Dear Stakeholders,

On behalf of the Board of Directors, I am pleased to present to you the 9th Integrated Annual Report and the Audited Financial Statements for the Financial Year 2022. SDB Bank has been at the forefront of building, connecting and empowering communities since its inception 25 years ago, and this year’s Annual Report resonates with our steadfast commitment and passion in ‘Building Vibrant Communities’. We will continue to embrace and leverage our rich heritage and cooperative ecosystem, enriched by adjacent growth opportunities and modern-day banking.

Challenging global and local economic and political ramifications have significantly impacted Sri Lanka both directly and indirectly; and has resulted in an uncertain and challenging landscape. Amidst these challenges, we have evidenced an improving sentiment and await the successful restructuring of the local economy and debt position as the nation regains its foothold. We celebrate the resiliency of our customers, staff and partners and the unmistakable “Sri Lankan Hope and Spirit” that characterises us as Sri Lankans, and that which continues to help us weather this storm.

As we celebrate our 25th anniversary, we are honoured to have been an impactful influence in the lives of our stakeholders. The bank began its journey as a development bank in 1997 on the strength of the modest savings of members through primary SANASA societies. Today your bank is positioned as an inclusive and equitable financial service provider, supporting and strengthening the backbone of the Sri Lankan economy.

We at SDB Bank, are ready to deliver and go beyond, in supporting the healing of Sri Lanka, and be the nucleus of rebuilding our communities and economy ground up, as we embark on the next phase of our journey.

Operating Environment

The year under review was one of the most challenging in the history of Sri Lanka with both economic and political crises taking centre stage leading to a contraction in the economy. Although the year began with signs of recovery from the prolonged COVID-19 pandemic, the steady decline of official foreign reserves in the early part of the year led to the depreciation of the rupee, followed by sharp hikes in interest rates. The scarcity of foreign currency resulted in delays in procuring essential imports, including medicine, gas and fuel. The resultant energy crisis and scarcities coupled with high inflation and increasing cost of living impacted all key sectors of the economy leading to social unrest and severe instability. The suspension of foreign currency sovereign debt service obligations followed by a downward revision of country rating closed most channels of foreign currency inflows pending the formalisation of a sustainable debt service plan. The harsh economic downturn along with political instability, cast down the potential post-pandemic recovery, giving rise to uncertainty on many fronts, with the economy recording a negative GDP growth rate of an estimated 7.8 percent. The wider impact of the economic crisis reverberated across the entire nation and was particularly felt across low and mid-income households which were severely impacted by the high cost of living, job losses and shortages in basic essentials and necessities, raw materials and other factors for production.

The banking sector and enterprise were not spared, and the resulting deterioration in the operating environment coupled with the high interest rates had significant repercussions, leading to stagnant credit growth, and depleting operational dynamics.

SDB Performance

SDB was no exception and had to confront these challenges in this volatile backdrop. This required a considerable focus on the part of the bank, to assess and limit the impact on the bank, customers, stakeholders and employees. The management ensured that comfortable liquidity buffers were maintained during the entire period with a sound capital position. The Bank’s liquidity measured by the Liquidity Coverage Ratio (LCR) at 191.22% and the Net Stable Funding Ratio (NSFR) at 241.61 together with the capital adequacy measured by the Tier 1 Ratio at 12.92% and Total Capital Ratio at 15.37% remained well above the regulatory norms.

We made every effort to address our challenges in ensuring sustainable progress, whilst also recognising and addressing the difficulties faced by our clientele including the SME and MSME segments collaboratively, and prudently implemented measures to support them in navigating these turbulent times. Despite wideranging concessions, there was a deterioration in the asset quality of the sector, and the Bank adopted a conservative and prudent approach and continues to support and strengthen its capabilities to minimise the impact and enhance our recovery efforts.

The benefit of being a predominantly domestic-focused development bank, resulted in us being insulated and not being directly impacted by the foreign exchange crisis; although it was inevitable that the stresses on the economy and the ripple effect would impact our performance. We delivered modest results, given the higher levels of impairment as a part of the prudent measures adopted considering the potential stresses faced by our borrowers, a sharp increase in the cost of financing and time lag in balance sheet re-pricing. The bank had to contend with the impact of high inflation and rupee depreciation on our cost of operations despite our best efforts to operate more efficiently.

We identified the need to focus on fee-based revenue streams to support our profitability; and have set ourselves a target to explore opportunities and improve on this front. We ensured our investments are sound and secure and applied a broad-based investment strategy, primarily in rupee denominated simple instruments.

We are ready to embrace the change in tide and scope new opportunities, whilst being cognizant of the need to have the requisite balance sheet, capability and focus.

Year of Consolidation

We perceived the year under review as a year of consolidation to grow our base and build on the core. Meanwhile, we took a closer look at our portfolio and the segments we are serving, realising the necessity for adeptness in our structuring in the current operating landscape.

The bank will continue its strategic focus on key segments; working closely with cooperatives, offering structured solutions to SMEs, providing banking services and financing to women-led businesses whilst building capability to facilitate digital inclusion. The bank has set up dedicated Units to manage the unique needs of these client segments to be able to tailor-make solutions and offer mentoring and support to suit their evolving needs.

We also continued the use of our digital products; the banking wallet UPay and SDB Mobile app in providing greater convenience and ease of transacting to our customers using the bank’s digital channels. As a future-ready bank, we will continue to build on and improve the digital solutions we offer, to scale our reach and provide greater access to all the client segments we serve. The use of technology to create impact and to fast-track our mission has been on top of the board’s agenda. But, we are mindful of the resource intensive nature of digital banking and its pace of evolution; and are fine-tuning the model to achieve the most favourable outcomes.

Risk Management and Corporate Governance

We remain committed to maintaining the highest standards of corporate governance that ensure our accountability and transparency. To this end, we have complied with all the required corporate governance standards including all the statutory requirements strengthening industry best practices across all levels of our business operations. During the year, in pursuant of further improvement on this front, we reviewed our governance framework in line with global best practices with a view to strengthening our governance structure.

We worked on building a stronger and closer dialogue between Board and Management, through the effective use of committees, and will continue to incorporate and adopt global best practices as we inculcate and instil a strong control and governance mind-set and framework.

We also understood the need to take a closer look at our Risk Management practices and processes in light of unprecedented and unexpected developments in both the global and the domestic economic landscape; and are monitoring and running scenarios on an ongoing basis, to ensure that the bank is safeguarded from any undue adverse effects. Another area of attention was IT and cyber security, which has evolved to be a key area of relevance for financial institutions and regulators. We understand the importance of information security, data privacy and governance, and have prioritised this as a key area of focus.

Commitment to Sustainability

Inclusive banking and building resilient communities have always been areas of focus of the bank, and form a core component of our Environmental, Social and Governance (ESG) and development goals. We continue to strengthen and create structures to ensure that we have far reaching and enhanced impact across all our work streams. The Board Subcommittee on Sustainability continues to review the bank's progress on ESG performance including on safeguards and has placed emphasis on ESG integration as a strategic priority for the bank.

The poly crisis exposed Sri Lanka's vulnerability and lack of adaptive capacity especially in relation to energy security and food security. As the country charts its path to recovery, social and economic resilience and sustainability must be at the core of the reform and structural adjustment process. With the stabilisation of the economy, we see the potential for the bank to play a meaningful role in mobilising sustainable finance for Sri Lanka's development. Currently, we are engaging with our clients and stakeholders to support them in a sustainable recovery. For our next phase of growth, we have identified clear focuses on sustainable finance and we continue to engage with development agencies and partners to obtain technical assistance to enhance our solutions and value propositions.

Despite the economic challenges, during the year under review, we financed for the first time in the bank's history, a 3MW commercial scale renewable energy venture and also implemented a 25-hectare agroforestry project in order to understand the potential for financing nature-based solutions. We hope to further strengthen our internal capacity in the ensuing years and introduce new sustainable finance propositions with the support of our stakeholders who share our ethos and commitment to sustainability.

Way forward

As a challenging year ends, a new year begins with hope. Holding on to this optimism, we will continue to take a closer look at our strategies with the adeptness to make changes where necessary in creating value for our stakeholders. We will continue to make positive strides into offering value to our SME, MSME and Cooperative clientele focusing on achieving higher penetration whilst maintaining costs at manageable levels. We have already initiated an expansion of our value offering with a structured program to operate across value chains. As a part of our continuous improvement, we will standardise and enhance service levels and work towards strengthening and cementing the Cooperative partnerships whilst focusing on near adjacencies.

The SDB Team is committed to setting the growth journey on track and staying true to the bank's potential, ensuring delivery and execution across all key segments. With the bank's levels of capital and liquidity being second to none in the SL Market, together with our early investment in Digital and in particular 'UPay', and the strong historical ties with Co-operatives and Sanasa communities gives us the right ingredients to embrace growth with purpose.

The bank will continue to build on its core business, driving transformation with Technology at the forefront and setting clear measurement criteria to be more execution focused. The bank will pursue a path of smart growth identifying quality over quantity, adopting lean strategies where possible, and using digitally enabled and supported solutions to drive efficiency with clear anticipation of future risks based on the learning from the past and other markets as well as scenario-based impact assessment of unknown factors. We will collaborate and partner with our stakeholders, DFIs, professional bodies and the government to power the next phase of the bank's growth and to deliver optimal outcomes for our clients.

Appreciation

I wish to take this opportunity to express my sincere gratitude to the outgoing Chairman Mr. Lakshman Abeysekera for his contribution and leadership in turbulent times for the bank, sector and economy. I would like to welcome our new CEO, Mr. Priyantha Talwatte, a veteran banker who has taken the mantle in pursuing and delivering a sustainable growth agenda. I would like to place on record my appreciation to the then acting CEO, Niranjan Thangarajah, who steered the bank during a period of transition, and in navigating the bank successfully through a year of extraordinary challenges.

My sincere gratitude to my fellow members of the Board for the heightened engagement, counsel, guidance and tighter rapport with Senior Management to help navigate a period of volatility and uncertainty. I am grateful to our Corporate Management Team for their unwavering commitment in steering the bank and leading by example in living and delivering our values, 'where you are valued'. My appreciation to the SDB team who steadfastly forged ahead despite obstacles to keep the bank's flag flying.

I am grateful to our longstanding investors, lenders, business partners, and customers who support and believe in our business model placing their unwavering trust and confidence in our ability to create value for them. We appreciate the support extended by our regulators. As we complete 25 years, it's a befitting time to show our humble gratitude to the visionary founders and subsequent leadership who steered the bank through its formative years, with a vision which is still relevant today.

A milestone year and a challenging environment led us to take a critical look at the way we worked in the past; and gave us an opportunity to test and prove our resilience, build on our strengths, look at adjacencies for growth, and fine-tune the model and charter our future course on a winning formula of our own design, leading the way in rebuilding our communities and the economy as a partner of national development.

Dinithi Ratnayake
Chairperson

12 April 2023
Colombo, Sri Lanka