to the Financial Statements:Note 10 – Impairment charges 283

iv. Interest income on impaired financial assets. Notes to the Financial Statements:Note 4 (a) Net interest income 278

1.3 Other disclosures

1.3.1 Accounting policies for financial instruments. Note 2.5 – Significant accounting policies – recognition of assets and liabilitiesFinancial instruments

263

1.3.2 Information on financial liabilities designated at FVPL. The Bank/Group has not designated any financial liability at FVPL. Notes to the Financial Statements:Note 2.5.1.5.1 – Financial liabilities at fair value through profit or loss

266

1.3.3 Investments in equity instruments designated at FVOCI

i. Details of equity instruments that have been designated as at FVOCI and the reasons for the designation.

Notes to the Financial Statements:Note 23 – Financial assets at fair value through other comprehensive income

305-309

ii. Fair value of each investment at the reporting date. Notes to the Financial Statements:Note 23 (e) – Quoted investments – Equity securitiesNote 23 (f) – Unquoted investments – Equity securities

308

309

iii. Dividends recognised during the period, separately for investments derecognised during the reporting period and those held at the reporting date.

Notes to the Financial Statements:Note 9 – Net other operating income 282

iv. Transfer cumulative gain or loss within equity during the period and the reasons for those transfers.

Income Statement, Statement of Other Comprehensive Income and Statement of Changes in Equity

248-254

v. If investments in equity instruments measured at FVOCI are derecognised during the reporting period:– reasons for disposing of the investments– fair value of the investments at the date of derecognition– the cumulative gain or loss on disposal

Income Statement, Statement of Other Comprehensive Income and Statement of Changes in Equity

248-254

1.3.4 Reclassification of financial assets

i. For all reclassifications of financial assets in the current or previous reporting period:– date of reclassification– detailed explanation of the change in the business model and a

qualitative description of its effect on the financial statements– the amount reclassified into and out of each category

Notes to the Financial Statements:Note 52 – Explanation of transition to Sri Lanka financial reporting standards (SLFRS 09)

342




ii. For reclassifications from FVTPL to amortised cost or FVOCI:– the effective interest rate (EIR) determined on the date of

reclassification– the interest revenue recognised

During the period, the Bank has not classified financial instruments from FVOCI to amortised cost

iii. For reclassifications from FVOCI to amortised cost, or from FVTPL to amortised cost or FVOCI:– The fair value of the financial assets at the reporting date– The fair value gain or loss that would have been recognised

in profit or loss or OCI during the reporting period if the financial assets had not been reclassified.

During the period, the Bank has not classified financial instruments from FVPL to amortised cost or FVOCI

1.3.5 Information on hedge accounting Notes to the Financial Statements:Note 19 – Derivative financial instruments 293-295

1.3.6 Information about the fair values of each class of financial asset and financial liability, along with:

i. Comparable carrying amounts. Notes to the Financial Statements:Note 55.4 – Fair value of financial instruments

378-379

ii. Description of how fair value was determined. Notes to the Financial Statements:2.1.12.2 – Fair value of financial instruments2.3 – Fair value measurementNote 55.2 – Determination of fair value and fair value hierarchyNote 55.5 Determination of fair value

260262

375-377

379-380

iii. The level of inputs used in determining fair value. Notes to the Financial Statements:Note 55 – Fair value of financial instruments

375-380

iv. a. Reconciliations of movements between levels of fair value measurement hierarchy.

b. Additional disclosures for financial instruments that fair value is determined using level 3 inputs.

No movements between levels of fair value hierarchy during the yearNote 55.3 – Reconciliation of movements between levels of fair value measurement hierarchy

378

v. Information if fair value cannot be reliably measured. Notes to the Financial Statements:Note 23 (f) – Unquoted investments – equity securitiesNote 55.5 – Determination of fair value

309

379-380

2. Information about the nature and extent of risks arising from financial instruments

2.1 Qualitative disclosures.

2.1.1 Risk exposures for each type of financial instrument. Notes to the Financial Statements:Note 53 – Financial risk managementRisk management report

355-372194-226


number/s




2.1.2 Management’s objectives, policies, and processes for managing those risks.

Notes to the Financial Statements:Note 53 – financial risk managementRisk management report

355-372194-226

2.1.3 Changes from the prior period. No major policy changes during the period under review

2.2 Quantitative disclosures.

2.2.1 Summary of quantitative data about exposure to each risk at the reporting date.

Notes to the Financial Statements:Note 53 – Financial risk managementRisk management report

355-372194-226

2.2.2 Disclosures about credit risk, liquidity risk, market risk, operational risk, interest rate risk and how these risks are managed.

i. Credit risk

(a) Maximum amount of exposure (before deducting the value of collateral), description of collateral, information about credit quality of financial assets that are neither past due nor impaired and information about credit quality of financial assets.

Notes to the Financial Statements:Note 53.1.1 – Credit quality analysis 355-361

(b) For financial assets that are past due or impaired, disclosures on age, factors considered in determining as impaired and the description of collateral on each class of financial asset.

Notes to the Financial Statements:Note 53.1.1 – Credit quality analysis 355-361

(c) Information about collateral or other credit enhancements obtained or called.

Notes to the Financial Statements:Note 53.1.1. (b) – Management of the credit portfolio

357-359

(d) Credit risk management practices: Notes to the Financial Statements:

– CRM practices and how they relate to the recognition and measurement ECL, including the methods, assumptions and information used to measure ECL.

Note 2.5.2.2.3 – Overview of the ECL principlesNote 10 – Impairment charges

270

283

– Quantitative and qualitative information to evaluate the amounts in the Financial Statements arising from ECL, including changes and the reasons for those changes.

Note 10 – Impairment charges 283

– How the Bank determines whether the credit risk of financial instruments has increased significantly since initial recognition

Note 2.5.2.2.7 – Significant increase in credit risk

272

– The Bank’s definitions of default for different financial instruments, including the reasons for selecting those definitions.

Note 2.5.2.2.8 – Definition of default and credit impaired assets

272

– How instruments are grouped if ECL are measured on a collective basis.

Note 10 – Impairment charges 283

– How the bank determines that financial assets are credit-impaired.

Note 2.5.2.2 – Impairment of financial assets (Policy applicable from 1 January 2019)

270

– The Bank’s write-off policy, including the indicators that there is no reasonable expectation of recovery.

Note 21 (d) – Movements in impairment during the year

301


number/s




– How the modification requirements have been applied. Note 2.5.1.9 – Modification of financial assets and financial liabilities

269

(e) ECL calculations:

– Basis of the inputs, assumptions and the estimation techniques used when estimating ECL.

Note 2.5.2.2.4 – The calculation of ECL 271

– How forward-looking information has been incorporated into the determination of ECL.

Note 2.5.2.2.6 – Forward looking information

272

– Changes in estimation techniques or significant assumptions made during the reporting period.

Note 2.2 – Changes in accounting policies and transitional disclosures on adoption of SLFRS – 09 in replacement of LKAS 39

261

(f) Amounts arising from ECL:

– Reconciliation for each class of financial instrument of the opening balance to the closing balance of the impairment loss allowance.

Note 16 – Cash and cash equivalentNote18 – Placement with banksNote 21 (d) – Movement in impairment during the year (Loan and advances)

292292301

– Explain the reasons for changes in the loss allowances in the reconciliation.

Note 22 (b) – Movement in impairment during the year (debt and other instruments)

305

(g) Collateral: Notes to the Financial Statements:

– Bank’s maximum exposure to credit risk at the reporting date Note 53.1.1 (a) – Net exposure to Credit risk by class of financial assets

355-357

– Description of collateral held as security and other credit enhancements

Note 53.1.1 (b) – Management of the credit portfolio

357-359

(h) Written-off assets Notes to the Financial Statements:Note 21 (d) – Movement in impairment during the year (loans and advances)

301-303

i. Pillar III disclosures of the Banking Act Directions No. 1 of 2016 on Capital requirements under Basel III for Licensed Banks

Risk Management Report 194-226

ii. Liquidity risk

(a) A maturity analysis of financial liabilities. Notes to the Financial Statements:Note 54 – Maturity analysis 372-374

(b) Description of approach to risk management. Notes to the Financial Statements:Note 53 – Financial risk managementRisk management report

355-372194-226

(c) Pillar III disclosures of the Banking Act Direction No. 1 of 2016 on capital requirements under Basel III for Licensed Banks

Risk management report 194-226


number/s





number/s

iii. Market risk

(a) A sensitivity analysis of each type of market risk to which the Bank exposed.

Notes to the Financial Statements:Note 53.3 – Market riskRisk management report

364-366194-226

(b) Additional information, if the sensitivity analysis is not representative of the Bank's risk exposure.


(c) Pillar III disclosures of the Banking Act Direction No. 1 of 2016 on Capital requirements under Basel III for Licensed Banks


iv. Operational risk

Pillar III disclosures of the Banking Act Direction No. 1 of 2016 on capital requirements under Basel III for Licensed Banks


v. Equity risk in the banking book

(a) Qualitative disclosures:

Differentiation between holdings on which capital gains are expected and those taken under other objectives including for relationship and strategic reasons.


305-309

Discussion of important policies covering the valuation and accounting of equity holdings in the banking book.


305-309

(b) Quantitative disclosures:

Value disclosed in the statement of financial position of investments, as well as the fair value of those investments; for quoted securities, a comparison to publicly quoted share values where the share price is materially different from fair value.

Notes to the Financial Statements:Note 20 – Financial assets recognised at through profit or lossNote 23 – Financial assets at fair value through other comprehensive income

296-299

305-309

The types and nature of investments

The cumulative realised gains/(losses) arising from sales and liquidations in the reporting period.

Notes to the Financial Statements:Note 6 – Net Gain/(loss) from tradingNote 8 – Net Gain/(loss) from derecognition of financial assets

281282

vi. Interest rate risk in the banking book

(a) Qualitative disclosures:

Nature of interest rate risk in the banking book (IRRBB) and key assumptions

Notes to the Financial Statements:Note 53 – Financial risk managementRisk management report

355-372194-226





number/s

(b) Quantitative disclosures:

The increase/(decline) in earnings or economic value (or relevant measure used by Management) for upward and downward rate shocks according to Management’s method for measuring IRRBB, broken down by currency (as relevant).


2.2.3 Information on concentrations of risk Notes to the Financial Statements:Note 53 Financial risk managementRisk Management Report

355-372194-226

3. Other disclosures

3.1 Capital structure

i. Qualitative disclosures

Summary information on the terms and conditions of the main features of all capital instruments, especially in the case of innovative, complex or hybrid capital instruments.

Basel III Disclosures as per schedule III of Banking Act Direction No. 1 of 2016Risk management report

389-401

194-226

ii. Quantitative disclosures

(a) The amount of Tier 1 capital, with separate disclosure of – Basel III Disclosures as per schedule III of Banking Act Direction No. 1 of 2016

389-401

Paid-up share capital/common stock

Reserves

Non-controlling interests in the equity of subsidiaries

Innovative instruments

Other capital instruments

Deductions from Tier 1 capital

(b) The total amount of Tier 2 and Tier 3 capital

(c) Other deductions from capital

(d) Total eligible capital

3.1.2 Capital adequacy

i. Qualitative disclosures

A summary discussion of the Bank’s approach to assessing the adequacy of its capital to support current and future activities.


ii. Quantitative disclosures

(a) Capital requirements for credit risk, market risk and operational risk.


(b) Total and Tier 1 capital ratio. Risk management report 194-226



Statistical Indicators 2009-2018

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Operating results (Rs. Mn.)Gross income 49,803 50,070 46,545 52,903 65,573 77,890 79,282 87,399 107,996 111,902 Interest income 49,046 48,142 47,096 52,531 64,248 74,023 78,128 86,390 103,579 110,507 Interest expenses 36,067 31,487 29,296 39,142 54,141 52,642 51,146 60,923 78,445 85,622 Net interest income 12,979 16,655 17,800 13,389 10,107 21,380 26,983 25,467 25,134 24,885 Other income 757 1,929 (578) 347 1,292 3,798 1,043 872 4,308 1,254 Operating expenses, provisions and VAT 6,792 8,807 7,967 7,396 9,120 14,706 14,991 13,036 15,307 18,197 Profit before tax 6,943 9,777 9,255 6,340 2,279 10,472 13,034 13,303 14,135 7,941 Income tax 3,229 4,386 3,193 2,578 1,095 3,606 4,361 3,805 4,419 3,441 Profit after tax 3,714 5,391 6,062 3,763 1,184 6,867 8,672 9,498 9,716 4,500 Contribution to the Government 7,277 10,107 7,970 6,327 4,731 11,043 11,016 19,251 13,440 7,536

ASSETS (Rs. Mn.)Cash and short-term funds 855 1,355 1,398 1,466 1,546 1,927 3,240 4,620 3,850 3,435Loans and investments 335,520 395,334 455,914 492,009 632,187 757,182 821,494 878,046 969,036 989,373Property, plant and equipment 3,584 4,971 5,247 5,264 5,692 5,594 7,025 7,277 12,396 13,466Other assets 14,463 2,733 3,415 10,075 14,943 14,764 16,320 21,761 25,696 31,209Total 354,422 404,393 465,974 508,813 654,368 779,466 848,079 911,704 1,010,977 1,037,483

Liabilities and shareholders’ funds (Rs. Mn.)Total deposits 313,007 364,430 421,849 457,650 501,890 554,060 595,776 657,280 737,213 839,574Repo/borrowings/ subordinated liabilities 8,730 11,436 16,270 22,958 120,561 191,192 207,101 213,162 224,143 144,313Differed taxation 84 27 96 123 143 270 504 416 507 582Other liabilities 14,841 5,997 4,707 4,314 9,557 10,684 12,274 8,600 10,019 9,280Shareholders’ funds 17,760 22,503 23,052 23,767 22,217 23,260 32,424 32,246 39,096 43,733 Total 354,422 404,393 465,974 508,813 654,368 779,466 848,079 911,704 1,010,977 1,037,483

Statistical Indicators 2009-2018



2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

RATIOS (%)Income growth 20.74 0.54 (7.04) 13.66 23.95 18.78 1.79 10.24 23.57 3.62 Interest margin 4.0 4.4 4.1 2.7 1.7 3.0 3.3 2.89 2.61 2.43 NIM/Gross income 26.1 33.3 38.2 25.3 15.4 27.4 34.0 29.14 23.27 22.24 Personnel cost/gross income 6.9 7.4 8.9 7.7 6.4 6.2 7.5 7.13 6.38 8.28 Overheads(excluding prov.)/gross income 10.7 12.0 13.5 12.0 10.9 11.9 13.3 11.99 10.33 12.72 Profit before tax/ gross income 13.9 19.5 19.9 12.0 3.5 13.4 16.4 15.22 13.09 7.10 Contribution to the GOSL/gross income 14.6 20.2 17.1 12.0 7.2 14.2 13.9 22.03 12.44 6.73 Cost to deposits 2.7 2.7 2.0 1.7 1.6 2.1 2.3 2.12 2.10 2.22 Cost to income with VAT 55.5 48.9 45.4 52.8 67.7 44.8 46.1 50.13 49.58 66.47 Cost to income without VAT 38.8 32.4 36.4 46.1 62.2 36.7 37.4 39.59 37.75 54.18 Return on average shareholder’s funds (ROE) 22.7 27.3 26.61 16.07 5.15 30.20 31.15 29.37 27.24 10.87 Return on average assets (ROA) 2.1 2.6 2.13 1.30 0.39 1.46 1.60 1.51 1.47 0.78 NPL (gross) 3.80 2.55 2.57 2.38 6.54 7.61 3.46 1.55 1.34 1.44 NPL (net) 3.00 1.80 1.93 1.78 6.66 7.56 3.35 1.47 1.22 1.22 Capital Adequacy – Tier 1 (minimum 5%) 25.1 22.2 20.10 20.40 18.50 20.46 17.90 12.53 – – Capital Adequacy – Total (minimum 10%) 21.5 19.2 17.70 19.10 16.72 18.98 16.40 14.68 – – Basel III – Tier 1 (minimum 8.875%) – – – – – – – 11.31 11.93 13.33Basel III – Total (minimum 12.875%) – – – – – – – 13.86 15.31 16.14All currency liquidity coverage ratio (minimum 90%) – – – – – – 445.88 393.96 376.18 321.29Deposits as % of assets 88.3 88.0 90.5 89.9 76.7 71.1 70.3 72.1 72.9 80.9Profit per employee (Rs. ’000) 2,382 3,205 2,826 2,026 774 3,119 3,585 3,034 3,162 1,760Deposit per employee (Rs. ’000) 107,378 116,513 128,809 146,261 170,537 164,997 163,855 149,927 164,925 186,076

Other information (Nos.)Number of employees 2,915 3,050 3,275 3,129 2,943 3,358 3,636 4,384 4,470 4,512Number of branches 157 186 210 219 229 236 245 250 253 255Post offices/sub post offices 4,055 4,053 4,058 4,053 4,063 4,063 4,063 4,061 4,062 4,062Account holders (Mn.) 16.3 16.7 17.0 17.4 17.9 18.3 18.8 19.3 19.9 20.4

*Note:

Highlighted information is based on LKASs/SLFRSs.2017 figures restated according to the SLFRS 9.




2009Rs. Mn.

2010Rs. Mn.

2011Rs. Mn.

2012Rs. Mn.

2013Rs. Mn.

2014Rs. Mn.

2015Rs. Mn.

2016Rs. Mn.

2017Rs. Mn.

2018Rs. Mn.

Local currency depositsSavings 79,280 94,118 105,108 106,177 113,165 139,384 160,814 173,583 185,201 194,946 Time 230,147 266,007 311,569 345,794 379,969 408,309 427,588 475,220 542,647 633,632

309,427 360,125 416,677 451,971 493,134 547,692 588,402 648,803 727,849 828,579 Growth (%) 20.2 13.5 15.7 8.5 9.1 11.1 7.4 10.3 12.2 13.8

Foreign currency depositsSavings 1,255 1,517 1,750 1,963 2,101 2,215 2,568 2,764 2,990 3,376 Time 2,325 2,788 3,422 3,717 6,654 4,153 4,806 5,714 6,373 7,620

3,580 4,305 5,172 5,679 8,755 6,368 7,373 8,478 9,364 10,996 Growth (%) 67.3 20.3 20.1 9.8 54.2 -27.3 15.8 15.0 10.5 17.4

Total deposits 313,007 364,430 421,849 457,650 501,890 554,060 595,776 657,280 737,213 839,574

Growth (%) 20.6 13.5 15.8 8.5 9.7 10.4 7.5 10.3 12.2 13.9

*Note: Highlighted information is based on LKASs/SLFRSs.



Correspondent Banks

Banca Popolare

Piazza Garibaldi 16 23100, Sondrlom SO, Italy POSOIT22 [email protected] Tel: +390342528111/ +390342528204

Commerzbank German

Commerzbank AG, Kaiser Platz.60311, Frankfurt am Main, Germany COBADEFF www.fi.commerzbank.com Tel: +496913626650

Deutsche Bank

NY Trust Company Americas No. 60, Wall Street, New York, NY 10005, USA BKTRUS33 www.deutsche-bank.com Tel: 12122502500/+1 212 7970291

Deutsche Postbank

AG Friedrich-Ebert-Allee 53113 Bonn, Germany PBNKDEFF www.postbank.de Tel: +114-126, 49 22855005500

Kookmin Bank

9-1, Namdaemunno 2-Ga, Jung-Gu Seoul 100-092 CZNBKRSE www.kbstar.com Tel: +82-(2)-2073-2869

Unicredito Italiano

Piazza Gae Aulenti 3 Tower A20154 Mingerstrasse 20, 54 Milano, Italy UNICRITMM www.unicreditgroup.eu Tel: +390288621/+390288623 340

Woori Bank

S.Korea 1-203, Hoehyeon-dong, Jung-gu, Seoul HVBKKRSE www.wooribank.com Tel: +82-2-2006 5000

DBS Bank, Singapore DBS Bank Limited

2 Changi Business Park Crescent, Lobby A # 04-02, DBS Asia Hub, Singapore 486029 DBSSSGSG www.dbs.com Tel: +65-6-2222200/ +65-6-8789010

Post Finance Bank – Switzerland

Mingerstrasse 20, 3030 Berne, Switzerland POFICHBE Tel: +4184888710

Bank of Tokyo

Mitsubishi Japan 2-7-1, Marunouchi, Chiyoda-ku, Tokyo, 100-8388, Japan BOTKGPJT www.bk.mufg.jp Tel: +81-3-3240-1111

Deutsche Bank AG

Frankfurt – German Deutsche Bank AG, P.O. Box: 60202 Frankfurt am Main, Germany DEUTDEFF www.deutsche-bank.cem Tel: +49 6991000/+49 6991034225

Citi Bank NA

388, Greenwich Street, New York, NY 10013, USA CITIUS33 www.citibank.com Tel: +800-285-3000

Keb Hana Korea

55, Eulji-ro, Jung-gu, Seoul Republic of Korea KOEXKRSE www.hanabank.com Tel: +82-02-2002-1111



Exchange Companies

Al Ahalia Exchange

P.O. Box: 35245 Electra Street, Abu Dhabi UAE Tel: +971229666

Al Ansari Exchange

Al Ansari Exchange LLC Al Ansari Business Centre Level 8 UAE Tel: +97143772890/+97143772788

Al Fardan Exchange Qatar

Al Fardan Centre Grand Hamad Avenue P.O. Box: 339, Doha, Qatar Tel: +97444537755

Al Fardan Exchange UAE

P.O. Box: 498, Liwa Street, Abu Dhabi UAE

Al Fardan Exchange LLC Regional Management OfficeP.O. Box: 2095, Khalid Bin Walid Road, Burdubai. Dubai UAE Tel: +9712622322

Al Mulla Exchange

P.O. Box: 177 Safat 13002 Kuwait Tel: +96522478250/+22478242

Al Rajhi Bank

Olaya Street, Aqaria 3, Riyadh, 11411, Kingdom of Saudi Arabia www.alrajhibank.com.sa Tel: +96614603333

Al Rostamani

The Maze Tower Level 18 Sheikh Zayed Road, P.O. Box: 10072, Dubai UAE Tel: +97144543200/+97144543284

Al Dar for Exchange Works

Al Dar for Exchange works IBA Building C Ring Doha Qatar

Arabian Exchange

Mercure Grand Hotel (Sofitel Shopping Complex), Ground Floor, Mushaireb Street, P.O. Box: 3535, Doha Qatar Tel: +97444438300

Arab National Bank – KSA

Building King Faysal Street Al Mouraba Area 56921. Saudi Arabia Tel: +966114029000

LuLu Exchange

P.O. Box: 881 Postal Code 112, Ruwi High Street, Muscat, Sultanate of Oman Tel: +97126547019

Bahrain Exchange

Bahrain Exchange Company W.L.L M Floor Al Hajery Building P.O. Box: 29149, Safat 13152 Kuwait Tel: +96522089039/+96522280520

Bahrain Finance Company

(Ez remit is a product of BFC) P.O. Box: 243, 3rd Floor, Bab Al Bahrain Building Manama Bahrain Tel: +97339958195

Bank Al Bilad

Corporate Banking Division P.O. Box: 140 Riyadh 11411 Saudi Arabia Tel: +96692000/002

City Exchange Company

City Exchange Co. LLC, Al wathan Doha Qatar City-Exchange Main Branch and Head Office Tel: +974 4476 9777

City International Exchange

Abdullah Dashti Building Near KPTC Bus Depot., Al Mirqab Abdullah Mubarak Street P.O. Box: 21804 Safat 13079 Kuwait Tel: +9652448507/2441845

Delma Exchange

304, Al Montazah Tower, Zayed the First Street, Khalidiya, Abu Dhabi UAE Tel: +97124915757

Dollarco Exchange Co Limited

P.O. Box: 26270 Safat 13123 Kuwait Tel: +96522412767/22454713

Habib Qatar Exchange

Al Asmakh Building Grand Hamad Street, Doha Qatar Tel: +97444425151/44328853

Index Exchange/Former Habib Exchange UAE

Office 201, 2nd Floor, Sons of Jassim Darwish Building, Zayad 1st Street, Khalidiyah P.O. Box: 2370 Abu Dhabi UAE Tel:+97126272656

Instant Cash

Instant Cash FZE P.O. Box: 3014 Dubai UAE Tel: +971 4 2059000/Ext: 260

Kapruka Pty Limited

2251, Princes Highway, Mulgrave, Australia Tel: +61395445060/95432123

Majan Exchange

P.O. Box: 583 P.C 117 Ruwi Sultanate of Oman Tel: +96824794017/18

National Exchange Company

Via Ferruccio 30,00185 Rome Italia Tel: +390644341221 (Direct)

Oman & UAE Exchange Centre

P.O. Box: 1116 Al Hamriyah P.C.131 Muscat Sultanate of Oman Tel: +96824796533

Exchange Companies



Samba Financial Group

P.O. Box: 833 Riyadh 11421 Kingdom of Saudi Arabia Tel: +966112117473/+966112117424

Small World

Parliament House,12 Salamanca Place,London,SE 1 7HB,United KingdomTel: +44 20 7407 1800

Transfast

44 Wall Street, 4th Floor New York NY10005 Trans-Fast GCC 903 Al Thurayya 2 Dubai Media City Dubai UAE Tel: +971 4 4587251

UAE Exchange

UAE Exchange Centre LLC, P.O. Box: 170, 5th Floor, Tamouh Tower (Building No. 12), Marina Square, Al Reem Island, Abu Dhabi, UAE Tel: +97124945406

Unistream

20, Verhnyaya Maskovka Street, Building 2 127083 Moscow Russia Tel: +74955179260

Valutrans

Valutrans SPA Via M.Gioia, 168 20125 Milan Italy Tel: +39 0291431306

Wall Street

Wall Street Exchange Centre LLC 2201 Twin Towers Baniyas Road, Dubai UAE Tel: +97142284889/ +971508764289/ +971504801659

Xpress Money

X Press Money Services Limited. 6th Floor Al Ameri Building TECOM, P.O. Box: 643996 Sheikh Zayad Road, Dubai UAE Tel: +97148186000/ +97148186000/ Ext: 6132/+97148186227

Doha Bank – Qatar

Doha Bank Head Office Tower, Corniche Street West Bay P.O. Box: 3818, Doha, Qatar Tel: +97444257683



Eurogiro Members

La Banque Postale France

115 Rue de Sevres CP.P210 75275 Paris Cedex 06 France Tel: +33157754947



A

Accounting policies The specific principles, bases, conventions, rules and practices adopted by an entity in preparing and presenting Financial Statements.

Accrual basis Recognising the effects of transactions and other events when they occur without waiting for receipt or payment of cash or its equivalent.

Actuarial gain Gain or loss arising from the difference between estimates and actual experience in an entity’s pension plan.

Amortisation The systematic allocation of the depreciable amount of an intangible asset over its useful life.

Amortised cost Amount at which the financial asset or financial liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity amount and minus any reduction for impairment or uncollectability.

Available-for-sale financial assets Available-for-sale financial assets are those non-derivative financial assets that are designated as available-for sale or are not classified as loans and receivables, held-to-maturity investments or financial assets at fair value through profit or loss.

B

Basel III Basel III is the global voluntary regulatory framework issued by the Basel Committee on Banking Supervision (BCBS) on Bank Capital Adequacy and Liquidity.

Basis point (BP) One hundredth of a percentage point (0.01 per cent); 100 basis points is 1 percentage point. Used in quoting movements in interest rates or yields on securities. Business model assessment Business model assessment is carried out as the first step of the financial assets classification process. Business model refers to how an entity manages its financial assets in order to generate cash flows. It is determined at a level that reflects how groups of financial assets are managed rather than at an instrument level. SLFRS 9 identifies three types of business models: “hold to collect”, “hold to collect and sell” and “other”. In order to determine the business model, it is necessary to understand the objectives of each business model. An entity would need to consider all relevant information including, for example, how business performance is reported to the entity’s Key Management personnel and how Managers of the business are compensated.

C

Capital adequacy ratio The relationship between capital and risk-weighted assets as defined in the framework developed by the Bank for International Settlements (BIS) and as modified by the Central Bank of Sri Lanka to suit local requirements.

Capital conservation buffer (CCB) A capital buffer prescribed by regulators under Basel III and designed to ensure banks build up capital buffers outside periods of stress that can be drawn down as losses are incurred. Should a bank’s capital levels fall within the capital conservation buffer range, capital distributions will be constrained by the regulators

Capital expenditure Total of additions to property, plant and equipment.

Capital gain (capital profit) The gain on the disposal of an asset calculated by deducting the cost of the asset from the proceeds received on its disposal.

Capital reserves Capital reserves consist of revaluation reserves arising from revaluation of properties owned by the Bank and Reserve Fund set aside for specific purposes defined under the Banking Act No. 30 of 1988 and shall not be reduced or impaired without the approval of the Monetary Board.

Carrying value Value of an asset or a liability as per books of the Organisation before adjusting for fair value.

Cash Generating Unit (CGU) The smallest group of assets that independently generates cash flow and the cash flow is largely independent of the cash flows generated by other assets.

Cash equivalents Short-term highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

Collective agreement A tripartite agreement entered into among the NSB, Ministry of Finance and Trade Unions.

Collectively assessed loan impairment provisions Also known as portfolio impairment provisions. Impairment assessment on a collective basis for homogeneous groups of loans that are not considered individually significant and to cover losses that has been incurred but has not yet been identified at the reporting date. Loans (housing, personal, auto loans etc.) are assessed on a portfolio basis.

Commitments Credit facilities approved but not yet utilised by the clients as at the reporting date.

Concentration risk Risk arisen from uneven distribution of counterparty and portfolio exposures to business sector or geographic region.

Contingencies A condition or situation existing at reporting date where the outcome will be confirmed only by occurrence or non-occurrence of one or more future events.

Corporate governance The process by which corporate entities are governed. It is concerned with the way in which power is exercised over the Management and the direction of entity, the supervision of executive actions and accountability to owners and others.

Cost/income ratio Operating expenses excluding impairment provision and provisioning for fall in value in dealing securities as a percentage of net income.





Cost method A method of accounting whereby the investment is recorded at cost. The Income Statement reflects income from the investment only to the extent that the investor receives distributions from accumulated net profits of the investee.

Credit ratings An evaluation of a corporate’s ability to repay its obligation or the likelihood of not defaulting, carried out by an independent rating agency.

Credit risk Credit risk or default risk is most simply defined as the potential that a borrower or counterparty will fail to meet its obligations in accordance with agreed terms and conditions.

Currency SWAPs The simultaneous purchase of an amount of a currency for spot settlement and the sale of the same amount of the same currency for forward settlement.

Customer deposits Money deposited by account holders. Such funds are recorded as liabilities.

D

Dealing securities Marketable securities that are acquired and held with the intention of reselling them in the short term.

Debenture A medium-term debt instrument issued by a corporate entity.

Deferred tax Sum set aside for tax in the Financial Statements that will become payable in a financial year other than the current financial year.

Depreciation The systematic allocation of the depreciable amount of an asset over its useful life.

Derecognition Removal of previously recognised financial assets or financial liability from an entity’s Statement of Financial Position.

Delinquency A debt or other financial obligation is considered to be in a state of delinquency when payments are overdue. Loans and advances are considered to be delinquent when consecutive payments are missed. Also known as “Arrears”.

Derivative Financial contract of which the value is derived from the value of underlined assets.

Documentary letters of credit (LCs) Written undertakings by a bank on behalf of its customers, authorising a third party to draw on the Bank up to a stipulated amount under specific terms and conditions. Such undertakings are established for the purpose of facilitating international trade.

Domestic Systemically Important Banks (D-SIBs) Systemically Important Banks (SIBs) are perceived as banks that are “Too Big To Fail”. D-SIBs are critical for the uninterrupted availability of essential banking services to the country’s real economy even during crisis. The CBSL has designated LCBs with total assets equal to or greater than Rs. 500 Bn. as D-SIBs.

E

Earnings per ordinary share (EPS) Profit attributable to ordinary shareholders divided by the number of ordinary shares in issue.

Economic value added (EVA) A measure of productivity which takes into consideration cost of total invested equity.

Effective income tax rate Provision for taxation divided by the profit before taxation

Effective interest rate (EIR) Rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instruments or when appropriate a shorter period to the net carrying amount of the financial asset or financial liability.

Equity instrument An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all its liabilities.

Equity method The equity method is a method of accounting whereby the investment is initially recognised at cost and adjusted thereafter for the post-acquisition changes in the investor’s share of net assets of the investee. The profit or loss of the investor includes the investor’s share of the profit or loss of the investee.

Equity risk Risk of depreciating equity investments due to stock market dynamics.

Exposure at default (EAD) EAD is an estimate of the exposure at a future default date, taking into account expected changes in the exposure after the reporting date, including repayments of principal and interest and expected draw downs of committed facilities.

Expected credit losses (ECLs) ECL approach is the loan loss impairment method under SLFRS 9 on “Financial Instruments”. ECLs are the discounted product of the Probability of Default (PD), Exposure at Default (EAD) and Loss Given Default (LGD). ECL measurements are unbiased and are determined by evaluating a range of possible outcomes.

Exchange gain/loss Profit earned on foreign currency transactions arising from the difference in foreign exchange rates between the transaction/last reporting date and the settlement/ reporting date. Also arises from trading in foreign currencies.

F

Fair value The amount for which an asset could be exchanged or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.

Financial asset Financial asset is any asset that is cash, an equity instrument of another entity or a contractual right to receive cash or another financial asset from another entity.




Financial assets measured at amortised cost A financial asset is measured at amortised cost if the asset is held within a business model whose objective is to hold assets to collect contractual cash flows and the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

Financial assets measured at fair value through other comprehensive income (FVOCI) FVOCI include debt and equity instruments measured at fair value through other comprehensive income. A debt instrument is measured at FVOCI, if it is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets and the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. Equity investments may be irrevocably classified as FVOCI when they meet the definition of Equity under LKAS 32 Financial Instruments: Presentation and are not held for trading.

Financial assets measured at fair value through profit or loss (FVPL) All financial assets other than those classified at Amortised Cost or FVOCI are classified as measured at FVPL. These are held for trading or managed, and their performance is evaluated on a fair value basis as they are neither held to collect contractual cash flows nor held both to collect contractual cash flows and to sell financial assets.

Financial instrument Financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.

Financial liability Financial Liability is a contractual obligation to deliver cash or another financial asset to another entity.

Foreclosed properties Properties acquired in full or partial; satisfaction of debts.

Foreign currency risk Risk exists in transaction other than the local currency. Adverse movements in foreign exchange rates may decline the value of assets/liabilities held in terms of foreign currency.

Foreign exchange contract Agreement between two parties to exchange one currency for another at a future date at a rate agreed upon today.

G

General provisions These are provisions made on loans and advances for anticipated losses on aggregate exposures where credit losses cannot yet be determined on an individual facility basis.

Group A group is a parent and all its subsidiaries.

Guarantees Three party agreement involving a promise by one party (the guarantor) to fulfil the obligations of a person owing a debt if that person fails to perform.

Global Reporting Initiatives (GRI) The GRI is an international independent standards organisation that helps businesses, governments and other organisations to understand and communicate their impacts on issues such as climate change, human rights and corruption. GRI promotes sustainability reporting as a way for organisations to become more sustainable and contribute to sustainable development.

H

Hedging A strategy under which transactions are effected with the aim of providing cover against the risk of unfavourable price movements (interest rates and prices of commodities etc.).

Held-to-maturity investments (HTM) Non-derivative financial assets with fixed or determinable payments and fixed maturity that an entity has the positive intention and ability to hold to maturity.

Held-for-trading (HFT) Debt and equity investments that are purchased with the intent of selling them within a short period of time (usually less than one year).

High quality liquid assets (HQLA) Assets that are unencumbered, liquid in markets during a time of stress and, ideally, be central bank eligible. These include, for example, cash and claims on central governments and central banks.

I

ICCAP Process by which the Bank ensures additional capital is provided for banking risks other than those covered in Pillar.

Impairment This occurs when recoverable amount of an asset is less than its carrying amount.

Impaired assets portfolio Impaired assets portfolio is the total of the individually significant impaired loans and individually insignificant loans which are overdue above 180 days.

Impairment allowances Impairment allowances are provisions held on the Statement of Financial Position as a result of the raising of a charge against profit for the incurred loss. An impairment allowance may either be identified or unidentified as individual (specific) or collective (portfolio) impairment allowance.

Impairment charge/(reversal) the difference between the carrying value of an asset and the sum of discounted future cash flows generating from the same asset.

Impaired loans Loans where the Group does not expect to collect all the contractual cash flows or expects to collect them later than they are contractually due.

Individually assessed impairment Exposure to loss is assessed on all individually significant accounts and all other accounts that do not qualify for collective assessment.




Intangible asset An asset that is not physical in nature. Corporate intellectual property (items such as patents, trademarks, copyrights, business methodologies), goodwill software and brand recognition are all common intangible assets in today’s marketplace.

Interest in suspense Interest suspended on non-performing loans and advances.

Interest rate risk The risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates.

Interest spread Represents the difference between the average interest rate earned and the average interest rate paid on interest earning assets and interest bearing liabilities, respectively. variables such as interest rates, exchange rates, credit spreads and other asset prices.

Investment properties Investment property is property (land or a building – or part of a building – or both) held (by the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or both, rather than for use or sale.

Investment securities Securities acquired and held for yield or capital growth purposes and are usually held-for-maturity.

Interest rate SWAP An agreement between two parties (known as counter parties) where one stream of future interest payments is exchanged for another stream of future interest payments based on a specified principal amount.

K

Key Managerial Personnel (KMP) Key managerial personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Bank, directly or indirectly.

L

Leverage ratio A measure that is the ratio of tier 1 capital to total exposures. This supplementary measure to the risk-based capital requirements is intended to constrain the build-up of excess leverage in the banking sector.

Liquid assets Assets that are held in cash or in a form that can be converted to cash readily, such as deposits with other banks, bills of exchange and Treasury Bills.

Liquid assets ratio Assets that are held in cash or in a form that can be converted to cash readily (as prescribed by the Central Bank of Sri Lanka) divided by the total liabilities including contingent liabilities.

Lifetime expected credit losses (LTECL) Lifetime ECL are the expected credit losses that result from all possible default events over the expected life of the financial instrument. According to SLFRS 9 on “Financial instruments”, the ECL allowance should be based on LTECL unless there has been no significant increase in credit risk since origination.

Liquidity coverage ratio – LCR Refers to highly liquid assets held by Banks to meet short-term obligations. The ratio represents a generic stress scenario that aims to anticipate market-wide shocks.

Liquidity risk The risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities.

Loans and advances Conventional loan assets that are unquoted (originated or acquired).

Loss given default (LGD) LGD is the percentage of an exposure that a lender expects to loose in the event of obligor default.

Loan-to-value ratio (LTV) The LTV ratio is a mathematical expression which expresses the amount of a first mortgage lien as a percentage of the total appraised value of real property. The LTV ratio is used in determining the appropriate level of risk for the loan and therefore the correct price of the loan to the borrower.

M

Market risk This refers to the possibility of loss arising from changes in the value of a financial instrument as a result of changes in market variables such as interest rates, exchange rates, credit spreads and other asset prices.

Materiality The relative significance of a transaction or an event, the omission or misstatement of which could influence the decisions of users of Financial Statements.

N

Net interest income (NII) The difference between the amount a bank earns on assets such as loans and securities and the amount it pays on liabilities such as deposits, refinance funds and inter-bank borrowings.

Net interest margin (NIM) The margin is expressed as net interest income divided by average interest earning assets.

Non-performing loans (NPL) The loans which are in default for more than three months.

NOSTRO accounts A bank account held in foreign country by a domestic bank, denominated in the currency of that country. NOSTRO accounts are used to facilitate the settlement of foreign exchange trade transactions.

NPL ratio Total non-performing loans and advances (net of interest in suspense) divided by total loans and advances portfolio (net of interest in suspense).

Net stable funding ratio (NSFR) Measures the amount of longer-term, stable sources of funding employed by a bank relative to the liquidity profiles of the assets funded and the potential for contingent calls on funding liquidity arising from off-balance sheet commitments and obligations.




O

Off-balance sheet transactions Transactions that are not recognised as assets or liabilities in the Statement of Financial Position, but which give rise to contingencies and commitments.

Operational risk This refers to the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events including legal risk.

Open credit exposure ratio Total net non-performing loans and advances expressed as a percentage of regulatory capital base.

P

Parent A parent is an entity that has one or more subsidiaries.

Portfolio A pool of investments including investment in Government Securities, loans and advances, equities, etc.

Probability of default (PD) PD is an internal estimate for each borrower grade of the likelihood that an obligor will default on an obligation.

Provision cover Total provisions for loan losses expressed as a percentage of net non-performing loans and advances before discounting for provisions on non-performing loans and advances.

Projected Unit Credit Method (PUC) An actuarial valuation method that sees each period of service as giving rise to an additional unit of benefit entitlement and measures each unit separately to build up the final obligation. Inclusion of a degree of caution in the exercise of judgement needed in making the estimates required under conditions of uncertainty, such that assets or income are not overstated, and liabilities or expenses are not understated.

R

Return on average assets (ROA) Profit after tax expressed as a percentage of the average assets.

Return on average equity (ROE) Net profit attributable to owners expressed as a percentage of average ordinary shareholders’ equity.

Related parties Parties where one party has the ability to control the other party or exercise significant influence over the other party in making financial and operating decisions, directly or indirectly.

Related party transaction (RPT) RPT is a transfer of resources, services or obligations between a reporting entity and a related party, regardless whether a price is charged.

REPOs Repurchase agreements. Securities sold to lenders with the commitment to buy back on a later date at a fixed price plus interest.

Reverse repurchase agreement Transaction involving the purchase of securities by a bank or a dealer and resale back to the seller at a future date at a specified price.

Revenue reserve Reserves set aside for future distribution and investment.

Risk-weighted assets The sum of assets as per the Statement of Financial Position and the credit equivalent of assets that are not on the Statement of Financial Position multiplied by the relevant risk-weighting factors.

Rupee loan Rupee securities issued by the Central Bank of Sri Lanka on behalf of the Government of Sri Lanka.

S

Shareholders’ funds A capital reserve created as per the provisions of the Banking Act No. 30 of 1988.

Significant increase in credit risk (SICR) According to SLFRS 9, an entity should assess whether the risk of default on a financial instrument has increased significantly since initial recognition. The assessment should consider reasonable and supportable information that is relevant and available without undue cost or effort. There is a rebuttable presumption in the Standard that the credit risk on a financial asset has increased significantly since initial recognition when contractual payments are more than 30 days past due.

SPPI Test Solely Payments of Principal and Interest Test (SPPI) is carried out as the second step of the classification process. “Principal” is defined as the fair value of the financial asset at initial recognition and may change due to repayments of principal or amortisation of the premium or discount. “Interest” is defined as consideration for the time value of money and for the credit risk associated with the principal amount outstanding. If a financial asset passes the SPPI test, then it will either be classified at amortised cost if the “hold to collect” business model test is met, or at Fair Value Through Other Comprehensive Income (FVOCI) if the “hold to collect and sell” business model test is met. If a financial asset fails, the SPPI test it must be classified at Fair Value Through Profit or Loss (FVPL) in its entirety

Statutory reserve fund A capital reserve created as per the provisions of the Banking Act No. 30 of 1988.

Subordinated liabilities Liabilities that rank after the claims of other creditors of the issuer in the event of insolvency or liquidation.

Stress test Integrated test that shows to varying degrees whether the Bank can withstand unforeseen scenarios of varying severity.

Subsidiary An entity that is controlled by another entity.




Substance over form The consideration that the accounting treatment and the presentation in Financial Statements of transactions and events should be governed by their substance and financial reality and not merely by legal form.

Swaps (currency) The simultaneous purchase of an amount of a currency for spot settlement and the sale of the same amount of the same currency for forward settlement. Alternatively, a simultaneous spot sale and forward purchase of a currency.

T

Tier 1 capital A component of regulatory capital, comprising common equity Tier 1 and additional Tier 1 capital. Core measure of financial strength of the Bank representing permanent shareholders’ equity and reserves created or increased by appropriations of retained earnings or other surpluses.

Tier 2 capital Tier 2 capital represents revaluation gains, general provisions and other capital instruments which combine certain characteristics of equity and debt such as subordinated term debts.

Total capital Total Capital is summation of the Tier 1 and the Tier 2 capital.

Treasury Bill A short-term debt instrument issued on auction basis by the Central Bank of Sri Lanka on behalf of the Government of Sri Lanka.

Treasury Bond A long-term debt instrument issued on auction basis by the Central Bank of Sri Lanka on behalf of the Government of Sri Lanka.

Twelve-month expected credit losses (12-Month ECL) The portion of lifetime expected credit losses that represent the expected credit losses that result from default events on a financial instrument that are possible within the 12-months after the reporting date.

U

Unit trust An undertaking formed to invest in securities under the terms of a trust deed.

Useful life Useful life is the period over which an asset is expected to be available for use by an entity or the number of production or similar units expected to be obtained from the asset by an entity.

V

Value added Wealth created by providing banking and other services less the cost of providing such services. The value added is allocated among the employees, the providers of capital, to Government by way of taxes and retained for expansion and growth.

Value at risk (“VaR”) A measure of the loss that could occur on risk positions as a result of adverse movements in market risk factors (e.g. rates, prices, volatilities) over a specified time horizon and to a given level of confidence.

Y

Yield to maturity (YTM) Discount rate at which the present value of future cash flows would equal the security’ s current price.

Preamble Highlights Messages€¦ · over Financial Reporting 238 Independent Assurance Report ......

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