Notes to the Financial Statements

This note presents information about the Bank’s exposure to financial risks and the Bank’s management of capital.

8.1 Introduction and Overview

The Bank has exposure to the following key risks from financial instruments:

• credit risk
• liquidity risk
• market risk
• operational risk

The following chart provides a link between the Bank's business units and the principal risks that they are exposed to. The significance of risk is assessed within the context of the Bank as a whole and is measured based on allocation of the regulatory capital within the Bank.

 

 

This note presents information about the Bank’s exposure to each of the above risks, the objectives, policies and processes for measuring and managing such risk.

Risk Management Framework

The Board of Directors has the overall responsibility for the establishment and oversight of the Bank’s risk management framework.

The Board Integrated Risk Management Committee (BIRMC) provides the Board, the assurance that risk management strategies, policies and processes are in place to manage events/outcomes that have the potential to impact significantly on earnings performance, reputation and capital.

Bank’s risk management policies are established to identify and analyse the risks faced by the Bank, to set appropriate risk limits and controls, to monitor risk and to ensure to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Bank activities. The Bank through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations.

Internal audit undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the Bank Audit Committee.

	Page
A. Credit risk
8.2.1 Settlement risk	223
8.2.2 Management of credit risk	223
8.2.3 Credit quality analysis	224
8.2.4 Collateral held and other credit enhancements	226
8.2.5 Amounts arising from ECL	227
8.2.6 Concentrations of credit risk	230
8.2.7 Offsetting financial assets and financial liabilities	231
B. Liquidity risk
8.3.1 Management of liquidity risk	231
8.3.2 Exposure to liquidity risk	231
8.3.3 Maturity analysis for financial liabilities and financial assets	232
8.3.4 Liquidity reserves	236
8.3.5 Financial assets available to support future funding	237
C. Market risk
8.4.1 Management of market risk	238
8.4.2 Exposure to market risk – Trading portfolios	239
8.4.3 Exposure to market risk – Non-trading portfolios	240
8.4.4 Interest rate risk	241
8.4.5 Foreign exchange risk	244
8.4.6 Market risk exposure for regulatory capital assessment	244
D. Operational risk	244
E. Capital Management	245

8.2 Credit Risk

Credit risk is the risk of financial loss to the Bank if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from Bank’s loans and advances to customers and other banks and investment in debt securities.

8.2.1 Settlement Risk

The Bank's activities may give rise to risk at the time of settlement of transactions and trades. “Settlement risk” is the risk of loss due to the failure of an entity to honour its obligations to deliver cash, securities or other assets as contractually agreed.

8.2.2 Management of Credit Risk

The Board of Directors, BIRMC, and the Credit Committee are responsible for the oversight of credit risk.

Management of credit risk includes the following;

1. Formulating credit policies in consultation with business units covering collateral requirements, credit assessment, risk grading and reporting, documentary and legal procedures and compliance with regulatory and statutory requirements.
2. Authority for establishing the authorisation structure for the approval and renewal of credit facilities is vested with the Board of Directors. Authorisation limits are allocated to business unit heads.
3. Reviewing and assessing credit risk: Bank credit assesses all credit exposures in excess of designated limits, before facilities are committed to customers by the business unit concerned. Renewals and reviews of facilities are subject to the same review process.
4. Limiting concentrations of exposure to counterparties, industries (for loans and advances, financial guarantees and similar exposures), credit ratings and countries.
5. Developing and maintaining the Bank’s processes for measuring ECL: This includes processes for:

– initial approval, regular validation and back-testing of the models used;

– determining and monitoring significant increase in credit risk; and

– incorporation of forward-looking information.

6. Reviewing compliance of business units with agreed exposure limits, including those for selected industries, country risk and product types. Regular reports on the credit quality of local portfolios are provided to Bank Credit, which may require appropriate corrective action to be taken. These include reports containing estimates of Expected Credit Loss (ECL) allowances.
7. Providing advice, guidance and specialist skills to business units to promote best practice throughout the Bank in the management of credit risk.

Each business unit is required to follow Bank credit policies and procedures and each business unit is responsible for the quality and performance of its credit portfolio and for monitoring and controlling all credit risks in its portfolios, including those subject to central approval.

Regular audits of business units and Bank credit processes are undertaken by internal audit.

Broader level of credit risk management approaches as described in 1 to 7 above are revised periodically and strengthened as required in line with the regulatory requirements and economic environment. During the year, all relevant policies, guidelines and processes have been reviews and updated accordingly.

8.2.3 Credit Quality Analysis

The following table sets out information about the overdue status of loans and advances to customers in Stages 1, 2, and 3.

Loans and advances to customers at amortised cost – gross carrying amount

As at 31 December	2022
In LKR ’000	Stage 1	Stage 2	Stage 3	Total
Current	227,418,588	7,450,885	2,128,905	236,998,378
Overdue < 30 days	58,876,794	14,042,076	1,010,958	73,929,828
Overdue > 30 days	–	49,313,022	42,734,602	92,047,624
Total	286,295,382	70,805,983	45,874,465	402,975,830

As at 31 December	2021
In LKR ’000	Stage1	Stage2	Stage3	Total
Current	231,739,069	2,111,642	2,342,596	236,193,307
Overdue < 30 days	77,364,183	3,144,710	3,291,210	83,800,103
Overdue > 30 days	–	40,356,388	24,608,792	64,965,180
Total	309,103,252	45,612,740	30,242,598	384,958,590

8.2.3.1 The following table shows an analysis of counterparty credit exposures arising from derivative transactions. Derivative transactions of the Bank are generally fully collateralised by cash. For further discussion of collateral and other credit enhancements:

	Derivative type
As at 31 December 2022 In LKR ’000	Forward		SWAP		Spot		Cross currency SWAP		Total
	Notional amount	Fair value	Notional amount	Fair value	Notional amount	Fair value	Notional amount	Fair value	Notional amount	Fair value
Derivative financial assets (Note 1)	7,256,643	185,831	59,177,339	20,287,713	29,072	–	–	–	66,463,054	20,473,544
Derivative financial liabilities (Note 2)	7,111,189	(62,011)	38,912,009	(22,606)	29,123	(53)	–	–	46,052,321	(84,670)
Note 1
Derivative financial assets by counterparty type
With banks	1,014,500	4,098	59,177,339	20,287,713	29,072	–	–	–	60,220,911	20,291,811
With other customers	6,242,143	181,733	–	–	–	–	–	–	6,242,143	181,733
Total	7,256,643	185,831	59,177,339	20,287,713	29,072	–	–	–	66,463,054	20,473,544
Note 2
Derivative financial liabilities by counterparty type
With banks	998,553	(7,545)	38,912,009	(22,606)	29,123	(53)	–	–	39,939,685	(30,204)
With other customers	6,112,636	(54,466)	–	–	–	–	–	–	6,112,636	(54,466)
Total	7,111,189	(62,011)	38,912,009	(22,606)	29,123	(53)	–	–	46,052,321	(84,670)

	Derivative type
As at 31 December 2021 In LKR ’000	Forward		SWAP		Spot		Cross currency SWAP		Total
	Notional amount	Fair value	Notional amount	Fair value	Notional amount	Fair value	Notional amount	Fair value	Notional amount	Fair value
Derivative financial assets (Note 1)	–	–	45,417,700	206,441	40,976	6	1,371,696	73,788	46,830,372	280,235
Derivative financial liabilities (Note 2)	–	–	45,690,089	(814,193)	40,996	(26)	–	–	45,731,085	(814,219)
Note 1
Derivative financial assets by counterparty type
With banks	–	–	45,417,700	206,441	40,976	6	1,371,696	73,788	46,830,372	280,235
With other customers	–	–	–	–	–	–	–	–	–	–
Total	–	–	45,417,700	206,441	40,976	6	1,371,696	73,788	46,830,372	280,235
Note 2
Derivative financial liabilities by counterparty type
With banks	–	–	45,690,089	(814,193)	40,996	(26)	–	–	45,731,085	(814,219)
With other customers	–	–	–	–	–	–	–	–	–	–
Total	–	–	45,690,089	(814,193)	40,996	(26)	–	–	45,731,085	(814,219)

8.2.4 Collateral Held and Other Credit Enhancements

The Bank holds collateral and other credit enhancements against certain of its credit exposures. The following table sets out the principal types of collateral held against different types of financial assets.

Type of credit exposure:

As at 31 December	2022		2021
	Gross loan balance LKR ’000	Security value LKR ’000	Gross loan balance LKR ’000	Security value LKR ’000
Stage 1
Cash collateral	18,971,263	40,521,690	13,700,373	32,428,966
Property, plant and machinery	65,289,880	351,246,265	81,148,479	283,971,161
Treasury guarantee	9,851,579	12,920,891	9,761,892	14,054,807
Others	145,601,278	22,719,434	156,675,101	25,198,860
Unsecured	38,874,768	–	32,702,116	–
Total	278,588,768	427,408,280	293,987,961	355,653,794
Stage 2
Cash collateral	1,674,779	3,004,663	2,008,907	3,077,989
Property, plant and machinery	19,821,329	82,770,318	13,269,267	46,147,047
Treasury guarantee	–	–	–	–
Others	37,821,508	6,130,047	19,935,954	3,934,887
Unsecured	4,513,543	–	3,305,529	–
Total	63,831,159	91,905,028	38,519,657	53,159,923
Stage 3
Cash collateral	480,046	1,102,725	348,981	1,076,080
Property, plant and machinery	13,126,419	39,117,082	11,458,713	29,420,878
Treasury guarantee	1,084	1,860	1,169	2,298
Others	22,089,904	71,847	13,570,519	37,616
Unsecured	7,620,547	–	3,309,990	–
Total	43,318,000	40,293,514	28,689,372	30,536,872

The above analysis does not include balances relating to lease rentals receivables, as the Bank holds the absolute ownership of lease assets.

8.2.4.1 Derivatives, Reverse Sale-and-Repurchase Agreements and Securities Borrowing

The Bank mitigates the credit risk of derivatives, reverse sale-and-repurchase agreements and securities lending by entering into master netting agreements and holding collateral in the form of cash and marketable securities.

DFCC requires counterparties to sign an ISDA master agreement (International Swaps and Derivative Association) in order to enter into swaps and other derivative transactions. The agreement outlines the terms and conditions to be applied to the derivative transactions agreed by DFCC and other parties. Any dispute of the transaction will be handled according to the agreement terms.

The Bank’s sale-and-repurchase, and reverse sale-and-repurchase, transactions and securities borrowing and lending are covered by master agreements. A master agreement has to be signed by both parties to enter such transactions. All terms and conditions are stipulated in the master agreement.

8.2.4.2 Loan to Value Ratio of Residential Mortgage Lending

The following tables stratify credit exposures by ranges of loan-to-value (LTV) ratio. LTV is calculated as the ratio of the gross amount of the loan to the value of the collateral. The valuation of the collateral excludes any adjustments for obtaining and selling the collateral. The value of the collateral is based on valuations made by independent professional valuers.

	BANK/GROUP
As at 31 December	2022 LKR ’000	2021 LKR ’000
LTV ratio
Stage 1
Less than 50%	3,803,529	4,063,363
51%-70%	3,301,538	3,590,858
71%-90%	893,429	2,303,450
More than 90%	2,470,955	3,079,027
Total	10,469,451	13,036,698
Stage 2
Less than 50%	1,018,064	798,948
51%-70%	1,122,642	899,574
71%-90%	573,291	472,597
More than 90%	817,611	368,958
Total	3,531,608	2,540,077
Stage 3
Less than 50%	688,928	379,664
51%-70%	414,826	462,999
71%-90%	410,020	179,485
More than 90%	385,528	246,450
Total	1,899,302	1,268,598
Carrying amount – amortised cost	15,900,361	16,845,373

8.2.4.3 Assets Obtained by Taking Possession of Collateral

The Bank’s policy is to pursue timely realisation of the collateral in an orderly manner. The Bank does not generally use the non-cash collateral for its own operations.

8.2.5 Amounts Arising from ECL

8.2.5.1 Loss Allowance

The following tables show reconciliations from the opening to the closing balance of the loss allowance by class of financial instrument. The basis for determining transfers due to changes in credit risk is set out in our accounting policy; see Note 17.

Financial assets at amortised cost – Loans to and receivables from other customers – ECL

	2022				2021
	Stage 1 LKR ’000	Stage 2 LKR ’000	Stage 3 LKR ’000	Total LKR ’000	Stage 1 LKR ’000	Stage 2 LKR ’000	Stage 3 LKR ’000	Total LKR ’000
Balance as at 1 January	2,202,668	1,989,584	14,865,798	19,058,050	1,305,740	1,065,570	12,951,966	15,323,276
Transfer to Stage 1	839,493	(665,794)	(173,699)	–	458,386	(310,328)	(148,058)	–
Transfer to Stage 2	(298,877)	418,169	(119,292)	–	(154,222)	406,248	(252,026)	–
Transfer to Stage 3	(73,938)	(259,735)	333,673	–	(53,608)	(142,167)	195,775	–
Net remeasurement of loss allowance	754,086	2,396,757	5,602,375	8,753,218	(386,947)	640,505	1,120,996	1,374,554
New financial assets originated or purchased	1,071,855	1,798,309	2,304,774	5,174,938	1,033,386	329,956	1,108,204	2,471,546
Write-off*			(46,612)	(46,612)	(67)	(200)	(213,315)	(213,582)
Foreign exchange and other movement			964,206	964,206	–	–	102,256	102,256
Balance as at 31 December	4,495,287	5,677,290	23,731,223	33,903,800	2,202,668	1,989,584	14,865,798	19,058,050

*The contractual amount outstanding on financial assets that were written off during the year ended 31 December 2021 and that are still subject to enforcement actively is LKR 186 Mn (year 2022 – Nil).

Financial assets at amortised cost-debt and other instruments – ECL

	2022		2021
	Stage 1 LKR ’000	Total LKR ’000	Stage 1 LKR ’000	Total LKR ’000
Balance at beginning	563,474	563,474	271,515	271,515
Transferred from FVOCI during the year	215,095	215,095	–	–
Transferred to other assets	(607,764)	(607,764)	–	–
Net remeasurement of loss allowance	1,785,267	1,785,267	291,959	291,959
Balance as at 31 December	1,956,072	1,956,072	563,474	563,474

Loan Commitments and financial guarantee contracts

	2022			2021
	Stage 1 LKR ’000	Stage 2 LKR ’000	Total LKR ’000	Stage 1 LKR ’000	Stage 2 LKR ’000	Total LKR ’000
Balance at beginning	576,290	31,962	608,252	343,598	13,292	356,890
Net remeasurement of loss allowance	(56,865)	65,338	8,473	232,692	18,670	251,362
Balance as at 31 December	519,425	97,300	616,725	576,290	31,962	608,252

8.2.5.2 Sensitivity of ECL to Future Economic Conditions

The ECL are sensitive to judgements and assumptions made regarding formulation of forward-looking scenarios and how such scenarios are incorporated into the calculations. Management performs a sensitivity analysis on the ECL recognised on material classes of its assets.

Sensitivity of factors used to determine impairment provisions

The uncertainty of the time to recover from the current economic turbulence introduces significant estimation uncertainty in relation to the measurement of the Bank’s allowance for expected credit losses. The consequences of the tax hike, inflation, high interest rate and high unemployment could result in significant adjustments to the allowance in future financial years.

Given current economic uncertainties and the judgement applied to factors used in determining the expected default of borrowers in future periods, expected credit losses reported by the Bank should be considered as a best estimate within a range of possible estimates.

The table below shows the sensitivity of the impairment provision of the Bank as at 31 December 2022 to a reasonably possible change in PDs, LGDs, and forward-looking information.

	Sensitivity effect on Statement of Financial Position Increase/(Decrease) in impairment provision
	Stage 1 LKR ’000	Stage 2 LKR ’000	Stage 3 LKR ’000	Total LKR ’000	Sensitivity effect on Income Statement LKR ’000
PD 1% increase across all age buckets	1,079,424	489,109	–	1,568,533	1,568,533
PD 1% decrease across all age buckets*	(1,073,020)	(489,107)	–	(1,562,127)	(1,562,127)
LGD 5% increase	330,835	682,733	628,797	1,642,365	1,642,365
LGD 5% decrease	(330,835)	(682,733)	(628,797)	(1,642,365)	(1,642,365)
Probability weighted economic scenarios
– Worst case 4% decrease and best case 4% Increase	(228,959)	(122,813)	–	(351,772)	(351,772)
– Worst case 4% Increase and best case 1% decrease	34,116	47,360	–	81,476	81,476

* The PD/LGD decrease is capped to 0%, if applicable.

8.2.6 Concentration of Credit Risk

The Group monitors concentrations of credit risk by sector and by geographic location. An analysis of concentrations of credit risk from loans and advances, loan commitments, financial guarantees and investment securities is shown below:

In LKR ’000	Loans and advances to customers		Investment in debt securities		Loan commitments and financial guarantees issued
As at 31 December	2022	2021	2022	2021	2022	2021
Gross carrying amount	402,975,830	384,958,590	108,625,488	69,014,083	–	–
Amount committed/guaranteed	–	–	–	–	119,355,420	117,609,177
Concentration by sector
Agriculture, forestry, and fishing	46,546,272	40,827,861	–	–	13,134,553	7,336,743
Manufacturing	78,732,730	68,451,049	–	–	22,662,992	21,669,988
Tourism	19,757,213	16,537,932	–	–	834,987	3,009,414
Transportation and storage	12,053,681	9,379,401	–	–	1,344,685	991,193
Construction	32,713,107	37,306,964	–	–	7,990,817	13,587,240
Infrastructure development	35,197,051	40,393,111	–	–	20,111,494	19,392,260
Wholesale and retail trade	50,128,157	51,206,160	–	–	23,038,508	28,818,181
Information technology and communication services	2,821,899	2,330,228	–	–	1,397,560	1,056,371
Financial services	15,565,468	20,393,853	763,635	879,281	5,406,814	5,302,922
Professional, scientific, and technical activities	3,300,176	3,289,367	–	–	550,583	398,058
Arts, entertainment, and recreation	1,004,770	1,016,926	–	–	114,684	159,239
Education	5,013,693	4,392,320	–	–	144,646	681,853
Health care, social services, and support services	7,296,365	6,107,068	–	–	608,148	690,845
Consumption	68,855,191	68,626,259	–	–	21,651,839	14,313,150
Lending to overseas entities	23,990,057	14,700,091	–	–	363,110	201,720
Government	–	–	107,861,853	68,134,802	–	–
Total	402,975,830	384,958,590	108,625,488	69,014,083	119,355,420	117,609,177

8.2.7 Offsetting Financial Assets and Financial Liabilities

Financial assets and financial liabilities are offset and the net amount presented in the Statement of Financial Position when, and only when the Group currently has a legally enforceable right to set off the amounts and it intends either to settle them on a net basis or to realise the asset and settle the liability simultaneously.

8.3 Liquidity risk

“Liquidity risk” is the risk that the Bank will encounter difficulty in meeting obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. Liquidity risk arises from mismatches in the timing and amounts of cash flows, which is inherent to the Bank’s operations and investments.

8.3.1 Management of Liquidity Risk

The Bank’s Board of Directors sets the Bank’s strategy for managing liquidity risk and oversight of the implementation is administered by Assets and Liability Management Committee (ALCO). ALCO approves the Bank’s liquidity policies and procedures. Treasury manages the Bank’s liquidity position on a day-to-day basis and reviews daily reports covering the liquidity position of both the Bank and operating subsidiaries. A summary report, including any exceptions and remedial action taken, is submitted to ALCO on a monthly basis or ad hoc when predefined thresholds are breached.

The Bank’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when they are due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Bank’s reputation. The key elements of the Bank’s liquidity strategy are as follows:

• Monitoring maturity mismatches, behavioural characteristics of the Bank’s financial assets and financial liabilities, and the extent to which the Group’s assets are encumbered and so not available as potential collateral for obtaining funding.
• Monitoring the Bank’s liquidity through the Liquid Assets Ratio (statutory minimum is currently 20%) and Liquidity Coverage Ratios (statutory minimum is currently 90%) using a stock approach.
• Effecting threshold limits relevant for liquidity management as part of the overall risk limits system of the Bank.
• Carrying a portfolio of highly liquid assets, diversified by currency and maturity.

8.3.2 Exposure to Liquidity Risk – Regulatory Liquidity (Bank)

As at 31 December	2022	2021
Statutory liquid assets (LKR ’000)	122,283,753	124,519,853
Statutory liquid assets ratio (minimum requirement 20%)
Total Bank Operations (%)	26.36	N/A
Domestic banking unit (%)	–	21.60
Offshore banking unit (%)	–	41.79
Liquidity coverage ratio (minimum requirement 90% in 2022 and 100% in 2021)
All currencies (%)	202.34	136.18
Rupee only (%)	289.85	152.86

8.3.3 Maturity Analysis for Financial Liabilities and Financial Assets

The following tables set out the remaining contractual maturities of the Bank’s gross nominal (undiscounted) financial liabilities and financial assets.

As at 31 December 2022 BANK	Carrying amount LKR ’000	Gross nominal amount LKR ’000	Up to 3 months LKR ’000	3 to 12 months LKR ’000	1 to 3 years LKR ’000	3 to 5 years LKR ’000	More than 5 years LKR ’000	Total LKR ’000
Financial liability by type
Non-derivative liabilities
Due to banks	15,857,994	16,002,590	12,099,097	3,903,493	–	–	–	16,002,590
Financial liabilities at amortised cost – Due to depositors	370,314,026	371,179,461	102,958,526	178,524,740	31,799,574	40,851,098	17,045,523	371,179,461
Financial liabilities at amortised cost – Due to other borrowers	81,145,692	81,158,528	4,576,098	10,089,507	27,331,823	25,833,178	13,327,922	81,158,528
Debt securities issued	16,304,115	16,327,016	1,051,031	290,804	8,790,470	1,783,541	4,411,170	16,327,016
Other liabilities	8,101,155	8,847,080	6,165,628	302,682	764,257	604,676	1,009,837	8,847,080
Subordinated term debt	18,399,991	18,420,972	3,604,056	6,215,834	8,396,255	204,827	–	18,420,972
	510,122,973	511,935,647	130,454,436	199,327,060	77,082,379	69,277,320	35,794,452	511,935,647
Derivative liabilities
Risk management:	84,670	–	–	–	–	–	–	–
Inflows	–	5,202,514	5,202,514	–	–	–	–	5,202,514
Outflow	–	5,290,398	5,290,398	–	–	–	–	5,290,398
Financial assets by type
Non-derivative assets
Cash and cash equivalents	16,122,565	16,122,565	16,122,565	–	–	–	–	16,122,565
Balances with Central Bank	9,030,868	9,030,868	9,030,868	–	–	–	–	9,030,868
Placements with banks	15,224,692	15,256,706	15,256,706	–	–	–	–	15,256,706
Financial assets measured at fair value through profit or loss	1,429,149	1,429,149	–	795,434	–	633,715	–	1,429,149
Financial assets at amortised cost – Loans to and receivables from other customers	369,072,030	372,625,730	71,881,473	78,147,256	96,627,094	56,313,580	69,656,327	372,625,730
Financial assets at amortised cost – Debt and other instruments	50,947,926	51,061,990	11,619,357	4,022,483	18,844,407	11,992,192	4,583,551	51,061,990
Financial assets measured at fair value through other comprehensive income	63,319,060	63,319,060	15,208,301	31,774,249	5,798,500	2,079,021	8,458,989	63,319,060
Other assets	7,791,475	7,791,475	2,076,431	203,126	5,274,666	104,057	133,195	7,791,475
	532,937,765	536,637,543	141,195,701	114,942,548	126,544,667	71,122,565	82,832,062	536,637,543
Derivative assets
Risk management:	20,473,544	–	–	–	–	–	–	–
Inflows	–	48,456,875	3,068,125	2,269,437	18,155,500	18,155,500	6,808,313	48,456,875
Outflows	–	28,062,536	2,811,286	1,262,562	10,100,500	18,155,500	3,787,688	28,062,536
The table below shows the contractual expiry by maturity of the Bank's contingent liabilities and commitments.
Documentary credit		5,629,169	2,041,986	3,587,183	–	–	–	5,629,169
Guarantees		26,029,465	25,365,762	663,703		–	–	26,029,465
Commitments for unutilised credit facilities		87,696,786	87,696,786	-	–	–	–	87,696,786
		119,355,420	115,104,534	4,250,886	–	–	–	119,355,420

As at 31 December 2021 BANK	Carrying amount LKR ’000	Gross nominal amount LKR ’000	Up to 3 months LKR ’000	3 to 12 months LKR ’000	1 to 3 years LKR ’000	3 to 5 years LKR ’000	More than 5 years LKR ’000	Total LKR ’000
Financial liability by type
Non-derivative liabilities
Due to banks	3,844,701	3,844,701	2,490,668	1,354,033	–	–	–	3,844,701
Financial liabilities at amortised cost – Due to depositors	319,861,013	327,681,290	81,601,821	130,346,356	25,433,646	22,937,555	67,361,912	327,681,290
Financial liabilities at amortised cost – Due to other borrowers	69,094,264	83,250,508	11,477,093	8,898,713	16,922,493	15,393,628	30,558,581	83,250,508
Debt securities in issue	16,297,256	24,840,225	475,186	857,065	4,940,183	9,715,044	8,852,747	24,840,225
Other liabilities	4,470,497	4,470,497	2,603,484	180,183	466,470	392,836	827,524	4,470,497
Subordinated term debt	18,387,276	23,616,937	27,223	446,151	11,221,832	11,606,585	315,146	23,616,937
	431,955,007	467,704,158	98,675,475	142,082,501	58,984,624	60,045,648	107,915,910	467,704,158
Derivative liabilities
Risk management:	814,219	–	–	–	–	–	–	–
inflows	–	33,566,066	3,171,547	5,143,270	6,312,812	18,938,437	–	33,566,066
Outflows	–	34,594,980	3,832,680	5,547,300	6,303,750	18,911,250	–	34,594,980
Financial assets by type
Non-derivative assets
Cash and cash equivalents	10,688,255	10,688,255	10,688,255	–	–	–	–	10,688,255
Balances with Central Bank	9,359,241	9,359,241	9,359,241	–	–	–	–	9,359,241
Placements with banks	6,288,006	6,288,006	6,288,006	–	–	–	–	6,288,006
Financial assets measured at fair value through profit or loss	218,875	218,875	218,875	–	–	–	–	218,875
Financial assets at amortised cost – Loans to and receivables from other customers	365,900,540	481,668,878	61,273,808	67,029,941	93,803,084	128,363,162	131,198,883	481,668,878
Financial assets at amortised cost – Debt and other instruments	26,674,962	27,333,991	2,434,964	15,898,873	6,334,236	2,665,918	–	27,333,991
Financial assets measured at fair value through other comprehensive income	54,329,436	54,894,914	16,294,094	10,064,019	7,571,114	4,713,767	16,251,920	54,894,914
Other assets	2,855,254	2,855,254	2,572,622	95,529	45,210	85,755	56,138	2,855,254
	476,314,569	593,307,414	109,129,865	93,088,362	107,753,644	135,828,602	147,506,941	593,307,414
Derivative assets
Risk management:	280,235	–	–	–	–	–	–	–
Inflows	–	3,758,040	3,758,040	–	–	–	–	3,758,040
Outflows	–	3,928,541	3,928,541	–	–	–	–	3,928,541
The table below shows the contractual expiry by maturity of the Bank's contingent liabilities and commitments.
Documentary credit		21,246,261	13,770,000	7,437,935	38,326	–	–	21,246,261
Guarantees		28,293,247	26,424,315	1,868,932		–	–	28,293,247
Commitments for unutilised credit facilities		68,069,669	68,069,669	–	–	–	-	68,069,669
		117,609,177	108,263,984	9,306,867	38,326	–	–	117,609,177

The following tables set out the remaining contractual maturities of the Group’s financial liabilities and financial assets.

As at 31 December 2022 GROUP	Carrying amount LKR ’000	Gross nominal amount LKR ’000	Up to 3 months LKR ’000	3 to 12 months LKR ’000	1 to 3 years LKR ’000	3 to 5 years LKR ’000	More than 5 years LKR ’000	Total LKR ’000
Financial liability by type
Non-derivative liabilities
Due to banks	15,857,994	16,002,590	12,099,097	3,903,493	–	–	–	16,002,590
Financial liabilities at amortised cost – Due to depositors	369,746,855	370,958,560	102,958,526	178,303,839	31,799,574	40,851,098	17,045,523	370,958,560
Financial liabilities at amortised cost – Due to other borrowers	81,145,692	81,158,528	4,576,098	10,089,507	27,331,823	25,833,178	13,327,922	81,158,528
Debt securities issue	16,304,115	16,327,016	1,051,031	290,804	8,790,470	1,783,541	4,411,170	16,327,016
Other liabilities	8,288,066	9,033,991	6,088,655	566,566	764,257	604,676	1,009,837	9,033,991
Subordinated term debt	18,399,991	18,420,972	3,604,056	6,215,834	8,396,255	204,827	–	18,420,972
	509,742,713	511,901,657	130,377,463	199,370,043	77,082,379	69,277,320	35,794,452	511,901,657
Derivative liabilities
Risk management	84,670	–	–	–	–	–	–	–
Inflows	–	5,202,514	5,202,514	–	–	–	–	5,202,514
Outflows	–	5,290,398	5,290,398	–	–	–	–	5,290,398
Financial Assets by type
Non-derivative assets
Cash and cash equivalents	16,126,635	16,126,635	16,126,635	–	–	–	–	16,126,635
Balances with Central Bank	9,030,868	9,030,868	9,030,868	–	–	–	–	9,030,868
Placements with banks	15,242,493	15,256,706	15,256,706	–	–	–	–	15,256,706
Financial assets measured at fair value through profit or loss	1,429,149	1,429,149	–	795,434		633,715	–	1,429,149
Financial assets at amortised cost – Loans to and receivables from other customers	369,072,030	372,625,730	71,881,473	78,147,256	96,627,094	56,313,580	69,656,327	372,625,730
Financial assets at amortised cost – Debt and other instruments	50,947,926	51,061,990	11,619,357	4,022,483	18,844,407	11,992,192	4,583,551	51,061,990
Financial assets measured at fair value through other comprehensive income	63,319,060	63,319,060	15,208,301	31,774,249	5,798,500	2,079,021	8,458,989	63,319,060
Other assets	7,957,934	7,957,934	2,076,429	369,587	5,274,666	104,057	133,195	7,957,934
	533,126,095	536,808,072	141,199,769	115,109,009	126,544,667	71,122,565	82,832,062	536,808,072
Derivative assets
Risk management	20,473,544	–	–	–	–	–	–	–
Inflows	–	48,456,875	3,068,125	2,269,437	18,155,500	18,155,500	6,808,313	48,456,875
Outflows	–	28,062,536	2,811,286	1,262,562	10,100,500	10,100,500	3,787,688	28,062,536

As at 31 December 2021 GROUP	Carrying amount LKR ’000	Gross nominal amount LKR ’000	Up to 3 months LKR ’000	3 to 12 months LKR ’000	1 to 3 years LKR ’000	3 to 5 years LKR ’000	More than 5 years LKR ’000	Total LKR ’000
Financial Liability by type
Non-derivative liabilities
Due to banks	3,844,701	3,844,701	2,490,668	1,354,033	–	–	–	3,844,701
Financial liabilities at amortised cost – Due to depositors	319,362,372	327,182,649	81,103,180	130,346,356	25,433,646	22,937,555	67,361,912	327,182,649
Financial liabilities at amortised cost – Due to other borrowers	69,094,264	83,250,508	11,477,093	8,898,713	16,922,493	15,393,628	30,558,581	83,250,508
Debt securities issued	16,297,256	24,840,225	475,186	857,065	4,940,183	9,715,044	8,852,747	24,840,225
Other liabilities	4,601,683	4,601,683	2,476,266	308,783	596,274	392,836	827,524	4,601,683
Subordinated term debt	18,387,276	23,616,937	27,223	446,151	11,221,832	11,606,585	315,146	23,616,937
	431,587,552	467,336,703	98,049,616	142,211,101	59,114,428	60,045,648	107,915,910	467,336,703
Derivative Liabilities
Risk management:	814,219	–	–	–	–	–	–	–
Inflows	–	33,566,066	3,171,547	5,143,270	6,312,812	18,938,437	–	33,566,066
Outflows	–	35,594,980	3,832,680	5,547,300	6,303,750	18,911,250	–	34,594,980
Financial Assets by type
Non-derivative assets
Cash and cash equivalents	10,690,873	10,690,873	10,690,873	–	–	–	–	10,690,873
Balances with Central Bank	9,359,241	9,359,241	9,359,241	–	–	–	–	9,359,241
Placements with banks	6,332,533	6,332,533	6,332,533	–	–	–	–	6,332,533
Financial assets measured at fair value through profit or loss	218,875	218,875	218,875	–	–	–	–	218,875
Financial assets at amortised cost – Loans to and receivables from other customers	365,900,540	481,668,878	61,273,808	67,029,941	93,803,084	128,363,162	131,198,883	481,668,878
Financial assets at amortised cost – Debt and other instruments	26,674,962	27,333,991	2,434,964	15,898,873	6,334,236	2,665,918	–	27,333,991
Financial assets measured at fair value through other comprehensive income	54,333,429	54,894,914	16,294,094	10,064,019	7,571,114	4,713,767	16,251,920	54,894,914
Other assets	2,916,565	2,916,565	2,518,797	95,529	131,331	114,770	56,138	2,916,565
	476,427,018	593,415,870	109,123,185	93,088,362	107,839,765	135,857,617	147,506,941	593,415,870
Derivative assets
Risk management:	280,235	–	–	–	–	–	–	–
Inflows	–	3,758,040	3,758,040	–	–	–	–	3,758,040
Outflows	–	3,928,541	3,928,541	–	–	–	–	3,928,541

The amounts in the table above have been compiled as follows:

Type of financial instrument	Basis on which amounts are compiled
Non-derivative financial liabilities and financial assets	Undiscounted cash flows, which include estimated interest payments.
Issued financial guarantee contracts, and unrecognised loan commitments.	Earliest possible contractual maturity. For issued financial guarantee contracts the maximum amount of the guarantee is allocated to the earliest period in which the guarantee could be called.
Derivative financial liabilities and financial assets held for risk management purposes	Contractual undiscounted cash flows. The amounts shown are the gross nominal inflows and outflows for derivatives that have simultaneous gross settlement (e.g. forward exchange contracts and currency swaps) and the net amounts for derivatives that are net settled.
Trading derivative liabilities and assets forming part of the Group’s proprietary trading operations that are expected to be closed out before contractual maturity.	Fair values at the date of the statement of financial position. This is because contractual maturities do not reflect the liquidity risk exposure arising from these positions. These fair values are disclosed in the “up to 3 months” column.
Trading derivative liabilities and assets that are entered into by the Bank with its customers	Contractual undiscounted cash flows. This is because these instruments are not usually closed out before contractual maturity and so the Group believes that contractual maturities are essential for understanding the timing of cash flows associated with these derivative positions.

The Bank’s expected cash flows on some financial assets and financial liabilities vary significantly from the contractual cash flows. The principal differences are as follows:

• demand deposits from customers are expected to remain stable or increase;
• unrecognised loan commitments are not all expected to be drawndown immediately;

8.3.4 Liquidity Reserves

As part of the management of liquidity risk arising from financial liabilities, the Bank holds liquid assets comprising cash and cash equivalents, and debt securities issued by sovereigns, which can be readily sold to meet liquidity requirements. In addition, the Bank maintains agreed lines of credit with other banks and holds unencumbered assets eligible for use as collateral with central banks (these amounts are referred to as the “Bank’s liquidity reserves”).

The following table sets out the components of the Bank’s liquidity reserves.

As at 31 December	2022 Carrying amount LKR ’000	2022 Fair value LKR ’000	2021 Carrying amount LKR ’000	2021 Fair value LKR ’000
Cash and cash equivalents	16,122,564	16,122,564	10,688,255	10,688,255
Balances with Central Bank of Sri Lanka	9,030,868	9,030,868	9,359,241	9,359,241
Placements with banks	15,224,692	15,224,692	6,288,006	6,288,006
Unencumbered debt securities issued by sovereigns	106,873,421	106,873,421	58,821,647	58,821,647
Total liquidity reserves	147,251,545	147,251,545	85,157,149	85,157,149

8.3.5 Financial Assets Available to Support Future Funding

The following table sets out the availability of the Bank’s financial assets to support future funding.

		Encumbered		Unencumbered
	Note	Pledged as collateral LKR ’000	Other* LKR ’000	Available as collateral LKR ’000	Other** LKR ’000	Total LKR ’000
31 December 2022
Cash and cash equivalents	26	–	–	16,122,565	–	16,122,565
Balances with Central Bank of Sri Lanka	27	–	9,030,868	–	–	9,030,868
Placements with banks	28	–	–	15,224,692	–	15,224,692
Derivative financial assets	29	–	–	20,473,544	–	20,473,544
Financial assets measured at fair value through profit or loss	30	–	–	1,429,149	–	1,429,149
Financial assets at amortised cost – Loans to and receivables to customers	31	–	–	369,072,030	–	369,072,030
Financial assets at amortised cost – Debt and other instruments	32	–	–	50,947,926	–	50,947,926
Financial assets measured at fair value through other comprehensive income	33	2,547,500	–	60,771,560	–	63,319,060
Other Assets	41	–	–	–	7,791,475	7,791,475
Non-financial assets		–	–	–	12,515,110	12,515,110
Total assets		2,547,500	9,030,868	534,041,466	20,306,585	565,926,419
31 December 2021
Cash and cash equivalents	26	–	–	10,688,255	–	10,688,255
Balances with Central Bank of Sri Lanka	27	–	9,359,241	–	–	9,359,241
Placements with banks	28	–	–	6,288,006	–	6,288,006
Derivative financial assets	29			280,235		280,235
Financial assets measured at fair value through profit or loss	30	–	–	218,875	–	218,875
Financial assets at amortised cost – Loans to and receivables to customers	31	–	–	365,900,540	–	365,900,540
Financial assets at amortised cost – Debt and other instruments	32	865,200	–	25,809,762	–	26,674,962
Financial assets measured at fair value through other comprehensive income	33	4,424,434	–	49,909,002	–	54,329,436
Other Assets	41	–	–	–	2,855,254	2,855,254
Non-financial assets		–	–	–	8,910,432	8,910,432
Total assets		5,289,634	9,359,241	459,090,675	11,765,686	485,505,236

*Represents assets that are not pledged but that the Group believes it is restricted from using to secure funding, for legal or other reasons.

**Represents assets that are not restricted for use as collateral, but that the Group would not consider readily available to secure funding in the normal course of business.

 

8.4 Market Risk

“Market risk” is the possibility of losses arising from changes in market variables such as interest rates, equity prices, foreign exchange rates, and credit spreads. The objective of the Bank’s market risk management is to manage and control market risk exposures within acceptable parameters to ensure the Bank’s solvency while optimising the return on risk.

8.4.1 Management of Market Risk

The Bank separates its exposure to market risks between trading and non-trading portfolios. Trading portfolios are mainly include positions arising from market making and proprietary position taking, together with financial assets and financial liabilities that are managed on a fair value basis and non-trading portfolios from positions arising from financial investments measured at fair value through other comprehensive income (FVOCI) and financial investments at amortised cost and from derivatives held for risk management purposes.

Overall authority for market risk management is vested with the Board of Directors through the Board Integrated Risk Management Committee (BIRMC). The operational authority for managing market risk is vested with ALCO. Foreign exchange risk is managed within approved limits of the Bank.

The Bank employs a range of tools to monitor and limit market risk exposures. These are discussed below, separately for trading and non-trading portfolios.

The following table sets out the allocation of assets and liabilities subject to market risk between trading and non-trading portfolios.

			Market risk measure
31 December 2022	Note	Carrying amount LKR ’000	Trading portfolio LKR ’000	Non-trading portfolio LKR ’000
Assets subject to market risk
Cash and cash equivalents	26	16,122,565		16,122,565
Placements with banks	28	15,224,692		15,224,692
Derivatives financial assets	29	20,473,544		20,473,544
Financial assets measured at fair value through profit or loss	30	1,429,149	1,398,145	31,004
Financial assets at amortised cost – Loans to and receivables from other customers	31	369,072,030		369,072,030
Financial assets at amortised cost – Debt and other instruments	32	50,947,926		50,947,926
Financial assets measured at fair value through other comprehensive income	33	63,319,060		63,319,060
Liabilities subject to market risk
Due to banks	43	15,857,994		15,857,994
Derivatives financial liabilities	29	84,670		84,670
Financial liabilities at amortised cost – Due to depositors	44	370,314,026		370,314,026
Financial liabilities at amortised cost – Due to other borrowers	45	81,145,692		81,145,692
Debt securities in issue	46	16,304,115		16,304,115
Subordinated term debt	50	18,399,991		18,399,991

			Market risk measure
31 December 2021	Note	Carrying amount LKR ’000	Trading portfolio LKR ’000	Non-trading portfolio LKR ’000
Assets subject to market risk
Cash and cash equivalents	26	4,606,253	–	4,606,253
Placements with banks	28	6,288,006	–	6,288,006
Derivatives financial assets	29	280,235	–	280,235
Financial assets measured at fair value through profit or loss	30	218,875	185,165	33,710
Financial assets at amortised cost – Loans to and receivables from other customers	31	365,900,540	–	365,900,540
Financial assets at amortised cost – Debt and other instruments	32	26,674,962	–	26,674,962
Financial assets measured at fair value through other comprehensive income	33	54,329,436	–	54,329,436
Liabilities subject to market risk
Due to banks	43	3,349,836	–	3,349,836
Derivatives financial liabilities	29	814,219	–	814,219
Financial liabilities at amortised cost – Due to depositors	44	319,861,013	–	319,861,013
Financial liabilities at amortised cost – Due to other borrowers	45	69,589,129	–	69,589,129
Debt securities in issue	46	16,297,256	–	16,297,256
Subordinated term debt	50	18,387,276	–	18,387,276

8.4.2 Exposure to Market Risks – Trading Portfolios

The principal tool used to measure and control market risk exposure within the Bank’s trading portfolios is VaR. The VaR of a trading portfolio is the maximum estimated loss that can arise with a specified probability (confidence level) in the portfolio over a specified period of time (holding period) from an adverse market movement.

The VaR model used by the Bank is based on a 99% confidence level and assumes 1, 10, and 60-day holding periods (Depending on product type) . The VaR model used is based mainly on historical simulation. Taking account of market data, and observed correlation between different markets and prices, the model generates a wide range of plausible future scenarios for market price movements.

Although VaR is an important tool for measuring market risk, the assumptions on which the model is based give rise to some limitations, including the following:

• It is assumed that, within the holding period it is possible to hedge or dispose of positions. This may not be the case for illiquid assets or in situations in which there is severe market liquidity.
• A 99% confidence level does not reflect losses that may occur beyond this level. Even within the model used, there is a 1% probability that losses could exceed the VaR in any given period.
• The calculated VaR does not reflect exposures that may arise on positions during the trading day.
• The calculations are based on historical data as a basis for determining the possible range of future outcomes does not cover all possible scenarios, especially those of an exceptional nature.
• The VaR measure is dependent on the Bank’s position and the volatility of market prices. The VaR of an unchanged position reduces if market price volatility declines and vice versa.

The limitations of the VaR methodology are recognised by supplementing VaR limits with other position and sensitivity limit structures, including limits to address potential concentration risks within each trading portfolio. In addition, the Bank uses a wide range of stress tests to model the financial impact of a variety of exceptional market scenarios on individual trading portfolios and the Bank's overall position. The Bank determines the scenarios as follows:

• sensitivity scenarios consider the impact of any single risk factor or set of factors that are unlikely to be captured within the VaR models;
• technical scenarios consider the largest move in each risk factor without consideration of any underlying market correlation; and
• ;hypothetical scenarios consider potential macroeconomic events – e.g. periods of prolonged market liquidity reduced fungibility of currencies, natural disasters or other catastrophes, health pandemics, etc.

The analysis of scenarios and stress tests is reviewed by ALCO.

8.4.2.1 Equity Price Risk

Equity prices risk is a part of the market risk which is defined as the risk of possible losses arising from the equity market investments due to changes in the market prices of the invested shares. The Bank is exposed to equity prices risk through its investments in the equity market which has been shown in the FVOCI portfolio and the trading portfolio.

Financial assets measured at fair value through profit or loss portfolio

Parameter	Position as at 31 December 2022 LKR ’000	Position as at 31 December 2021 LKR ’000
Marked-to-market value of the total quoted equity portfolio	598,972	181,425
Value-at-risk (under 99% probability for a quarterly time horizon)	56.69%	36.83%
Maximum possible loss of value in the marked-to-market value of the portfolio as indicated by the VAR over a quarterly period	339,556	66,818
Unrealised gains in the trading equity portfolio reported in the fair value reserve	(200,202)	49,014

Equity price risk is quantified using the Value at Risk (VAR) approach based on the Historical Loss Method. Historical four-year portfolio returns is adopted to compute VAR as a measure of the equity prices risk exposure by the Bank. This VAR computation for the equity Trading portfolio considers a quarterly time horizon.

8.4.3 Exposure to Market Risks – Non-Trading Portfolios

Financial assets measured at fair value through other comprehensive income

Parameter	Position as at 31 December 2022 LKR ’000	Position as at 31 December 2021 LKR ’000
Marked-to-market value of the total quoted equity portfolio	8,171,584	12,337,187
Value-at-risk (under 99% probability for a quarterly time horizon)	37.37%	25.18%
Maximum possible loss of value in the marked-to-market value of the portfolio as indicated by the VAR over a quarterly period	3,053,434	3,106,503
Unrealised gains in the equity portfolio reported in the fair value reserve	(2,271,901)	2,419,120

Equity price risk is quantified using the Value at Risk (VAR) approach based on the Historical Loss Method. Historical three-year portfolio returns is adopted to compute VAR as a measure of the equity prices risk exposure by the Bank. This VAR computation for the equity trading portfolio considers a quarterly time horizon.

8.4.4 Interest Rate Risk

The principal risk to which non-trading portfolios are exposed is the risk of loss from fluctuations in the future cash flows or fair values of financial instruments as a result of changes in market interest rates.

Duration analysis as at 31 December 2022

Portfolio	Face value LKR ’000	Marked-to market value LKR ’000	Modified Duration	Interpretation of duration
Government Securities measured at FVPL/LKR Bills	885,607	795,433	0.35	Portfolio value will decline approximately by 0.35% as a result of 1% increase in the interest rates.
Government Securities measured at FVOCI/LKR Bills and Bonds	61,169,207	54,926,057	0.55	Portfolio value will decline approximately by 0.55% as a result of 1% increase in the interest rates.
Government Securities measured at FVOCI/Sovereign Bonds	Nil	Nil	Nil

Market risk exposure for interest rate risk in the FVPL Rupee portfolio as at 31 December 2022 is depicted by modified duration of 0.35%. Market risk exposure for interest rate risk in the FVOCI Rupee portfolio as at 31 December 2022 is depicted by modified duration of 0.55%.

This level of interest rate risk exposure in the Rupee FVPL and FVOCI portfolios can be interpreted as a possible potential loss in the marked-to-market value amounting to LKR 2.79 Mn and LKR 302 Mn respectively, as at 31 December 2022.

Market risk exposure for interest rate risk in the FVOCI US Dollar portfolio as at 31 December 2022 is Nil.

8.4.4.1 Potential Impact to NII Due to Change in Market Interest Rates

Overall up to the 12-month time bucket, the Bank carried a net liability sensitive position. This sensitivity will vary for each time bucket up to the 12-month period where up to three months there are net asset sensitive positions.

The interest rate risk exposure as at 31 December 2022 is quantified based on the assumed change in the interest rates for each time period and is given in table below:

31 December 2022	Over 0 up to 1 month LKR ’000	Over 1 up to 3 months LKR ’000	Over 3 up to 6 months LKR ’000	Over 6 up to 12 months LKR ’000	Over 12 months LKR ’000
Cash and cash equivalents	1,566,636	–	–	–	–
Placements with banks	13,018,678	2,206,014	–	–	–
Financial assets measured at fair value through profit or loss	–	–	795,433	–	–
Financial assets at amortised cost – Loans to and receivables from other customers	139,846,895	95,477,247	31,372,076	35,969,173	54,804,395
Financial assets at amortised cost – Debt and other instruments	1,745,942	9,889,773	2,339,275	1,650,345	37,278,663
Financial assets measured at fair value through other comprehensive income	3,797,959	11,490,644	13,510,430	18,263,819	7,863,205
	159,976,110	119,063,678	48,017,214	55,883,337	99,946,263
Due to banks	13,763,582	2,094,412	–	–	–
Financial liabilities at amortised cost – Due to depositors	88,920,831	62,265,263	77,026,884	89,260,266	42,999,820
Financial liabilities at amortised cost – Due to other borrowers	2,735,001	5,933,047	3,394,560	5,221,804	63,861,280
Debt securities in issue	–	1,007,125	296,990	–	15,000,000
Subordinated term debt	–	3,567,232	–	6,223,229	8,609,530
	105,419,414	74,867,079	80,718,434	100,705,299	130,470,630
Net rate sensitive assets (liabilities)	54,556,696	44,196,599	(32,701,220)	(44,821,962)	(30,524,367)
Assumed change in interest rates (%)	0.50	1.00	1.50	2.00
Impact	272,783	405,135	(367,889)	(448,220)
Total net impact if interest rates increase				(138,189)
Total net impact if interest rates decline				138,189

31 December 2021	Over 0 up to 1 month LKR ’000	Over 1 up to 3 months LKR ’000	Over 3 up to 6 months LKR ’000	Over 6 up to 12 months LKR ’000	Over 12 months LKR ’000
Cash and cash equivalents	844,731	–	–	–	–
Placements with banks	6,288,006	–	–	–	–
Financial assets at amortised cost – Loans to and receivables from customers	246,322,818	18,918,758	23,714,679	14,306,803	54,326,519
Financial assets at amortised cost – Debt and other instruments	297,302	2,605,484	13,030,998	2,323,072	8,418,106
Financial assets measured at fair value through other comprehensive income	4,379,590	12,358,991	5,786,131	4,595,256	14,655,679
	258,132,447	33,883,233	42,531,808	21,225,131	77,400,304
Due to banks	–	1,105,860	–	1,105,860	–
Financial liabilities at amortised cost – Due to depositors	111,704,790	51,549,556	57,791,338	74,085,686	12,556,723
Financial liabilities at amortised cost – Due to other borrowers	5,117,887	6,606,257	5,116,823	3,621,298	49,126,864
Debt securities in issue	–	–	–	–	16,297,256
Subordinated term debt	–	–	–	–	18,387,276
	116,822,677	59,261,673	62,908,161	78,812,844	96,368,119
Net rate sensitive assets (liabilities)	141,309,770	(25,378,440)	(20,376,353)	(57,587,713)	(18,967,815)
Assumed change in interest rates (%)	0.50	1.00	1.50	2.00
Impact	706,549	(232,636)	(229,234)	(575,877)
Total net impact if interest rates increase				(331,198)
Total net impact if interest rates decline				331,198

The Bank has assumed that the assets and liabilities are repriced at the beginning of each time bucket and has also taken into account the remaining time from the repricing date up to one year.

8.4.4.2 Interest Rate Benchmark Reform

Overview

A fundamental reform of major interest rate benchmarks is being undertaken globally, replacing some interbank offered rate (IBORs) with alternative nearly risk free rates (referred to as “IBOR reform”). The Bank has exposure to certain IBORs on its financial instruments that are being reformed as part of these market-wide initiatives.

The main risks to which the Bank has been exposed as a result of IBOR reform are operational. For example, the renegotiation of loan contracts through bilateral negotiation with customers, updating of contractual terms, updating of systems that use IBOR curves and revision of operational controls related to the reform and regulatory risks. Financial risk is predominantly limited to interest rate risk.

The Asset and Liability Management Committee (ALCO) and Treasury Department of DFCC Bank PLC is working on its transition to alternative rates. The objectives of this task include evaluating the extent to which loans advanced, loan commitments, liabilities and derivatives reference IBOR cash flows, whether such contracts need to be amended as a result of IBOR reform and how to manage communication about IBOR reform with counterparties. It provides periodic reports to ALCO and Central Treasury to support the management of interest rate risk and works closely with the Group Operational Risk Committee to identify operational and regulatory risks arising from IBOR reform.

The Bank is in the process of applying a policy to require that retail products, such as its residential mortgage portfolio, are amended in a uniform way, and bespoke products, such as loans and advances to corporates, are amended in bilateral negotiations with the counterparties.

As at 31 December 2022, IBOR reform in respect of currencies to which the Bank has exposure is in the process of reforming. The table below sets out the IBOR rates that the group had exposure to, the new benchmark rates to which these exposures have or are being transitioned.

Currency	Benchmark before reform	Benchmark after reform	Status
GBP	GBP LIBOR	SONIA	In progress
USD	USD LIBOR	SOFR	In progress
EURO	EONIA	€STR	In progress
EURO	EURIBOR	€STR	In progress

Exposures subject to benchmark reform as at 31 December 2022

The table below shows the Group's exposure to interest rate benchmarks subjects to IBOR reform. These are financial instruments that contractually reference an IBOR benchmark planned to transition to an risk free rate, and have contractual maturity date beyond the planned IBOR cessation date.

	Financial instruments to be transferred to risk free rate
	USD Libor
	USD Mn	LKR Mn
Non-derivative financial assets
Loans and advances to customers	132	48,021
Non-derivative financial liabilities
Borrowings	20	7,162

8.4.5 Foreign Exchange Risk

Foreign exchange risk in net open position (NOP)/unhedged position of Bank

The following table indicates the DFCC’s exchange rate risk exposure based on its size of the NOP/unhedged positions in the foreign currency assets/liabilities. By 31 December 2022, DFCC carried a USD equivalent net open/unhedged “long” position of LKR 1,901 Bn. The impact of exchange rate risk is given below:

	Amount
Net exposure – USD equivalent	5,235,640
Value of position in LKR ’000	1,901,113
Exchange rate (USD/LKR) as at 31 December 2022	363.11
Possible potential loss to Bank – LKR ’000
– If Exchange rate (USD/LKR) depreciates by 1%	(19,011)
– If exchange rate depreciates by 10%	(190,111)
– If exchange rate depreciates by 15%	(285,167)

The estimated potential exchange loss is off set by the interest gain due to interest differential between Sri Lankan Rupee and the respective foreign currencies.

8.4.6 Market Risk Exposures for Regulatory Capital Assessment

Under the standardised approach of Basel III with effect from July 2017, market risk exposures are quantified for regulatory capital purposes. The computation results as at 31 December 2022 are as follows:

	Risk-weighted assets LKR ’000	Quantified possible exposure LKR ’000
Interest rate risk	4,181,448	522,681
Equity price risk	1,097,176	137,147
Foreign exchange and gold risk	3,113,024	389,128
Total	8,391,648	1,048,956

8.5 Operational Risk

“Operational risk” is the risk of direct or indirect loss arising from a wide variety of causes associated with the Bank’s processes, personnel, technology, and infrastructure, and from external factors other than credit, market and liquidity risks-e.g. those arising from legal and regulatory requirements and generally accepted standards of corporate behaviour. Operational risks arise from all of the Bank’s operations.

The Bank’s objective is to manage operational risk so as to balance the avoidance of financial losses and damage to the Bank’s reputation with overall cost effectiveness and innovation. In all cases, Bank’s policy requires compliance with all applicable legal and regulatory requirements.

The following are included in the process of the operational risk management in the Bank.

1. Monitoring of the Key Risk Indicators (KRIs) for the departments/functions under the defined threshold limits using a traffic light system. Develop Risk and Control Self-Assessments to identify the risk exposure of all processes.
2. Operational risk incident reporting system and the independent analysis of the incidents by the IRMD, and recognise necessary improvements in the systems, processes and procedures.
3. Analyse downtime of the critical systems, attrition information, exit interview comments and complaints to identify operational risks and recommend mitigating controls. The key findings of the analysis are evaluated at the ORMC and the BIRMC meetings in an operational risk perspective.

The primary responsibility for the development and implementation of controls to address operational risk lies with IRMD whilst implementation is assigned to Senior Management within each business unit. Operational Risk Coordinating Officers are appointed within each department/Branch to assist in managing the Operational Risk. This responsibility is supported by the development of overall standards for management of operational risk in the following areas:

1. Requirements for appropriate segregation of duties, including independent authorisation of transactions.
2. Requirements for reconciliation and monitoring of transactions.
3. Compliance with regulatory and other legal requirements.
4. Documentation of controls and procedures.
5. Requirements for periodic assessment of operational risks faced and the adequacy of controls and procedures to address the identified risks.
6. Requirements for reporting of operational losses and propose remedial action.
7. Development of contingency plans.
8. Training and professional development to establish ethics and business standards.
9. Insurance covering risk due to threats arising from external and other events.

Compliance with the Bank’s standards is supported by a programme of periodic reviews undertaken by internal audit. The results of internal audit reviews are discussed with the business unit to which they relate, with summaries submitted to the Audit Committee and Senior Management.

Group operational risk assessments are conducted at the Board level.

8.6 Capital Management

The Bank manages its capital at Bank and Group level considering both regulatory requirement and risk exposures. Its regulatory capital position is analysed by the BIRMC on a quarterly basis and recommendations and decisions are made accordingly. The Group capital management goals are as follows:

1. Ensure regulatory minimum capital adequacy requirements are not compromised.
2. Bank to maintains its international and local credit ratings and to ensure that no downgrading occurs as a result of deterioration of risk capital of the Bank other than in an extreme change in external operating environment.
3. Ensure capital impact of business decisions including strategic business plans are properly assessed and taken in to consideration.
4. Ensure capital consumption by business actions are adequately priced.
5. Optimizing ROE

Central Bank of Sri Lanka sets and monitors regulatory capital requirement on both consolidated and solo basis. The Bank currently uses the standardised approach for credit risk and market risk and basic indicator approach for operational risk.

The Basel III capital regulations, which are currently in force, are based on the three-mutually reinforcing Pillars introduced under Basel II, i.e., minimum capital requirement, supervisory review process and market discipline. Basel III focuses 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. DFCC Bank started reporting capital computations under the Basel III requirements from mid 2017 as per the regulatory requirements.

Regulatory capital comprises Tier 1 capital and Tier 2 capital. The Bank’s policy is to maintain a strong capital base so as to ensure investor, creditor, and market confidence to sustain future development of the business. DFCC Bank and its Group have complied with the minimum capital requirements imposed by the Central Bank of Sri Lanka throughout the year.

8.6.1 Key Regulatory Ratios – Capital Adequacy

31 December	2022		2021
Item	Bank	Group	Bank	Group
Regulatory capital (LKR ’000)
Common equity Tier 1	36,818,873	36,381,997	34,259,288	34,265,838
Tier 1 capital	36,818,873	36,381,997	34,259,288	34,265,838
Total capital	48,004,800	47,574,241	47,968,017	47,974,567
Regulatory capital ratios (%)
Common equity Tier 1 capital ratio	10.09	9.94	9.31	9.28
minimum requirement -7.0%
Tier 1 capital ratio	10.09	9.94	9.31	9.28
minimum requirement -8.5%
Total capital ratio	13.15	12.99	13.03	13.00
minimum requirement - 12.5%

Basel III computation of capital ratios

31 December	2022		2021
Item	Bank LKR ’000	Group LKR ’000	Bank LKR ’000	Group LKR ’000
Common equity Tier 1 (CET 1) capital after adjustments	36,818,873	36,381,997	34,259,288	34,265,838
Common equity Tier 1 (CET 1) capital	52,778,734	56,909,693	46,687,119	50,436,550
Equity capital (stated capital)/assigned capital	13,182,025	13,182,025	8,600,457	8,600,457
Reserve fund	2,874,968	2,874,968	2,746,968	2,746,968
Published retained earnings/(accumulated retained losses)	22,600,898	26,731,857	22,091,649	25,831,589
Published accumulated other comprehensive income (OCI)	341,004	341,004	(531,794)	(522,303)
General and other disclosed reserves	13,779,839	13,779,839	13,779,839	13,779,839
Unpublished current year’s profit/loss 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	15,959,861	20,527,696	12,427,831	16,170,712
Goodwill (net)	–	156,226	–	156,226
Intangible assets (net)	2,198,042	2,218,827	2,227,577	2,252,589
Investment in capital of banks and financial institutions	13,761,819	18,152,643	10,200,254	13,761,897
Others	–	–	–	–
Additional Tier 1 (AT1) capital after adjustments
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	–	–	–	–
Others (specify)	–	–	–	–
Tier 2 Capital after adjustments	11,185,927	11,192,244	13,708,729	13,708,729
Tier 2 Capital	11,185,927	11,192,244	13,708,729	13,708,729
Qualifying Tier 2 Capital instruments	7,039,040	7,039,040	10,511,268	10,511,268
Revaluation gains	–	–	–	–
Loan Loss Provisions	4,146,887	4,153,204	3,197,461	3,197,461
Instruments issued by consolidated banking and financial subsidiaries of the Bank and held by third parties	–	–	–	–
Total adjustments to Tier 2
Investment in own shares	–	–	–	–
Others (specify)	–	–	–	–
CET1 capital	36,818,873	36,381,997	34,259,288	34,265,838
Total Tier 1 capital	36,818,873	36,381,997	34,259,288	34,265,838
Total capital	48,004,800	47,574,241	47,968,017	47,974,567
Total Risk Weighted Assets (RWA)
RWAs for credit risk	331,750,969	332,256,324	339,260,886	339,722,423
RWAs for market risk	8,391,648	8,391,648	10,005,925	10,005,925
RWAs for operational risk	24,960,191	25,491,894	18,909,993	19,380,488
CET1 Capital Ratio (including Capital Conservation Buffer, Countercyclical Capital Buffer & Surcharge on D-SIBs) (%)	10.09	9.94	9.31	9.28
of which: Capital Conservation Buffer (%)	2.50	2.50	2.50	2.50
of which: Countercyclical Buffer (%)	N/A	N/A	N/A	N/A
of which: Capital Surcharge on D-SIBs (%)	N/A	N/A	N/A	N/A
Total Tier 1 Capital Ratio (%)	10.09	9.94	9.31	9.28
Total Capital Ratio (including Capital Conservation Buffer, Countercyclical Capital Buffer and Surcharge on D-SIBs) (%)	13.15	12.99	13.03	13.00
of which: Capital Conservation Buffer (%)	2.50	2.50	2.50	2.50
of which: Countercyclical Buffer (%)	N/A	N/A	N/A	N/A
of which: Capital Surcharge on D-SIBs (%)	N/A	N/A	N/A	N/A

Accounting Policy

See accounting policy in Note 5.3.7.

9.1 Valuation Models

The Group measures fair values using the following fair value hierarchy, which reflects the significance of the inputs used in making the measurements.

Level 1: Inputs that are quoted market prices (unadjusted) in active markets for identical instruments.

Level 2: Inputs other than quoted prices included within Level 1 that are observable either directly (i.e. as prices) or indirectly (i.e. derived from prices). This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or other valuation techniques
in which all significant inputs are directly or indirectly observable from market data.

Level 3: Inputs that are unobservable. This category includes all instruments for which the valuation technique includes inputs that are not observable and the unobservable inputs have a significant effect on the instrument’s valuation. This category includes instruments that are valued based on quoted prices for similar instruments for which significant unobservable adjustments or assumptions are required to reflect differences between the instruments.

Valuation techniques include net present value and discounted cash flow models, comparison with similar instruments for which observable market prices exist, and other valuation models. Assumptions and inputs used in valuation techniques include risk-free and benchmark interest rates, credit spreads and other premiums used in estimating discount rates, bond and equity prices, foreign currency exchange rates, equity and equity index prices and expected price volatilities and correlations.

The objective of valuation techniques is to arrive at a fair value measurement that reflects the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction between market participants at the measurement date.

The Group uses widely recognised valuation models for determining the fair value of common and more simple financial instruments, like government securities, interest rate and currency swaps that use mostly observable market data and require little management judgment and estimation. Observable prices and model inputs are usually available in the market for listed debt and equity securities, government securities and simple over the counter derivatives like forward exchange contracts and interest rate swaps. Availability of observable market prices and model inputs reduces the need for management judgment and estimation and also reduces the uncertainty associated with determination of fair values. Availability of observable market prices and inputs varies depending on the products and markets and is prone to changes based on specific events and general conditions in the financial markets.

Fair value estimates obtained from models are adjusted for any other factors, such as liquidity risk or model uncertainties, to the extent that the Group believes that a third party market participant would take them into account in pricing a transaction.

Model inputs and values are calibrated against historical data and published forecasts and, where possible, against current or recent observed transactions in different instruments and against broker quotes. This calibration process is inherently subjective and it yields ranges of possible inputs and estimates of fair value, and management uses judgement to select the most appropriate point in the range.

9.2 Valuation Framework

The established control framework with respect to the measurement of fair values, includes an oversight which is independent of front office management. Treasury Middle Office has overall responsibility for independently verifying the results of trading and investment operation.

Specific controls include:

• Verification of observable pricing
• Review and approval process for new models and changes to models involving both product control and group market risk
• Calibration and back testing of models
• Stress testing

When third party information, such as broker quotes or pricing services is used to measure fair value, the evidence so obtained to support the conclusion that such valuations meet the requirements of SLFRSs/LKASs is documented.

This includes:

• Verifying that the broker or pricing service is approved by the Bank for use in pricing the relevant type of financial instrument
• Several quotes obtained from randomly selected brokers for the same financial instrument and the fair value determined on this basis

Any changes to the fair value methodology is reported to the Bank’s Audit Committee.

9.3 Financial Instruments Measured at Fair Value – Fair Value Hierarchy

The following table analyses financial instruments measured at fair value at the reporting date, by the level in the fair value hierarchy into which the fair value measurement is categorised. The amounts are based on the values recognised in the statement of financial position. The fair values include any deferred differences between the transaction price and the fair value on initial recognition when the fair value is based on a valuation technique that uses unobservable inputs.

A. Bank/Group

As at 31 December 2022	Note	Level 1 LKR ’000	Level 2 LKR ’000	Level 3 LKR ’000	Total LKR ’000
Financial assets
Derivative financial assets	29
Forward foreign exchange contracts		–	20,473,544	–	20,473,544
Financial assets measured at fair value through profit or loss	30
Government of Sri Lanka Treasury Bills and Bonds		795,433	–	–	795,433
Equity securities – quoted		598,972	–	–	598,972
Units in unit trusts – quoted		3,740	–	–	3,740
Units in unit trusts – unquoted		–	31,004	–	31,004
Financial assets measured at fair value through other comprehensive income	33
Government of Sri Lanka Treasury Bills and Bonds		54,926,057	–	–	54,926,057
Sri Lanka sovereign bonds		–	–	–	–
Equity shares – quoted		8,171,584	–	–	8,171,584
Equity shares – unquoted		–	–	221,419	221,419
		64,495,786	20,504,548	221,419	85,221,753
Financial liabilities
Derivative financial liabilities
Forward foreign exchange contracts	29	–	84,670	–	84,670
		–	84,670	–	84,670

As at 31 December 2021	Note	Level 1 LKR ’000	Level 2 LKR ’000	Level 3 LKR ’000	Total LKR ’000
Financial assets
Derivative financial assets	29
Forward foreign exchange contracts		–	280,235	–	280,235
Financial assets measured at fair value through profit or loss	30
Equity securities – quoted		181,425	–	–	181,425
Units in unit trusts – quoted		3,740	–	–	3,740
Units in unit trusts – unquoted		–	33,710	–	33,710
Financial assets measured at fair value through other comprehensive income	33
Government of Sri Lanka Treasury Bills and Bonds		40,780,663	–	–	40,780,663
Sri Lanka sovereign bonds		994,984	–	–	994,984
Equity shares – quoted		12,337,187	–	–	12,337,187
Equity shares – unquoted		–	–	216,602	216,602
		54,297,999	313,945	216,602	54,828,546
Financial liabilities
Derivative financial liabilities	29
Forward foreign exchange contracts		–	814,219	–	814,219
		–	814,219	–	814,219

As Treasury Bills/Bonds are valued using Central Bank published rates, investments in Treasury Bills/Bonds are classified under Level 1. Other securities which are listed in Colombo stock exchange are also classified as Level 1 asset by referring to the quoted prices.

9.3.1 Valuation Techniques and Significant Unobservable Inputs

The following tables show the valuation techniques used in measuring Level 2 and Level 3 fair values for financial instruments in the statement of financial position, as well as the significant unobservable inputs used.

Type	Valuation technique	Significant unobservable inputs	Inter-relationship between significant unobservable inputs and fair value measurement
Unquoted equity shares	Net asset approach: The fair value is determining based on the net assets value of the unquoted equity share	Net asset value per share	The estimated fair value would increase/(decrease) if the adjusted net asset value per share were higher/(lower)

9.3.2 Transfers between Levels 1 and 2

There were no transfers from Level 1 to 2 or Level 2 to Level 1 in 2022 and no transfers in either direction in 2021.

9.3.3 Level 3 Recurring Fair Values

9.3.3.1 Reconciliation of Level 3 Fair Values

The following table shows a reconciliation from the opening balances to the closing balances for Level 3 fair values:

	Equity securities
	Bank/Group
	2022 LKR ’000	2021 LKR ’000
Balance at 1 January	216,602	213,810
Purchased during the year	–	–
Gain included in OCI
– Net change in fair value (unrealised)	4,817	2,792
Balance at 31 December	221,419	216,602

9.3.3.2 Transfer Out of Level 3

There were no transfers out of Level 3 and no transfers out of Level 2 in 2022.

9.3.3.3 Sensitivity Analysis

For the fair values of equity securities, reasonably possible changes at the reporting date to one of the significant unobservable inputs, holding other inputs constant, would have the following effects:

	OCI, net of tax
As at 31 December 2022	Increase LKR ’000	Decrease LKR ’000
Equity securities
Adjusted net assets value (5% movement)	11,071	(11,071)

Accounting Judgements, Estimates and Assumptions

Where the fair values of financial assets and financial liabilities recorded in the statement of financial position cannot be derived from active markets, those are determined using a variety of valuation techniques that include the use of mathematical models. The inputs to these models are derived from observable market data where possible, but if this is not available, judgement to establish fair values. The valuation of financial instruments is described in more detail in Note 4 to the financial statements.

The Group evaluates the material accuracy of the valuations incorporated in the financial statements as they can involve a high degree of judgement and estimation in determining the carrying values of financial assets and financial liabilities at the reporting date.

For certain financial instruments, the Group may use data that is not readily observable in current markets. If we use unobservable market data, then more judgement is exercised to determine fair value depending on the significance of the unobservable input to the overall valuation. Generally, unobservable inputs are derived from other relevant market data and compare them to observed transaction prices where available.

When establishing the fair value of a financial instrument using a valuation technique, the Group considers valuation adjustments in determining the fair value. The Group may apply adjustments (such as bid/offer spreads, credit valuation adjustments and funding valuation adjustments – refer Note 29 Derivative Financial Instruments) to reflect the Group’s assessment of factors that market participants would consider in setting fair value.

9.4 Financial Instruments not Measured at Fair Value

The following table sets out the fair values of financial instruments not measured at fair value and analyses them by the level in the fair value hierarchy into which each fair value measurement is categorised:

A. Bank

As at 31 December 2022	Note	Level 1 LKR ’000	Level 2 LKR ’000	Level 3 LKR ’000	Fair value LKR ’000	Carrying amount LKR ’000
Assets
Cash and cash equivalents	26	–	16,122,565	–	16,122,565	16,122,565
Balances with Central Bank of Sri Lanka	27	–	9,030,868	–	9,030,868	9,030,868
Placements with banks	28	–	15,224,692	–	15,224,692	15,224,692
Financial assets at amortised cost – Loans to and receivables from other customers	31	–	–	339,333,283	339,333,283	369,072,030
Financial assets at amortised cost – Debt and other instruments	32	37,049,928	2,607,280	240,533	39,897,741	50,947,926
Other assets				7,791,475	7,791,475	7,791,475
Total		37,049,928	42,985,405	347,365,291	427,400,624	468,189,556
Liabilities
Due to banks	43	–	15,857,994	–	15,857,994	15,857,994
Financial liabilities at amortised cost – Due to depositors	44	–	–	361,987,182	361,987,182	370,314,026
Financial liabilities at amortised cost – Due to other borrowers	45	–	–	81,145,692	81,145,692	81,145,692
Debt securities in issue	46	–	11,786,903	–	11,786,903	16,304,115
Other liabilities		–	–	8,101,155	8,101,155	8,101,155
Subordinated term debt	50	–	15,010,515	–	15,010,515	18,399,991
		–	42,655,412	451,234,029	493,889,441	510,122,973

As at 31 December 2021	Note	Level 1 LKR ’000	Level 2 LKR ’000	Level 3 LKR ’000	Fair value LKR ’000	Carrying amount LKR ’000
Assets
Cash and cash equivalents	26	–	10,688,255	–	10,688,255	10,688,255
Balances with Central Bank of Sri Lanka	27	–	9,359,241	–	9,359,241	9,359,241
Placements with banks	28	–	6,288,006	–	6,288,006	6,288,006
Financial assets at amortised cost – Loans to and receivables from other customers	31	–	–	348,256,773	348,256,773	365,900,540
Financial assets at amortised cost – Debt and other instruments	32	24,847,144	1,315,778	–	26,162,922	26,674,962
Other assets		–	–	2,855,254	2,855,254	2,855,254
Total		24,847,144	27,651,280	351,112,027	403,610,451	421,766,258
Liabilities
Due to banks	43	–	3,349,836	–	3,349,836	3,349,836
Financial liabilities at amortised cost – Due to depositors	44	–	–	319,604,601	319,604,601	319,861,013
Financial liabilities at amortised cost – Due to other borrowers	45	–	–	69,589,129	69,589,129	69,589,129
Debt securities in issue	46	–	14,932,065	–	14,932,065	16,297,256
Other liabilities		–	–	4,470,497	4,470,497	4,470,497
Subordinated term debt	50	–	16,580,539	–	16,580,539	18,387,276
		–	34,862,440	393,664,227	428,526,667	431,955,007

B. Group

As at 31 December 2022	Note	Level 1 LKR ’000	Level 2 LKR ’000	Level 3 LKR ’000	Fair value LKR ’000	Carrying amount LKR ’000
Assets
Cash and cash equivalents	26	–	16,126,635	–	16,126,635	16,126,635
Balances with Central Bank of Sri Lanka	27	–	9,030,868	–	9,030,868	9,030,868
Placements with banks	28	–	15,242,493	–	15,242,493	15,242,493
Financial assets at amortised cost – Loans to and receivables from other customers	31	–	–	339,333,283	339,333,283	369,072,030
Financial assets at amortised cost – Debt and other instruments	32	37,049,928	2,607,280	240,533	39,897,741	50,947,926
Other assets				7,957,904	7,957,904	7,957,904
Total		37,049,928	43,007,276	347,531,720	427,588,924	468,377,856
Liabilities
Due to banks	43	–	15,857,994	–	15,857,994	15,857,994
Financial liabilities at amortised cost – Due to depositors	44	–	–	369,746,855	369,746,855	369,746,855
Financial liabilities at amortised cost – Due to other borrowers	45	–	–	81,145,692	81,145,692	81,145,692
Debt securities in issue	46	–	16,304,115	–	16,304,115	16,304,115
Other liabilities		–	–	8,288,066	8,288,066	8,288,066
Subordinated term debt	50	–	–	18,399,991	18,399,991	18,399,991
		–	32,162,109	475,580,604	509,742,713	509,742,713

As at 31 December 2021	Note	Level 1 LKR ’000	Level 2 LKR ’000	Level 3 LKR ’000	Fair value LKR ’000	Carrying amount LKR ’000
Assets
Cash and cash equivalents	26	–	10,690,873	–	10,690,873	10,690,873
Balances with Central Bank of Sri Lanka	27	–	9,359,241	–	9,359,241	9,359,241
Placements with banks	28	–	6,332,533	–	6,332,533	6,332,533
Financial assets at amortised cost – Loans to and receivables from other customers	31	–	–	348,256,773	348,256,773	365,900,540
Financial assets at amortised cost – Debt and other instruments	32	24,346,886	1,315,778	–	25,662,664	26,674,962
Other assets		–		2,916,565	2,916,565	2,916,565
Total		24,346,886	27,698,425	351,173,338	403,218,649	421,874,714
Liabilities
Due to banks	43	–	3,349,836	–	3,349,836	3,349,836
Financial liabilities at amortised cost – Due to depositors	44	–	–	319,105,960	319,105,960	319,362,372
Financial liabilities at amortised cost – Due to other borrowers	45	–	–	69,589,129	69,589,129	69,589,129
Debt securities in issue	46	–	16,297,256	–	16,297,256	16,297,256
Other liabilities		–	–	4,601,683	4,601,683	4,601,683
Subordinated term debt	50	–	–	16,580,539	16,580,539	18,387,276
		–	19,647,092	409,877,311	429,524,403	431,587,552

Given below is the basis adopted by the Bank/Group in order to establish the fair values of the financial instruments.

9.4.1 Cash and Cash Equivalents and Placements with Banks

Carrying amounts of cash and cash equivalents and placements with banks approximates their fair value as these balances have a remaining maturity of less than three months from the reporting date.

9.4.2 Loans to and Receivables from Other Customers – Lease Rentals Receivable

The estimated fair value of lease rentals receivable is the present value of future cash flows expected to be received from such finance lease facilities calculated based on current interest rates for similar type of facilities.

9.4.3 Loans to and Receivables from Other Customers – Other Loans

	Composition %
Floating rate loan portfolio	77
Fixed rate loans	23
– With remaining maturity less than one year	6
– Others	17

Since the floating rate loans can be repriced monthly, quarterly and semi-annually in tandem with market rates fair value of these loans is approximately same as the carrying value. Carrying amount of fixed rate loans with a remaining maturity of less than one year approximates the fair value.

Based on the results of the fair value computed on the lease rentals receivable, it is estimated that the fair value of the other loans at fixed interest rates with maturity of more than one year is not materially different to its carrying value as at the reporting date.

9.4.4 Financial Assets at Amortised Cost – Debt and Other Instruments

Fair value of the fixed rate debentures are based on prices quoted in the Colombo Stock Exchange, where there is an active market for quoted debentures.

Where there is no active market, fair value of the fixed rate debentures has been determined by discounting the future cash flows by the interest rates derived with reference to Government Treasury Bond rates with adjustments to risk premiums at the time of investment.

9.4.5 Due to Banks

The carrying value of amounts due to banks approximates their fair value as these balances have a remaining maturity of less than one year approximate their fair value.

The others are repriced either monthly, quarterly or semi annually and rates are revised in line with changes in market rates. Hence, the carrying value of these borrowings approximate the fair value.

9.4.6 Due to Depositors

The carrying value of deposits with a remaining maturity of less than one year approximates the fair value.

Fair values of deposits with a remaining maturity of more than one year is estimated using discounted cash flows applying current interest rates offered for deposits of similar remaining maturities.

The fair value of a deposit repayable on demand is assumed to be the amount payable on demand at the reporting date and the savings account balances are repriced frequently to match with the current market rates, therefore the demand and saving deposits carrying amounts are reasonable approximation to the fair values as at the reporting date.

9.4.7 Due to Other Borrowers

This consists of borrowings sourced from multilateral and bilateral institutions. 70% of these borrowing are repriced either monthly, quarterly or semi-annually and rates are revised in line with changes in market rates. Hence the carrying value of these borrowings approximates the fair value.

The others at fixed rates which relates to borrowings on credit lines are based on interest rates which are specific to each refinancing arrangement and as such there are no comparable market rates. Hence, the fair value approximates the carrying value.

9.4.8 Debt Securities in Issue

Debts issued comprise the LKR debentures. The LKR debentures are fair valued by reference to current Government Treasury Bond rates with a risk premium.

	BANK		GROUP
For the year ended 31 December	2022 LKR ’000	2021 LKR ’000	2022 LKR ’000	2021 LKR ’000
Interest income (Note 11.1)	67,460,357	36,599,000	67,464,328	36,599,512
Fee and commission income (Note 12.1.1)	3,643,039	2,888,346	3,641,487	2,887,711
Net (loss)/gain from trading (Note 13)	(213,103)	436,675	(213,103)	436,675
Net gain/(loss) from financial instruments at fair value through profit or loss (Note 14)	276,319	(247,268)	276,319	(247,268)
Net gain from derecognition of financial assets (Note 15)	99,112	1,391,008	99,112	1,391,008
Net other operating income (Note 16)	1,742,548	1,581,002	2,251,996	1,961,642
	73,008,272	42,648,762	73,520,140	43,029,280

Accounting Policy

Effective Interest Rate

Interest income and expenses are recognised in profit or loss using the effective interest method.

The “effective interest rate” is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument to:

• the gross carrying amount of the financial asset; or
• the amortised cost of the financial liability.

When calculating the effective interest rate for financial instruments other than purchased or originated credit-impaired assets, the Group estimates future cash flows considering all contractual terms of the financial instrument, but not ECL. For purchased or originated credit impaired financial assets, a credit-adjusted effective interest rate is calculated using estimated future cash flows including ECL.

The calculation of the effective interest rate includes transaction costs and fees and points paid or received that are an integral part of the effective interest rate. Transaction costs include incremental costs that are directly attributable to the acquisition or issue of a financial asset or financial liability.

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 effective interest method of any difference between that initial amount and the maturity amount and, for financial assets, adjusted for any expected credit loss allowance. The ‘gross carrying amount of a financial asset’ is the amortised cost of a financial asset before adjusting for any expected credit loss allowance.

Calculation of Interest Income and Expense

The effective interest rate of a financial asset or financial liability is calculated on initial recognition of a financial asset or a financial liability. In calculating interest income and expense, the effective interest rate is applied to the gross carrying amount of the asset (when the asset is not credit impaired) or to the amortised cost of the liability. The effective interest rate is revised as a result of periodic re-estimation of cash flows of floating-rate instruments to reflect movements in market rates of interest. The effective interest rate is also revised for fair value hedge adjustments at the date on which amortisation of the hedge adjustment begins.

For the financial asset that has become credit impaired subsequent to initial recognition, interest income is calculated by applying the effective interest rate to the amortised cost of the financial asset. If the asset is no longer credit-impaired, then the calculation of interest income reverts to the gross basis.

11.1 Composition

	BANK		GROUP
For the year ended 31 December	2022 LKR ’000	2021 LKR ’000	2022 LKR ’000	2021 LKR ’000
Interest income (Note 11.1.1)	67,460,357	36,599,000	67,464,328	36,599,512
Interest expenses (Note 11.1.2)	(41,391,046)	(23,946,256)	(41,317,083)	(23,918,895)
Net interest income	26,069,311	12,652,744	26,147,245	12,680,617

11.1.1 Interest Income

	BANK		GROUP
For the year ended 31 December	2022 LKR ’000	2021 LKR ’000	2022 LKR ’000	2021 LKR ’000
Placements with banks	559,190	306,823	563,162	307,335
Financial assets measured at fair value through profit or loss	25,694	294	25,694	294
Financial assets at amortised cost – Loans to and receivables from banks	111,038	83,608	111,037	83,608
Financial assets at amortised cost – Loans to and receivables from other customers (Note 11.1.1.1)	58,052,403	29,277,833	58,052,403	29,277,833
Financial assets at amortised cost – Debt and other instruments	4,397,052	2,312,359	4,397,052	2,312,359
Financial assets measured at fair value through other comprehensive income	4,314,980	4,618,083	4,314,980	4,618,083
Total interest income	67,460,357	36,599,000	67,464,328	36,599,512

11.1.1.1 Interest Income from loans to and receivables from other customers includes modifications made to loans due to moratorium/debt concessionary schemes implemented by the Government/Bank as a measure to support the recovery of businesses/customers affected by economic crisis. There is no material modification loss or gain due to modification to the original terms and conditions of the loan during the year ended 31 December 2022.

11.1.2 Interest Expenses

	BANK		GROUP
For the year ended 31 December	2022 LKR ’000	2021 LKR ’000	2022 LKR ’000	2021 LKR ’000
Due to banks	521,361	635,452	521,361	635,452
Financial liabilities at amortised cost – Due to depositors	33,314,183	17,309,634	33,240,219	17,282,273
Financial liabilities at amortised cost – Due to other borrowers	3,389,930	1,738,349	3,389,930	1,738,349
Debt securities in issue	4,023,673	4,125,396	4,023,674	4,125,396
Interest expense on lease liabilities (Note 58.3)	141,899	137,425	141,899	137,425
Total interest expenses	41,391,046	23,946,256	41,317,083	23,918,895

The amounts reported above include interest income and expense, calculated using the effective interest method, that relate to the following financial assets and financial liabilities.

	BANK		GROUP
As at 31 December	2022 LKR ’000	2021 LKR ’000	2022 LKR ’000	2021 LKR ’000
Financial assets measured at amortised cost (Note 25)	468,189,556	421,766,258	468,377,886	421,874,714
Financial assets measured at FVOCI (Note 25)	63,319,060	54,329,436	63,319,060	54,333,429
Total	531,508,616	476,095,694	531,696,946	476,208,143
Financial liabilities measured at amortised cost (Note 25)	510,122,973	431,955,007	509,742,713	431,587,552

11.1.3 Interest Income from Government Securities – Bank/Group

For the year ended 31 December	2022 LKR ’000	2021 LKR ’000
Financial assets measured at fair value through profit or loss	25,694	294
Financial assets at amortised cost – Debt and other instruments	4,327,593	2,296,146
Financial assets measured at fair value through other comprehensive income	4,314,980	4,618,083
	8,668,267	6,914,523

Accounting Policy

Fee and commission income and expense that are integral to the effective interest rate on a financial asset or liability are included in the measurement of the effective interest rate. Other fees and commission income are recognised as the related services are performed. When a loan commitment is not expected to result in the draw down of a loan, the related loan commitment fees are recognised on a straight-line basis over the commitment period. A contract with a customer that results in a recognised financial instrument in the Group’s financial statements may be partially in the scope of SLFRS 9 and partially in the scope of SLFRS 15. If this is the case, then the Group first applies SLFRS 9 to separate and measure the part of the contract that is in the scope of SLFRS 9 and then applies SLFRS 15 to the residual. Fees for guarantees and trade related commissions are recognised on a straight-line basis over the period of the contract. Other fees and commission expense relate mainly to transaction and service fees, which are expensed, as the services are received.

12.1 Composition

	BANK		GROUP
For the year ended 31 December	2022 LKR ’000	2021 LKR ’000	2022 LKR ’000	2021 LKR ’000
Fee and commission income (Note 12.1.1)	3,643,039	2,888,346	3,641,487	2,887,711
Fee and commission expenses	(766,002)	(292,468)	(766,002)	(292,468)
Net fee and commission income	2,877,037	2,595,878	2,875,485	2,595,243

12.1.1 Fee and Commission Income

In the following table, fee and commission income from contracts with customers in the scope of SLFRS 15 is disaggregated by major type of services.

Major service lines

	BANK		GROUP
For the year ended 31 December	2022 LKR ’000	2021 LKR ’000	2022 LKR ’000	2021 LKR ’000
Loans and advances	611,997	919,868	611,997	919,868
Credit cards	947,624	460,772	947,624	460,772
Trade and remittances	1,325,237	713,443	1,325,237	713,443
Customer accounts	281,298	286,648	281,298	286,648
Guarantees	340,983	424,178	340,983	424,178
Others (management, consulting and other fees)	135,900	83,437	134,348	82,802
Total fee and commission income	3,643,039	2,888,346	3,641,487	2,887,711

12.1.2 Performance Obligations and Revenue Recognition Policies

Fee and commission income from contracts with customers is measured based on the consideration specified in a contract with a customer. The Group recognises revenue when it transfers control over a service to a customer.

The following table provides information about the nature and timing of the satisfaction of performance obligations in contracts with customers, including significant payment terms, and the related revenue recognition policies.

Type of service	Nature and timing of satisfaction of performance obligations, including significant payment terms	Revenue recognition under SLFRS 15
Retail and corporate banking service	The Group provides banking services to retail and corporate customers, including account management, provision of overdraft facilities, foreign currency transactions, credit card and servicing fees.	Revenue from account service and servicing fees is recognised over time as the services are provided.
	Fees for ongoing account management are charged to the customer’s account on a monthly basis. The Group sets the rates separately for retail and corporate banking customers in each jurisdiction on an annual basis.	Revenue related to transactions is recognised at the point in time when the transaction takes place.
	Transaction-based fees for interchange, foreign currency transactions and overdrafts are charged to the customer’s account when the transaction takes place.
	Servicing fees are charged on a monthly basis and are based on fixed rates reviewed annually by the Group.

Accounting Policy

Results arising from trading activities include all gains and losses from realised and unrealised fair value changes, related capital gains and losses, dividend income from trading assets and trading liabilities and foreign exchange differences.

	BANK		GROUP
For the year ended 31 December	2022 LKR ’000	2021 LKR ’000	2022 LKR ’000	2021 LKR ’000
Foreign exchange from banks and other customers	(11,024)	236,496	(11,024)	236,496
Government securities
Net marked to market gain/(loss)	9,994	–	9,994	–
Net capital gain/(loss)	11,800	(703)	11,800	(703)
Equities
Net marked to market (loss)/gain	(249,217)	37,946	(249,217)	37,946
Net capital gain	16,669	160,561	16,669	160,561
Dividend income	8,675	2,375	8,675	2,375
	(213,103)	436,675	(213,103)	436,675

Accounting Policy

The Bank has non-trading derivatives held for risk management purposes (e.g., forward foreign exchange purchase or sale contracts) that do not form part of qualifying hedge relationship, that are mandatorily fair valued through profit or loss. In respect of such financial instruments, all realised and unrealised fair value changes and foreign exchange differences are included.

14.1 Net Gain from Financial Instruments Mandatorily Measured at FVTPL other than those Included in “Net Trading Income”

	BANK		GROUP
For the year ended 31 December	2022 LKR ’000	2021 LKR ’000	2022 LKR ’000	2021 LKR ’000
Forward exchange fair value changes
– Contracts with commercial banks	299,859	(217,548)	299,859	(217,548)
– Contract with CBSL	(20,835)	(2,332)	(20,835)	(2,332)
Loss on financial assets fair value through profit or loss equity securities	(2,705)	(27,388)	(2,705)	(27,388)
	276,319	(247,268)	276,319	(247,268)

Forward exchange fair value changes on contracts with commercial banks includes the unrealised gain/(loss) on derivatives carried for risk management purposes, after netting off the spot movement arising from the long-term foreign currency liabilities designated as hedge item as per the fair value hedge applied by the Bank (Note 29.2). The Bank has applied the fair value hedge accounting for a part of its foreign currency liabilities using forward contracts.

Accounting Policy

“Net gains from derecognition of financial assets” comprise realised gains less losses related to debt instruments measured at FVOCI and financial assets measured at amortised cost as per SLFRS 9.

	BANK		GROUP
For the year ended 31 December	2022 LKR ’000	2021 LKR ’000	2022 LKR ’000	2021 LKR ’000
Fair value through profit or loss Gain on sale of equity securities	–	65,260	–	65,260
Fair value through other comprehensive income Gain on sale of Government securities	99,112	1,325,748	99,112	1,325,748
	99,112	1,391,008	99,112	1,391,008

Accounting Policy

Net other operating income includes realised gain or loss on sale of fair value through other comprehensive income securities (e.g., Treasury Bills and Bonds, and dividend income from ordinary shares classified as fair value through other comprehensive income financial assets, dividend income from group entities, rental income, gains on disposal of property, plant and equipment and foreign exchange gains and losses.

Rental Income

Rental income and expenses are accounted on a straight-line basis over the entire period of the tenancy incorporating predetermined rent escalation during the period of the tenancy.

Dividend Income

Dividend income received by way of cash or scrip is recognised when the right to receive dividend is established. Dividend income from subsidiaries and joint venture is recognised when the Bank’s right to receive the dividend is established.

Gains and Losses on Disposal of Assets

Net gains and losses of a revenue nature arising from the disposal of property, plant and equipment and other non-current assets including investments in subsidiaries, joint ventures and associates are accounted for, in the statement of profit or loss after deducting from the proceeds on disposal, the carrying amount of such assets and the related selling expenses.

Foreign Exchange Gain/(Loss)

Foreign currency positions are revalued at each reporting date. Gains and losses arising from changes in fair value are included in the income statement in the period in which they arise.

	BANK		GROUP
For the year ended 31 December	2022 LKR ’000	2021 LKR ’000	2022 LKR ’000	2021 LKR ’000
Financial assets measured at fair value through other comprehensive income
Dividend income	1,110,577	951,419	1,110,577	951,419
Dividend income from subsidiaries, joint venture and associate	89,861	89,277	–	–
Net gain from repurchase transactions	451,755	369,894	451,755	369,894
Premises rental income	–	–	383,792	329,545
Gain/(loss) on sale of property, plant and equipment	8,744	(13,807)	8,744	(1,696)
Foreign exchange gain	(159,510)	103,644	(140,929)	105,005
Recovery of loans written-off	162,518	66,380	162,518	66,380
Others	78,603	14,195	275,539	141,095
	1,742,548	1,581,002	2,251,996	1,961,642

Accounting Policy

The Group recognises loss allowances for ECL on the following financial instruments that are not measured at FVTPL:

• financial assets that are debt instruments;
• lease receivables;
• financial guarantee contracts issued; and
• loan commitments issued.

No impairment loss is recognised on equity investments.

The Group measures loss allowances at an amount equal to lifetime ECL, except for the following, for which they are measured as 12-month ECL:

• debt investment securities that are determined to have low credit risk at the reporting date; and
• other financial instruments on which credit risk has not increased significantly since their initial recognition.

The Group considers a debt investment security to have low credit risk when its credit risk rating is equivalent to the globally understood definition of “”investment grade” other than the investment in government debt instruments. The Group does not apply the low credit risk exemption to any other financial instruments.

Individually Assessed Loans and Advances and Amortised Cost Debt Instruments

These are exposures, where evidence of impairment exists and those that are individually significant meriting individual assessment for objective evidence of impairment and computation of impairment allowance. The factors considered in determining that the exposures are individually significant include –

• the size of the loan; and
• the number of loans in the portfolio.

For all loans and amortised cost debt instruments that are considered individually significant, Bank assesses on a case by case basis, whether there is any objective evidence of impairment. The criteria used by the Bank to determine that there is such objective evident include –

• Significant financial difficulty of the borrower or issuer;
• A breach of contract such as a default or past due event;
• The restructuring of a loan or advance by the Bank on terms that the Bank would not consider otherwise;
• It is becoming probable that the borrower will enter bankruptcy or other financial reorganisation; or
• The disappearance of an active market for a security because of financial difficulties.

A loan that has been renegotiated due to a deterioration in the borrower’s condition is usually considered to be credit-impaired unless there is evidence that the risk of not receiving contractual cash flows has reduced significantly and there are no other indicators of impairment.

Impairment allowance on loans and advances and other financial instruments measured at amortised cost are calculated as the difference between the carrying amount and the present value of estimated future cash flows discounted at the asset’s original effective interest rate.

Collective Assessment

This includes all loans and advances of smaller value where there is no evidence of impairment and those individually assessed for which no evidence of impairment has been specifically identified on an individual basis.

These loans and advances are grouped together as per Basel Guidelines and product level according to their credit risk characteristics for the purpose of calculating an estimated collective impairment.

In making an assessment of whether an investment in debt instrument is credit-impaired, the Bank considers the following factors:

• The market’s assessment of creditworthiness as reflected in the bond yields.
• The rating agencies’ assessments of creditworthiness.
• The country’s ability to access the capital markets for new debt issuance.
• The probability of debt being restructured, resulting in holders suffering losses through voluntary or mandatory debt forgiveness.
• The international support mechanisms in place to provide the necessary support as “lender of last resort” to that country, as well as the intention, reflected in public statements, of governments and agencies to use those mechanisms. This includes an assessment of the depth of those mechanisms and, irrespective of the political intent, whether there is the capacity to fulfil the required criteria.

The Bank manages credit quality using a three stage approach which is in line with SLFRS 9.

12-month ECL are the portion of lifetime ECL that result from default events on a financial instrument that are possible within the 12 months after the reporting date. Financial instruments for which 12-month ECL are recognised are referred to as “Stage 1 financial instruments”. Financial instruments allocated to Stage 1 have not undergone a significant increase in credit risk since initial recognition and are not credit-impaired.

Lifetime ECL are the ECL that result from all possible default events over the expected life of the financial instrument or the maximum contractual period of exposure. Financial instruments for which lifetime ECL are recognised but that are not credit-impaired are referred to as "Stage 2 financial instruments". Financial instruments allocated to Stage 2 are those that have experienced a significant increase in credit risk since initial recognition but are not credit-impaired.

Financial instruments for which lifetime ECL are recognised and that are credit-impaired are referred to as "Stage 3 financial instruments".

Significant Increase in Credit Risk

When determining whether the risk of default on a financial instrument has increased significantly since initial recognition, the Bank considers reasonable and supportable information that is relevant and available without undue cost or effort. This includes both quantitative and qualitative information and analysis, based on the Bank’s historical experience and expert credit assessment and including forward-looking information.

The objective of the assessment is to identify whether a significant increase in credit risk has occurred for an exposure by comparing:

• the remaining lifetime probability of default (PD) as at the reporting date; with
• the remaining lifetime PD for this point in time that was estimated at the time of initial recognition of the exposure (adjusted where appropriate for changes in prepayment expectations).

The Bank considers an exposure to have significant increase in credit risk (SICR) when the contractual payment of a customer are more than 30 days past due in accordance with rebuttable presumption in SLFRS 9, or other qualitative indicators reveal that there had been SICR.

Impact Due to Ongoing Economic Crisis

The ongoing economic crisis in the country meant that there are industries and customers who had got impacted resulting in an increase in risk of default although customers may yet be servicing the loans. Significant Increase in Credit Risk (SICR) has been determined based on various measures of the customer’s current financial position, future earning capacity and sectors in which the customers operate etc. Facilities are categorized into risk categories (identifying risk elevated industries). SICR is then determined based on the resulting risk categorization and specific indicators based on the evaluations. Facilities have been stressed tested and required overlays have been made.

Generating the Term Structure of PD

The Bank collects performance and default information about its credit risk exposures analysed by type of product and borrower.

The Bank employs statistical models to analyse the data collected and generate estimates of the remaining lifetime PD of exposures and how these are expected to change as a result of the passage of time.

Determining Whether Credit Risk has Increased Significantly

The Bank assesses whether credit risk has increased significantly since initial recognition at each reporting date.

Credit risk may also be deemed to have increased significantly since initial recognition based on qualitative factors linked to the Bank’s credit risk management processes that may not otherwise be fully reflected in its quantitative analysis on a timely basis. This will be the case for exposures that meet certain heightened risk criteria, such as placement on a watch list. Such qualitative factors are based on its expert judgement and relevant historical experiences.

As a backstop, the Bank considers that a significant increase in credit risk occurs no later than when an asset is more than 30 days past due. Days past due are determined by counting the number of days since the earliest elapsed due date in respect of which full payment has not been received.

If there is evidence that there is no longer a significant increase in credit risk relative to initial recognition, then the loss allowance on an instrument returns to being measured at 12-month ECL.

The Bank monitors the effectiveness of the criteria used to identify significant increases in credit risk by regular reviews to confirm that:

• the criteria are capable of identifying significant increases in credit risk before an exposure is in default;
• the criteria do not align with the point in time when an asset becomes 30 days past due;
• the average time between the identification of a significant increase in credit risk and default appears reasonable;
• exposures are not generally transferred directly from 12-month ECL measurement to credit impaired; and
• there is no unwarranted volatility in loss allowance from transfers between 12-month PD (Stage 1) and lifetime PD (Stage 2).
• All credit facilities listed in section 07 of Directive No. 13 of 2021 issued by Central Bank of Sri Lanka on adoption of Sri Lanka Accounting Standards SLFRS 9 – “Financial Instruments”.

Definition of Default

The Bank considers a financial asset to be in default when:

• the borrower is unlikely to pay its credit obligations to the Bank in full, without recourse by the Bank to actions such as realising security (if any is held); or
• the borrower is more than 90 days past due on any material credit obligation to the Bank.
• the assessment of the external rating agencies indicates a default grading of the borrower; or
• all credit facilities listed in section 07 of Directive No. 13 of 2021 issued by Central Bank of Sri Lanka on adoption of Sri Lanka Accounting Standard SLFRS 09 – “Financial Instruments”.

Financial Instruments

In assessing whether a borrower is in default, the Bank considers indicators that are:

• qualitative – e.g. breaches of covenant;
• quantitative – e.g. overdue status and non-payment on another obligation of the same issuer to the Bank; and based on data developed internally and obtained from external sources

Inputs into the assessment of whether a financial instrument is in default and their significance may vary over time to reflect changes in circumstances. The definition of default largely aligns with that applied by the Bank for regulatory capital purposes.

Incorporation of Forward-Looking Information

The Bank incorporates forward-looking information into both its assessment of whether the credit risk of an instrument has increased significantly since its initial recognition and its measurement of ECL using a variety of external actual and forecasted information.

The Bank formulates a base case view of the future direction of relevant economic variables as well as a representative range (Best Case and Worst Case) of other possible forecast scenarios.

This process involves developing two or more additional economic scenarios and considering the relative probabilities of each outcome. External information includes economic data and forecasts published by both local and international sources. The base case represents a most-likely outcome. The other scenarios represent more optimistic and more pessimistic outcomes.

The Bank has identified and documented key drivers of credit risk and credit losses for each portfolio of financial instruments and, using an analysis of historical data, has estimated relationships between macroeconomic variables credit risk and credit losses.

The economic variables used by the Bank based on the statistical significance include the followings:

Unemployment rate		Base case scenario along with two other scenarios has been used (Best Case and Worst Case)
Interest rate
GDP growth rate
Inflation rate
Exchange rate

Modified Financial Assets

The contractual terms of a loan may be modified for a number of reasons, including changing market conditions, customer retention and other factors not related to a current or potential credit deterioration of the customer. An existing loan whose terms have been modified may be derecognised and the renegotiated loan recognised as a new loan at fair value in accordance with the accounting policy set out in Note 5.3.4.

When the terms of a financial asset are modified and the modification does not result in derecognition, the determination of whether the asset’s credit risk has increased significantly reflects comparison of:

• its remaining lifetime PD at the reporting date based on the modified terms; with
• the remaining lifetime PD estimated based on data on initial recognition and the original contractual terms.

When modification results in derecognition, a new loan is recognised and allocated to Stage 1 (assuming it is not credit-impaired at that time).

The Bank renegotiates loans to customers in financial difficulties (referred to as “forbearance activities”) to maximise collection opportunities and minimise the risk of default. Loan forbearance is granted on a selective basis if the debtor is currently in default on its debt or if there is a high risk of default, there is evidence that the debtor made all reasonable efforts to pay under the original contractual terms and the debtor is expected to be able to meet the revised terms.

The revised terms usually include extending the maturity, changing the timing of interest payments and amending the terms of loan covenants. The Bank’s Credit Committee regularly reviews reports on forbearance activities.

For financial assets modified as part of the Bank’s forbearance activity, the estimate of PD reflects whether the modification has improved or restored the Bank’s ability to collect interest and principal and the Bank’s previous experience of similar forbearance action. As part of this process, the Bank evaluates the borrower’s payment performance against the modified contractual terms and considers various behavioural indicators.

Generally, forbearance is a qualitative indicator of a significant increase in credit risk and an expectation of forbearance may constitute evidence that an exposure is credit-impaired. A customer needs to demonstrate consistently good payment behaviour over a period of time before the exposure is no longer considered to be credit-impaired/to have SICR or the PD is considered to have decreased such that it falls within the 12-month PD ranges for the asset to be considered Stage 1.

If the terms of a financial asset are modified, then 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 plus any eligible transaction costs. If cash flows are modified when the borrower is in financial difficulties, then the objective of the modification is usually to maximise recovery of the original contractual terms rather than to originate a new asset with substantially different terms. This approach impacts the result of the quantitative evaluation and means that the derecognition criteria are not usually met in such cases. If the modification of a financial asset measured at amortised cost or FVOCI does not result in derecognition of the financial asset, then the Bank first recalculates the gross carrying amount of the financial asset using the original effective interest rate of the asset and recognises the resulting adjustment 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 calculated using the effective interest rate method.

Measurement of ECL

ECL are a probability-weighted estimate of credit losses. They are measured as follows:

• financial assets that are not credit-impaired at the reporting date: as the present value of all cash shortfalls (i.e. the difference between the cash flows due to the entity in accordance with the contract and the cash flows that the Group expects to receive);
• financial assets that are credit-impaired at the reporting date: as the difference between the gross carrying amount and the present value of estimated future cash flows;
• undrawn loan commitments: as the present value of the difference between the contractual cash flows that are due to the Group if the commitment is drawn down and the cash flows that the Group expects to receive; and
• financial guarantee contracts: the expected payments to reimburse the holder less any amounts that the Group expects to recover.
• When discounting future cash flows, the following discount rates are used:
• financial assets other than purchased or originated credit-impaired (POCI) financial assets and lease receivables: the original effective interest rate or an approximation thereof;
• POCI assets: a credit-adjusted effective interest rate;
• lease receivables: the discount rate used in measuring the lease receivable;
• undrawn loan commitments: the effective interest rate, or an approximation thereof, that will be applied to the financial asset resulting from the loan commitment; and
• ;financial guarantee contracts issued: the rate that reflects the current market assessment of the time value of money and the risks that are specific to the cash flows.
• The key inputs into the measurement of ECL are the term structure of the following variables:
• Probability of default (PD);
• Loss given default (LGD);
• Exposure at default (EAD).

ECL for exposures in Stage 1 are calculated by multiplying the 12-month PD by LGD and EAD.

Lifetime ECL are calculated by multiplying the lifetime PD by LGD and EAD.

The methodology for estimating PDs is discussed above under the heading “Generating the term structure of PD”.

LGD is the magnitude of the likely loss if there is a default. The Bank estimates LGD parameters based on the history of recovery rates of claims against defaulted counterparties. The LGD models consider the structure, collateral, seniority of the claim, counterparty industry and recovery, costs of any collateral that is integral to the financial asset. LGD estimates are recalibrated for different economic scenarios and, for lending collateralised by property, to reflect possible changes in property prices. They are calculated on a discounted cash flow basis using the effective interest rate as the discounting factor.

EAD represents the expected exposure in the event of a default. The Bank derives the EAD from the current exposure to the counterparty and potential changes to the current amount allowed under the contract and arising from amortisation. The EAD of a financial asset is its gross carrying amount at the time of default. For lending commitments, the EADs are potential future amounts that may be drawn under the contract, which are estimated based on historical observations and forward-looking forecasts. For financial guarantees, the EAD represents the amount of the guaranteed exposure when the financial guarantee becomes payable. For some financial assets, EAD is determined by modelling the range of possible exposure outcomes at various points in time using scenario and statistical techniques.

As described above, and subject to using a maximum of a 12-month PD for Stage 1 financial assets, the Bank measures ECL considering the risk of default over the maximum contractual period (including any borrower’s extension options) over which it is exposed to credit risk, even if, for credit risk management purposes, the Bank considers a longer period. The maximum contractual period extends to the date at which the Bank has the right to require repayment of an advance or terminate a loan commitment or guarantee.

Where modelling of a parameter is carried out on a collective basis, the financial instruments are Grouped on the basis of shared risk characteristics, which may include:

• instrument type;
• credit risk grade;
• collateral type;
• date of initial recognition;
• remaining term to maturity;
• industry; and
• client segment.

The Groupings are subject to regular review to ensure that exposures within a particular Group remain appropriately homogeneous.

Restructured Financial Assets

If the terms of a financial asset are renegotiated or modified or an existing financial asset is replaced with a new one due to financial difficulties of the borrower, then an assessment is made of whether the financial asset should be derecognised and ECL are measured as follows.

• If the expected restructuring will not result in derecognition of the existing asset, then the expected cash flows arising from the modified financial asset are included in calculating the cash shortfalls from the existing asset.
• If the expected restructuring will result in derecognition of the existing asset, then the expected fair value of the new asset is treated as the final cash flow from the existing financial asset at the time of its derecognition. This amount is included in calculating the cash shortfalls from the existing financial asset that are discounted from the expected date of derecognition to the reporting date using the original effective interest rate of the existing financial asset.

Purchase of Credit-Impaired (Poci) Financial Assets

POCI financial assets are assets that are credit-impaired on initial recognition. For POCI assets, lifetime ECL are incorporated into the calculation of the effective interest rate on initial recognition.

Consequently, POCI assets do not carry an impairment allowance on initial recognition. The amount recognised as a loss allowance subsequent to initial recognition is equal to the changes in lifetime ECL since initial recognition of the asset.

Write-off

Loans and debt securities are written off (either partially or in full) when there is no reasonable expectation of recovering a financial asset in its entirety or a portion thereof. This is generally the case when the Group determines that the borrower does not have assets or sources of income that could generate sufficient cash flows to repay the amounts subject to the write-off. This assessment is carried out at the individual asset level.

Reversals of Impairment

If the amount of an impairment loss decreases in a subsequent period, and the decrease can be related objectively to an event occurring after the impairment was recognised, the excess is written-back by reducing the loan impairment allowance accordingly. The write-back is recognised in the income statement.

Renegotiated Loans

Loans subject to collective impairment assessment whose terms have been renegotiated are no longer considered past due, but are treated as up-to-date loans for measurement purposes once a minimum number of payments required have been received.

Loans subject to individual impairment assessment, whose terms have been renegotiated, are subject to ongoing review to determine whether they remain impaired. The carrying amounts of loans that have been classified as renegotiated retain this classification until it is upgraded.

Financial Guarantee Contracts Held

The Group assesses whether a financial guarantee contract held is an integral element of a financial asset that is accounted for as a component of that instrument or is a contract that is accounted for separately. The factors that the Group considers when making this assessment:

• the guarantee is implicitly part of the contractual terms of the debt instrument;
• the guarantee is required by laws and regulations that govern the contract of the debt instrument;
• the guarantee is entered into at the same time as and in contemplation of the debt instrument; and
• the guarantee is given by the parent of the borrower or another company within the borrower’s group.

If the Group determines that the guarantee is an integral element of the financial asset, then any premium payable in connection with the initial recognition of the financial asset is treated as a transaction cost of acquiring it. The Group considers the effect of the protection when measuring the fair value of the debt instrument and when measuring ECL.

If the Group determines that the guarantee is not an integral element of the debt instrument, then it recognises an asset representing any prepayment of guarantee premium and a right to compensation for credit losses. A prepaid premium asset is recognised only if the guaranteed exposure neither is credit-impaired nor has undergone a significant increase in credit risk when the guarantee is acquired. These assets are recognised in ‘other assets'. The Group presents gains or losses on a compensation right in profit or loss in the line item ‘impairment losses on financial instruments’.

Presentation of allowance for ECL in the statement of financial position loss allowances for ECL are presented in the statement of financial position as follows:

• financial assets measured at amortised cost: as a deduction from the gross carrying amount of the assets;
• loan commitments and financial guarantee contracts: generally, as a provision;
• debt instruments measured at FVOCI: no loss allowance is recognised in the statement of financial position because the carrying amount of these assets is their fair value. However, the loss allowance is disclosed and is recognised in fair value reserve.

Regulation Issued by Central Bank of Sri Lanka (“CBSL”)

During the year the CBSL issued circular relating to moratorium/debt relief/credit support to customers and industries schemes offered by the Government to support recovery of the economy. These circulars have an impact on Recognition of Interest Income, stage-wise classification of facilities and computation of expected credit loss.

Composition

	BANK		GROUP
For the year ended 31 December	2022 LKR ’000	2021 LKR ’000	2022 LKR ’000	2021 LKR ’000
Financial assets at amortised cost – Loans to and receivables from other customers	13,928,156	3,846,100	13,928,156	3,846,100
Financial assets at amortised cost – Debt and other instruments	1,785,267	291,959	1,785,267	291,959
Other assets	1,165,107		1,165,107
Financial assets measured at fair value through other comprehensive income	137,570	56,673	137,570	56,673
Loan commitments and financial guarantee contracts	8,473	251,362	8,473	251,362
Other debts and investments	34,397	39,194	34,397	39,194
Reversal of provision made on investment in subsidiaries	(17,499)	–	–	–
	17,041,471	4,485,288	17,058,972	4,485,288

Impairment Charge to the Income Statement

For the year ended 31 December 2022	Note	Stage 1 LKR ’000	Stage 2 LKR ’000	Stage 3 LKR ’000	Total LKR ’000
Impairment charge		3,311,294	4,843,726	9,109,444	17,264,464
Transfer to other stages/Impairment reversals due to the recoveries		(1,018,675)	(1,156,020)	(1,161,613)	(3,336,308)
Financial assets at amortised cost – Loans to and receivables from other customers	31.1.4	2,292,619	3,687,706	7,947,831	13,928,156
Financial assets at amortised cost – Debt and other instruments	32.5		1,785,267		1,785,267
Other assets	41.1.2		1,165,107		1,165,107
Financial assets measured at fair value through other comprehensive income	33.5	137,570			137,570
Loan commitments and financial guarantee contracts	56.1.1	(56,865)	65,338		8,473
		2,373,324	6,703,418	7,947,831	17,024,573
Other debts					34,397
Investment in subsidiaries	34.1				(19,600)
Investment in associate	35				2,101
Total impairment charge – Bank					17,041,471
Investment in subsidiaries/associate					17,499
Total impairment charge – Bank/Group					17,058,972

Impairment Charge for International Sovereign Bond and Sri Lanka Development Bond

The Bank's total exposure to foreign currency denominated matured and ongoing investments are presented in Note 32 and 41. The main uncertainties regarding the estimations for the recoverability of the Bank’s total exposure relate to the debt service capacity of the Government of Sri Lanka , which, in turn, is affected by the development of the prevailing macroeconomic environment as well as by the levels of liquidity of the Government and the outcome of the Debt restructuring negotiations with the International Monetary Fund (IMF) and the resultant comprehensive debt restructuring program. Due to the uncertainties relating to the above, the Bank has used significant judgement using the information available as at reporting date to estimate to recoverable value. Accordingly an impairment charge has been recognized.

For the year ended 31 December 2021	Note	Stage 1 LKR ’000	Stage 2 LKR ’000	Stage 3 LKR ’000	Total LKR ’000
Financial assets at amortised cost – Loans to and receivables from other customers	31.1.4	896,995	924,214	2,024,891	3,846,100
Financial assets at amortised cost – Debt and other instruments	32.4	291,959	–	–	291,959
Financial assets measured at fair value through other comprehensive income	33.5	56,673	–	–	56,673
Loan commitments and financial guarantee contracts	56.1.1	232,692	18,670	–	251,362
		1,478,319	942,884	2,024,891	4,446,094
Other debts					39,194
Total impairment charge - Bank/Group					4,485,288

Accounting policy in Note 47.

Short-term Employee Benefits

Short-term employee benefits are expensed as the related service is provided. A liability is recognised for the amount expected to be paid if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.

18.1 Composition

		BANK		GROUP
For the year ended 31 December	Note	2022 LKR ’000	2021 LKR ’000	2022 LKR ’000	2021 LKR ’000
Salaries and other benefits		3,835,013	3,498,482	4,039,967	3,651,774
Contributions to defined benefit plans	18.1.1	187,348	22,644	194,351	28,857
Contributions to defined contribution plans	18.1.2	421,851	376,599	443,805	397,881
		4,444,212	3,897,725	4,678,123	4,078,512

18.1.1 Contributions to Defined Benefit Plans

		BANK		GROUP
For the year ended 31 December	Note	2022 LKR ’000	2021 LKR ’000	2022 LKR ’000	2021 LKR ’000
Funded pension liability
Current service cost		38,673	53,371	38,673	53,371
Interest on obligation		242,304	254,459	242,304	254,459
Expected return on pension assets		(243,074)	(243,743)	(243,074)	(243,743)
Past service cost	18.1.1.1	–	(176,254)	–	(176,254)
		37,903	(112,167)	37,903	(112,167)
Unfunded pension liability
Interest on obligation		5,322	5,379	5,322	5,379
		5,322	5,379	5,322	5,379
Unfunded end of service gratuity liability
Current service cost		87,812	71,336	90,872	75,280
Interest on obligation		56,311	46,738	60,254	49,007
Past service cost		–	11,358	–	11,358
		144,123	129,432	151,126	135,645
Total contribution to defined benefit plans		187,348	22,644	194,351	28,857

18.1.1.1 Past Service Cost

The Bank reassessed the pension fund liability taking in to consideration the retirement age revision under the “Minimum Retirement Age of Workers Act No. 28 of 2021”. This reassessment resulted in a net reversal of liability which was immediately reversed to the statement of profit or loss as it is considered as a change to the plan in compliance with the Sri Lanka Accounting Standard “LKAS 19- Employee Benefits”.

18.1.2 Contributions to Defined Contribution Plans

		BANK		GROUP
For the year ended 31 December		2022 LKR ’000	2021 LKR ’000	2022 LKR ’000	2021 LKR ’000
Employer's contribution to Employees’ Provident Fund		351,543	313,786	369,220	330,907
Employer's contribution to Employees’ Trust Fund		70,308	62,813	74,585	66,974
Total defined contribution plans		421,851	376,599	443,805	397,881

Accounting policy in Note 38 and 39.

	BANK		GROUP
For the year ended 31 December	2022 LKR ’000	2021 LKR ’000	2022 LKR ’000	2021 LKR ’000
Depreciation
– Investment property	–	–	33,864	23,670
– Property, plant and equipment (Note 38.1)	400,320	415,353	421,921	435,230
– Right-of-use assets (Note 38.1)	309,678	287,629	309,678	287,629
Amortisation
– Intangible assets (Note 39.1)	414,668	320,869	422,970	327,644
	1,124,666	1,023,851	1,188,433	1,074,173

Accounting Policy

Expenses are recognised in the income statement 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 in maintaining the property, plant and equipment in a state of efficiency has been charged to the income statement.

	BANK		GROUP
For the year ended 31 December	2022 LKR ’000	2021 LKR ’000	2022 LKR ’000	2021 LKR ’000
Directors’ emoluments	20,445	18,135	22,613	19,019
Auditors’ remuneration
Audit fees and expenses	5,624	4,890	6,526	5,748
Audit related fees and expenses	3,821	2,622	3,821	2,849
Fees for non-audit services	180	2,457	332	2,457
Professional and legal expenses	3,807	174	3,807	174
Premises, equipment and establishment expenses	2,772,494	1,848,282	2,772,494	1,848,282
Other overhead expenses	1,741,730	1,583,082	1,669,139	1,522,333
	4,548,101	3,459,642	4,478,732	3,400,862

Directors emolument include fees paid to Non-Executive Directors. Remuneration paid to Executive Directors are included under salaries and other benefits in Note 18.1.

Accounting Policy

Value Added Tax on Financial Services (VAT)

VAT on financial services is calculated in accordance with Value Added Tax Act No. 14 of 2002 and subsequent amendments thereto.

The value base for computation of VAT is the operating profit before taxes on financial services adjusted for emoluments of employees and depreciation computed as per prescribed rates. Value added tax rate was revised from 15% to 18% effective from 01 January 2022.

Social Security Contribution Levy (SSCL)

SSCL on financial services is calculated in accordance with social security contribution Levy Act, No. 25 of 2022. SSCL is chargeable on the value addition at 2.5% effective from 01 October 2022 onwards.

21.1 Composition

	BANK		GROUP
For the year ended 31 December	2022 LKR ’000	2021 LKR ’000	2022 LKR ’000	2021 LKR ’000
Value Added Tax on financial services (Note 21.1.1)	1,209,964	1,217,068	1,209,964	1,217,068
Social security contribution levy	42,268	–	42,268	–
Change in estimates related to prior years
– Debt repayment levy	1,685	–	1,685	–
– Nation Building Tax	(616)	–	(616)	–
Total	1,253,301	1,217,068	1,253,301	1,217,068

21.1.1 Value Added Tax on Financial Services

	BANK		GROUP
For the year ended 31 December	2022 LKR ’000	2021 LKR ’000	2022 LKR ’000	2021 LKR ’000
Current year	1,235,451	1,218,859	1,235,451	1,218,859
Change in estimates related to prior years	(25,487)	(1,791)	(25,487)	(1,791)
Total	1,209,964	1,217,068	1,209,964	1,217,068