BOC Annual Report

The Bank delivered outstanding results across key financial indicators, including total assets, deposits, and profitability, despite ongoing market volatility. This strong performance reflects the Bank's agility and adaptability as Sri Lanka's economy gradually recovers from a challenging period.

As the 'Bankers to the Nation' and a domestic systemically important bank, BOC played a pivotal role in revitalising the economy. A key focus was supporting the micro, small, and medium enterprises (MSMEs), enabling it to regain momentum and drive economic resilience.

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OPERATING CONTEXT

In 2024, the Sri Lankan banking sector continued the growth momentum that began at the end of 2023 driven by the success of economic reforms of the Government, the prudential policies of the CBSL and the overall positive effects from the global economy.
Credit growth continued due to the increasing business and consumer confidence and declining interest rate environment. Interest rate stability was strengthened by the CBSL adopting a single policy interest rate; the Overnight Policy Rate (OPR), replacing the previous dual policy interest rate mechanism, with effect from 27 November 2024.

STABILITY, GOVERNANCE AND SUSTAINABLE GROWTH

Delivering an exemplary financial performance through careful allocation of financial capital and execution of strategies thereby creating value for all stakeholders.

Priority Areas

Delivering a sound financial performance
Strengthening the balance sheet
Shareholder value creation

Impact of the Government's Debt Restructuring Programme to the Bank

Investment made in Sri Lanka International Sovereign Bonds (SLISBs) issued by the Government of Sri Lanka was considered to restructure under the Government's Debt Restructuring programme that executed on 20 December 2024. As per the exchange invitation issued on 25 November 2024 for the SLISBs restructuring two distinct options were communicated.

Option 01 – Global Bond Option
Option 02 – Local Bond Option

After a careful evaluation on the salient features of the two options available, the Bank decided to exercise the Local Bond Option as it resulted in a significantly lower principle after the haircut compared to the other option (Global Bond Option). Further LKR denominated settlement option is available in the event of inability to settle in USD albeit at a lower coupon rate and extended maturities.

The Bank had USD 245.0 million as principal amount with past due interest of USD 32.7 million as at 31 March 2024 against which approximately USD 150 million of impairment provision had been made covering more than 50% of the exposure.

Under the local bond option, 70% of the total capital outstanding of USD 245.0 million with 10% haircut was converted to new USD bonds with maturities up to the year 2038 and the balance 30% was converted to the LKR denominated Treasury Bonds. For the accrued coupon (past due interest) on the original ISBs up to 31 March 2024 was settled through

USD denominated bonds (PDI Bonds) at a haircut of 11%. The net impact (favourable) of this transaction to the Profit and Loss amounted to LKR 14.1 billion after considering the reversal of LKR 38.6 billion impairment provision already made, Day one loss of LKR 19.6 billion pertaining to the newly issued USD Bonds and the haircut loss of LKR 4.9 billion.

Description	Amount LKR billion	Disclosed in
Net reversal of existing provision	38.6	Impairment charge/ (reversal) for loans and other losses (Note No. 14)
Haircut loss	(4.9)	Net gains /(losses) from derecognition of financial assets (Note No. 12)
Day one loss adjustment	(19.6)	Interest income (Note No. 8)
Total net impact	14.1

More details are given under the Financial Statements Note No. 29.4 (Page 250)

Further, during the year, under the Domestic Debt Optimisation, some of the SOE exposures which had been granted under sovereign guarantee were restructured and transferred to the Central Government. Accordingly, after successful completion of the restructuring process, the relevant suspended interest income on those exposures were recognised to the interest income during the year.

Priority Area: 01

DELIVERING A SOUND FINANCIAL PERFORMANCE

Net Interest Income (NII)

The market interest rates continued to display a downward trend during the year in line with the eased monetary policy and administrative measures implemented by the CBSL. Despite interest rate fluctuation and the policy rates reduction of above 100 bps exercised throughout the year, the Bank was able to report 84% increase in the net interest income.

This demonstrated the Bank's agility in repricing assets and liabilities conforming with shifting market dynamics.

The net interest income reached to LKR 167.5 billion (2023: LKR 91.2 billion) contributing 92% to total operating income.

The lag effect of repricing the deposit base was eliminated during the year with the maturities of long term deposits at higher interest rates and the decrease in interest expense by 32% offset the drop in interest income by 12%. This performance underscores the Bank's drive towards preserving and growing profitability amidst trying economic conditions.

Despite a 14% increase in average interest earning assets, the resulted interest income was LKR 63.7 billion lower than 2023 backed by lower interest rate regime. The interest income from loans and advances which accounted more than 55% of the total interest income dropped to LKR 251.4 billion by 25% compared to last year reflecting effects of shifting to low interest rate scenario.

The interest expense declined to LKR 293.6 billion from the level of LKR 433.6 billion reported in 2023. Interest expense which denoted 83% of the interest income in previous year dropped to 64% showcasing the repricing effect of the high cost deposit base. Time deposit cost accounted for about 81% of the total funding cost also came down by 32% during 2024 causing financial cost of fund to come down by about 250 bps during the year. Even though the Bank's CASA ratio experienced a plunge during the year under review, the Bank was able to minimise its negativity steaming to NIM.

The net interest margin rose to 3.6% during 2024, achieving a five year high, and a noteworthy growth over the 2.1% NIM achieved in 2023.

Non-Fund Based Income

Fee and commission income in 2024 grew by 18% YoY over 2023 to reach LKR 30.4 billion. Fee and commission expenses grew by 19% YoY resulting in a net fee and commission income of LKR 20.6 billion. This was a 17% net increase over LKR 17.6 billion reported in 2023.

Net fee and commission income was a significant contributor to profitability, driven primarily by increases in card-related transactions, retail banking services, and the heightened adoption of digital banking channels by customers during the year.

By materialising the increase in credit card portfolio by 29% during previous year, along with the 5% growth reported during this year, the fee income generated from card transactions improved by 25% YoY.

Demonstrating its commitment to enhancing retail banking through digital channels, e-payment portals, and improved service efficiency, the Bank achieved a remarkable 45% growth in fee income from retail banking activities, reaching LKR 6.8 billion. This reflects the Bank's focus on delivering shared value and optimising customer experience through digital transformation.

Other non-fund based income/ expense of the Bank are generated through;

● The trading gains/ losses from foreign exchange, changes in fair value of derivative financial instruments, dividend income from trading equities.

● Unrealised gains/ losses from investments in equities and debt

instruments classified at fair value through Profit or loss.

● Net gains/ losses from derecognition of financial assets.

● Net other operating income derived from dividend income from subsidiaries, gains/ losses from foreign currency assets/ liabilities revaluation to reporting currency, rent income, etc.

The net impact of non-fund based activities accumulated to a loss of LKR 6.1 billion against a loss of LKR 8.5 billion reported in previous year.

The Bank leveraged its robust trading capabilities to capitalise on market opportunities resulting in a LKR 3.4 billion net gain in 2024. The appreciation by the Sri Lankan Rupee by 10% meanwhile resulted in exchange loss of LKR 9.0 billion. Apart from that, the Day one loss of LKR 4.9 billion was also reported under net gain/ losses from derecognition of financial assets.

Impairment Charge And Other Losses

The Bank continued its proactive and prudent approach to making impairment provisions under the Expected Credit Loss model, Despite of continuous recovery follow-ups, business revival activities, and stringent credit monitoring mechanisms. The Bank ensures adequate provision reserves are maintained to cover the expected losses arising due to credit risk.

The Individually Significant Loan (ISL) customers are quarterly evaluated through three-layer evaluation process where the Credit Risk Division of the Independent Integrated Risk Management Division (IIRMD) carried out an independent review for each ISL customer.

In 2024, the Bank recognised an impairment charge of LKR 12.4 billion on loans and advances; by considering the challenges that some business and industry sectors are still facing, as an outfall of the economic downturn and the global disruptions that occurred in the preceding years are not eliminated fully.

Amidst the economic turmoil and unrest that prevailed in Sri Lanka from 2021 to 2022, the Bank proactively identified Risk Elevated Industries (REIs) through management overlays. Sectors such as tourism, construction and textile export were classified as REIs due to cash flow deterioration, reduced demand, and the need for economic support.

Given that risks associated with these industries have not been fully mitigated, the Bank transferred exposures from Stage 1 to Stage 2, recognising a lifetime expected credit loss.

Even though, the economy is in a gradual recovery, the Bank did not consider an upward adjustment to parameters used for calculating Economic Factor Adjustment (EFA) which is used to calculate Expected Credit Loss (ECL) under collective impairment calculation on the prudent basis except for some portfolios which were clearly demarcated as associated economic impacts are reduced.

The impairment provision for investment in International Sovereign Bonds (ISBs), which was built upon the announcement of foreign currency default position in previous years was reversed to the Profit and Loss in line with the finalisation of SLISB debt restructuring during December 2024. Accordingly, a net reversal of LKR 38.6 billion in respect of other financial assets, was made upon the finalisation of the debt restructuring process.

Total Operating Costs

The Bank's total operating expenses amounted to LKR 67.1 billion, marking a 28% YoY increase. This was primarily driven by a 35% rise in personnel costs and a 21% increase in other overhead expenses.

During the year, the Bank finalised its collective agreement reinforcing its commitment to human capital. The increase in personnel costs reflects the Bank's dedication to rewarding its workforce, its most valuable asset.

Depreciation and amortisation expenses grew by 9%, largely due to investments in digital infrastructure, aligning with the Bank's strategic vision of becoming a digitally empowered, future-ready institution.

Other expenses, accounting for approximately 34% of total operating costs, rose by LKR 4.0 billion, reflecting a 22% increase. Other expenses primarily included administrative costs, deposit insurance premiums, and fixed asset maintenance, essential components in delivering exceptional customer service.

Despite the rise in operating expenses, the Bank successfully enhanced operational efficiencies, as demonstrated by the significant reduction in the cost-to-income ratio to 40%, from 56% in the previous year.

Taxation

VAT on financial services increased by 124% YoY, reflecting the increased volume of services offered.

BOC contributed LKR 70.9 billion to the Government in the form of taxes during the year, including Income tax, Value Added Tax (VAT), Social Security Contribution Levy (SSCL) and the additionally charged Surcharge Tax.

Once the Deferred tax is adjusted, total contribution to the Government amounted to LKR 65.9 billion which is 154% growth YoY.

Income tax for the year amounted to LKR 42.5 billion, 212% increase over the previous year. An effective tax rate of 52% was applicable to the Bank in 2024, which again reflects the BOC's substantial contribution to the national economy as a state-owned institution.

Profitability

The Bank delivered an outstanding financial performance, recording a profit before tax of LKR 106.9 billion marking a remarkable 165% growth compared to 2023 despite ongoing challenges in the operating environment. This solidifies the Bank's position as one of the most profitable institutions of the country.

The Bank's ability to generate value for its stakeholders over the past five years in one of the most challenging periods in both the country's and its own history, is evident in its sustained financial strength.

Profit after tax surged by 141% YoY to LKR 64.4 billion. Both key profitability ratios, Return on Assets (ROA) and Return on Equity (ROE), saw significant improvements, reflecting the Bank's enhanced profitability and operational efficiency.

The Bank reported LKR 12.1 billion net loss during the year against the net loss of LKR 29.0 billion reported in other comprehensive income in 2023. Net actuarial loss of LKR 18.9 billion on retirement benefit plans in 2023 declined to net loss of LKR 13.8 billion as a result of less volatility in actuarial assumptions used. The cash flow hedge reserve adjustment was also decreased this year by 82% provided the lower interest rate and LKR appreciation. The fair value adjustment on investment in equity instruments measured at Fair Value Through Other Comprehensive Income (FVTOCI) increased by 56% to LKR 2.8 billion during the year 2024 in line with the surge reported in equity market.

PRIORITY AREA: 02

STRENGTHENING THE BALANCE SHEET

Total Assets

By the end of 2024, the total assets of the Bank stood at LKR 4,985.1 billion, with a notable growth of 13% during the year and the total Group's assets stood at LKR 5,048.7 billion being the first Sri Lankan banking group to record LKR 5.0 trillion assets base.

The Bank's asset book witnessed a number of changes during the year. The increase in total assets was primarily driven by a significant increase in Government debt instruments and securities purchased under resale agreements. Cash and cash equivalents dropped by 15% YoY while balances held by the CBSL grew to LKR 52.3 billion from LKR 34.9 billion in 2023.

This robust asset position reinforces the Bank's ability to maintain its leadership position in the competitive banking sector. It is also evidence of the Bank's strategic approach to liquidity management and the ability to capitalise on favourable market conditions with dynamism.

The interest earning assets which comprise with 93% of the total assets of the Bank improved by 14% to LKR 4.6 trillion. This growth has been fuelled by the increase in investment portfolio due to deploying excess liquidity in high liquid investments as a short term strategy.

The value of net loans and advances stood at LKR 2.2 trillion at the end of 2024 and accounted for 44% of the total assets base and 47% of the interest earning assets base of the Bank. Even though total gross loans reported a marginal decline of 1%, the private sector lending improved by around 11% during the year with the Bank's strategic approach of the calibrating of its credit portfolio in line with post crisis

new business climate. The credit demand from the private sector improved with the gradual recovery of economic activities and the Bank catered to this steaming credit demand in a courteous approach.

Exposure to SOEs and Direct Government stood at around 32% by end of the year, consequent to the settlement of foreign currency exposures of Direct Government. Appreciation of 10% in LKR against USD also contributed to the contraction in USD denominated exposures.

Assets Quality

In order to minimise current and potential Stage 3 exposures and improve the asset quality, the Bank actively supported business revival efforts and engaged closely with customers to speed up their recovery. Even though Stage 3 loans amounted to LKR 372.8 billion with an up-tick of 20% from end -2023, it was mainly due to classification of some of the SOE exposures under Stage 3 due to delay of restructuring process of those exposures. The Bank believes that the restructuring will be completed during the year 2025. These initiatives coupled with strategic credit decisions have supported to mitigate credit losses during the year. These efforts will continue to deliver positive results, reinforcing BOC's role as a key contributor to the Sri Lankan economy.

The Bank maintained an impairment reserve of LKR 200.0 billion against the Stage 3 loan exposures which covered 54% of the total Stage 3 exposures as at the end of 2024.

The value of Stage 2 loans dropped by LKR 93.1 billion to LKR 245.1 billion at the end of 2024. The movement was mainly attributed to the classification of some of the SOE exposures to Stage 3, which was done on a proactive basis and the exchange rate variances in foreign currency denominated loans.

Under the CBSL Direction No. 13 of 2021; Classification, Recognition and Measurement of Credit Facilities, Licensed Banks are required to maintain 0.5% coverage for all Stage 1 loans. For the year 2024, BOC has maintained 1.9% compared to 1.7% coverage at the end of 2023, which is well above the regulatory requirement.

Funding

Total liabilities increased by 13% primarily due to the 8% growth in deposits, which increased to LKR 4.2 trillion from LKR 3.9 trillion at the end of 2023. Securities sold under repurchase agreements also grew by 67% YoY to reach LKR 131.1 billion by the end of the year. Current tax liabilities stemming from an improved bottom line and other liabilities also added to the growth in the Bank's liabilities.

Deposits are the key funding source of the Bank which accounts for 95% of the total funding base (deposits and borrowings). The Bank's strategic focus on deposit mobilisation and the sustained customer confidence was demonstrated by further strengthened deposit base of the Bank during the year.

Time deposits amounted to LKR 3.1 billion reporting 26% upward shift and Current and Savings, i.e the low cost fund base declined by 21%. Consequently, the composition of the low cost fund base declined to 27% against 37% reported at the end of 2023.

The total borrowing increased by 28% to LKR 230.4 billion following the increase in short term Repo borrowing to LKR 131.1 billion from LKR 78.5 billion. The Bank deployed these excess fund effectively amidst the challenges and was able to improve the NIM by 150 bps.

Capital And Liquidity

Retained earnings of the Bank stood at LKR 183.4 billion by end 2024. Among the LKR 64.4 billion added through profit after tax, LKR 39.9 billion was allocated to a Special Reserve in compliance with the Government's debt restructuring process for restructured SOEs and ISBs. However, this reserve is not considered for capital adequacy purposes.

The Bank's total equity strengthened, reaching LKR 302.6 billion demonstrating a robust growth of 20% from the previous year.

At the end of 2024, the Capital Adequacy Ratio (CAR) improved to 16.6%, up from 15.8% in 2023. This increase was driven by enhanced internally generated capital and the issuance of a Basel III-compliant debentures worth LKR 15.0 billion.

Amidst a complex operating environment, the Bank ensured financial stability through proactive liquidity management and risk mitigation strategies. Its strong liquidity position was reflected in a LKR liquidity coverage ratio of 329.0% and an all-currency liquidity coverage ratio of 269.6%, underscoring its resilience and prudent financial management.

PRIORITY AREA: 03

SHAREHOLDER VALUE CREATION

For the year ended 31 December	2024	2023	2022	2021	2020
Return on equity (%)	23.2	10.6	14.1	21.0	11.9
Earnings per share (LKR)	2,575.5	1,067.7	1,278.9	1,503.6	710.6
Dividends per share (LKR)	-	6.9	13.9	73.9	63.9
Net Assets Value (NAV) per share (LKR)	12,102.4	10,068.6	10,167.4	8,030.4	6,266.4

The Earnings per Share and Return on Equity of the Bank improved significantly due to the improved profitability and the net assets value per share also reported the highest value ever the history.

As a part of the capital management process, the Bank has not declared any dividend during the year 2024.

OVERSEAS OPERATIONS AND GROUP PERFORMANCE

At a consolidated level, Group pre-tax profits for the year reached LKR 108.2 billion, recording a YoY growth of 159%. By the end of 2024, the Bank had nine subsidiaries, and four associate companies involved in diverse operations ranging from financial services, property management services and leisure management, among others. The Bank operates a foreign subsidiary, which facilitates market access in Europe, which enhances the Bank's reputation while offering an effective platform for giving foreign exposure to employees. BOC is the most dominant entity within the Group, and accounts for 98% of total assets. The subsidiaries are managed under a subsidiary charter and are subject to an annual comprehensive subsidiary performance review. The financial and operational performance of the subsidiaries are monitored by the parent entity on a regular basis. Their risk dashboards are shared with the Bank's Chief Risk Officer to ensure that risks are managed within acceptable levels and in accordance with the Group's overall risk appetite. Each subsidiary and associate have a representative from the Bank, holding a Board position to ensure that their operations are conducted in line with the expectations of the parent entity.

WAY FORWARD

As Sri Lanka navigates its path towards economic resurgence, the Bank of Ceylon stands as a steadfast cornerstone, driving collective progress and revitalising the economy. By supporting both businesses and individuals alike, the Bank exemplifies resilience with sustained financial growth and reinforces its role as a catalyst for prosperity and stability.

The Bank will strive to strategically align its resources to unleash the future growth potential of Sri Lanka as projected by the optimistic economic growth forecasts over the coming years. Lending to the SMEs will continue to remain a key priority area. Future lending to SOEs will be managed with extreme vigilance. All banking operations will strive to maintain the growth momentum of KPIs that were achieved during 2024.

Capital management will continue to be a key factor in decision making processes in the Bank. The Bank will continue to strengthen its capital position through internal and external sources, but the main source of funds will continue to be from deposit mobilisation. From time to time, the Bank will supplement its capital position with Tier 11 instrument issues, specially for financing growth.

The Bank will also strengthen financial reporting based on SLFRS S1 and S2 standards by incorporating sustainability and climate risk reporting.

We will continue to make investments in building the capacity of our human resources and in digital infrastructure. Together, these investments will facilitate BOC to continue its leadership position in the future fit banking landscape in Sri Lanka.

Our Performance

Financial Review