FINANCING BEST PLACE TO OBTAIN FINANCING FACILITIES

[Pages:7]DELIVERING OUR STRATEGY THROUGH OUR BUSINESS CLUSTERS

FINANCING BEST PLACE TO OBTAIN FINANCING FACILITIES

With the economic crisis that arose on the back of the COVID-19 pandemic setting the backdrop for the year, the entire financial services sector found itself challenged by the sluggish credit appetite in the market. Not willing to let this scenario define LBF's prospects for the FY 2020/21, the Company's lending teams swung into action in a bid to seize available opportunities in the market.

Tactical strategies were deployed with the aim of retaining LBF's captive market in the auto finance segment - the Company's core business.

Mr. Ravindra Yatawara Executive Director

SWOT ANALYSIS

Strengths

Strong physical and digital presence and the diverse product portfolio coupled with the Company's long standing reputation for service excellence provides a clear competitive advantage over peers

Opportunities

Increased automation and digitization to enhance the customer experience

Core competencies A diverse product suite to cater all customer segments

Flexible and tailored solutions to match customer needs

Robust multi channels environment for convenient access

Best in-class service that includes guaranteed quick turnaround times and continuous support

Weaknesses

Non-availability of a fully integrated process capability to facilitate seamless end-to-end customer relationship management

Threats

Unscrupulous behaviour by some NBFI's could tarnish the reputation of the sector as a whole

Product offerings

RESPONDING TO COVID ? 19 Actions taken

For next financial years

Implemented innovative IT solutions, which facilitated all employees to work from home Virtual customer visit to ensure proper credit assessment even during the lockdown

Ensuring the readiness of the company to completely operate virtually in case of any pandemic situation where physical movement might be restricted

Close monitoring of customers who have been highly affected by pandemic There is a chance that the pandemic would have a slow effect on customer sales and subsequent cash flows. Special consideration must be given to those companies and their potential cash flows in order to retain a stable asset portfolio Launch online onboarding for customers

L B Finance PLC | Annual Report 2020/21

BUSINESS PERFORMANCE

Portfolio growth (%)

Lease Vehicle loan Mortgage loan Personal loan FD loan Power draft Gold loan Other

2016/17

28.70 (17.95) 66.75 173.24 37.56 45.52 23.84 (21.74)

2017/18

13.62 (3.10) 12.49 190.57 34.94 25.54 23.61 (42.78)

2018/19

6.01 40.91 (10.56) 38.76 10.69 38.50 27.89 (58.55)

2019/20

(8.18) 107.63 (18.15)

29.09 15.98

4.33 20.02 (48.57)

2020/21

(21.88) 40.55 (28.85)

6.44 (10.10)

0.59 17.32 (8.13)

AUTO FINANCE

The year under review was a challenging one for LBF's auto finance business. Despite myriad challenges presented by the COVID-19 pandemic, focused strategies and early actions to capitalise market opportunities enabled the auto finance business to register satisfactory for the FY 2020/21.

The two months island-wide lockdown period declared by the government at the onset of the COVID-19 pandemic in Sri Lanka made the Q1 of the current financial year particularly tough for LBF's auto finance business. With the entire country under curfew orders and many sectors forced to shut down, there was very little opportunity to grow the leasing business during this period. Around the same time, LBF also began seeing higher NPLs purely because customers found it difficult to meet their repayment obligations due to ongoing mobility restrictions in place. Taking immediate actions to bring the situation under control, LBF intensified recovery efforts during the lockdown period with all branch teams being mobilised to lend support to the recoveries unit and call centre. Continuing to maintain a focus on recoveries, after giving consideration to moratorium requests even after lockdown restrictions were lifted enabled LBF to gradually lower the NPL ratio.

Furthermore, with the demand for unregistered vehicles disappearing virtually overnight after the announcement of the vehicle import ban, the auto finance unit moved swiftly to seize available opportunities in the registered vehicle market. Despite this change in market dynamics, it was resolved to work towards achieving pre-COVID volume targets set for the year under review. Consequently a tactical realignment of the marketing strategy saw a broad based promotional campaign being rolled out from May 2020 onwards aimed at expanding the Company's registered vehicle finance portfolio. As part of this same effort, a series of dealer engagement activities were also carried out to strengthen ties with dealer networks. These well timed initiatives coupled with strategic repricing to reflect the low interest environment that prevailed throughout the year, helped drive a month-on-month improvement in auto finance volumes from Q2 onwards. Notably while a slight volume drop was seen in the aftermath of Sri Lanka's COVID-19 second wave in October 2020, this proved to be only a temporary setback as consistent volume growth was registered thereafter. With the trend continuing until end March 2021, LBF's auto finance unit succeeded in achieving the pre-COVID leasing targets for the current financial year.

Impact on LBF's Risk Profile Credit Risk (H)

Liquidity Risk (M) Refer Risk Management Report

Key macroeconomic challenges COVID-19 pandemic impact Ongoing tightening of LTV rules Additional regulatory controls to restrict import of vehicles Currency depreciation Poor performance of certain key sectors leading to weak economic conditions

LB Auto Finance

L B Finance PLC | Annual Report 2020/21

DELIVERING OUR STRATEGY THROUGH OUR BUSINESS CLUSTERS Financing

Given that the vehicle import ban is likely to remain in force for the foreseeable future, the prospects for LBF's auto finance business will depend on the demand for the unregistered vehicles.

Performance outcome The overall vehicle finance portfolio registered a year-on-year decline of 11.66%. This was partly due to the volume shortfall for the year. The drop was also due to the higher number of settlements during the year as customers were taking advantage of the current price driven by demand and supply dynamics to dispose of their vehicles.

Despite the drop in portfolio value, interest income attributed to auto finance was on par with the previous year, which points to the success of LBF's fundamental yield management strategy.

Outlook for the future Given that the vehicle import ban is likely to remain in force for the foreseeable future, the prospects for LBF's auto finance business will depend on the demand for the unregistered vehicles.

Having made some good headway in this market in the current financial year, LBF's auto finance unit will look to further expand captive market share and consolidate its position in this space in the year ahead. The key to achieving this would cautiously enhance the Company's risk appetite to facilitate solid loan growth, combined with proactive yield management and strict control over credit quality at all times.

Lending portfolio (volume) (%)

2021 0.27

31.73

41.49

2.61

3.39 2.73 3.18

14.61

Lease Vehicle Loan Mortgage Loan Personal Loan Power Draft

FD Loan Gold Loan others

Lending customer base composition (%)

2021 1.67

22.31

2.49 0.59 0.34 0.90

71.69

Lease Vehicle Loan Mortgage Loan Personal Loan Power Draft

FD Loan Gold Loan others

Rs.Bn

80 70 60 50 40 30 20 10

0

Auto finance

Key macroeconomic challenges COVID-19 pandemic impact

Pursue alternative lending strategies as a counter measure for the LTV challenge

Proactive NIM management

NPL management

MICRO LEASING

After successfully navigating the challenges of the previous financial year, it was hoped that the year under review would offer a fresh perspective for LBF's micro leasing business to resume its growth trajectory. Regrettably the COVID-19 pandemic impact made the FY 2020/21 even more challenging for the micro leasing business as its mainstay operation, three wheeler leasing once again came under pressure.

The demand for unregistered three wheelers which for years had been on the decline due to LTV restrictions, vanished completely in the year under review following the vehicle import ban declared by the government at the onset of the COVID-19 pandemic in March 2020.

Meanwhile with several factors affecting the demand for registered three wheelers, the micro leasing unit kicked off a two-pronged strategy to consolidate the portfolio and maintain market share. Customer retention was declared a key priority in light of the severe economic downturn in the first six months of the financial year and its adverse impact on self employed individuals and micro entrepreneurs, the micro leasing segments' key target markets. Consequently pre-approved refinance facilities were

2017 2018 2019 2020 2021

L B Finance PLC | Annual Report 2020/21

Tuk Mahaththaya

2017 2018 2019 2020 2021 2017 2018 2019 2020 2021

offered to existing customers to help them tide over the difficult times. Eligible customers were also given the opportunity to benefit from the debt moratorium scheme announced by the government to bring relief to COVID-19 affected individuals and businesses. At the same time recovery actions were strengthened in bid to minimize NPL's among customers who were not eligible for the moratorium.

The demand for registered three wheelers remained sluggish in the second half of the year as well. This was primarily due to the higher LTV requirements associated with the upward movement in the market price of registered three wheelers. The price of registered three wheelers increased immediately following the government decision to indefinitely extend the import ban, effectively halting the import of unregistered three wheelers for the foreseeable future.

Faced with these multiple challenges, LBF's micro leasing operation refreshed its rate structures and rolled out several focused campaigns to appeal to the target market. This was followed by "Tuk Mahaththaya", a social media awareness campaign launched in 2020 across all digital platforms, with the aim of further expanding the customer base. Dealer promotional activities also continued throughout the year.

Performance outcome Micro leasing portfolio

(Rs. `000) 20,000,000

15,000,000

10,000,000

5,000,000

0

Three wheeler Unregistered Three wheeler Registered Motor Bicycles

Key macroeconomic challenges COVID-19 pandemic impact Movements in world gold prices Tough competition in the market

Micro leasing customer base composition (%)

2021 5.59 9.84

84.57 Three wheeler Unregistered Three wheeler Registered Motor Bicycles

Outlook for the future The micro leasing segment will move forward based on the assumption that the import ban will remain in place for at least the next twelve months. Amidst this backdrop it would be imperative for the segment to improve the competitiveness of its offering in order to target the broader island-wide market for registered three wheelers.

GOLD LOAN

LBF's gold loan business recorded good results for the FY 2020/21, despite facing some notable challenges at the start of the year - Q1 in particular, where the opportunity to generate new business was lost due to the two months island-wide lockdown.

However, moving swiftly to take advantage of the high world gold prices and the low interest rate environment, LBF gold loan

business was able to significantly accelerate its growth trajectory from Q2 onwards. Given the consistently high demand for gold loans throughout the year, LBF took wide ranging action to secure a competitive advantage. Seeing a strong demand for gold loans from all market segments, LB Gold, a new high value gold loan offering was launched several times in 2020.

At the same time promotional activities were stepped up. Prevented from conducting face to face campaigns due to COVID-19 restrictions, island-wide promotional activities were done mostly with the use of the mobile propaganda vehicle. A sizable portion of the activities were also moved to digital mediums, a move that has helped LBF to make inroads into yet untapped market segments.

A concerted effort was also made to strengthen LBF's island-wide gold loan footprint, which saw new branches being opened to deepen the presence. Four branches were relocated to bring greater visibility in the areas. The ongoing counter expansion programme was also rolled out across more branches in the year under review.

Performance outcome

Despite the fact that no new business was generated during the two months lockdown period, overall volume targets for the year were successfully met, enabling the gold loan portfolio to even record a slight year on year growth of 17.32%. The customer base too grew compared to the previous year.

Gold loan portfolio growth (%)

30

25

20

15

10

5

0

L B Finance PLC | Annual Report 2020/21

DELIVERING OUR STRATEGY THROUGH OUR BUSINESS CLUSTERS Financing

Key macroeconomic challenges COVID-19 pandemic impact Rising trend in interest rates Regulatory controls Poor performance of certain key sectors leading to weak economic conditions

LB Gold loan ? Supreme, speedy and courteous service

Outlook for the future As it stands now, the short term outlook for LBF's gold loan operation appears to indicate the potential for solid growth over the next 6 -12 months. However, given that the prospects of the gold loan operation remains largely predicted on the movement in world gold prices, LBF will continue to exercise greater vigilance to proactively realign its strategy and safeguard the gold loan portfolio against adverse price movements in the months ahead.

MORTGAGE LOAN

LBF's mortgage loan portfolio consists of lending through the "Mul Gala" product. "Mul Gala" which is essentially a consumption loan, designed to facilitate the home improvement needs of customers. In recent times, it has also been promoted as an easily accessible working capital loan for self-employed individuals and micro entrepreneurs. The mortgage loan product suite was further expanded in mid-2019 with the introduction of the mortgagebacked educational loan.

The COVID-19 pandemic impacted the mortgage loan portfolio in multiple ways, starting with the sharp increase in NPL's owing to the widespread economic uncertainty. Moreover the market demand for "Mul Gala'' more or less disappeared during the two months lockdown period. Demand stayed muted for the remainder of the year as well amidst a visible lack of interest in construction activity after the second wave of the pandemic in October 2020.

Nonetheless taking advantage of the prevailing low interest rates, promotional activities were accelerated on digital mediums in a bid to stimulate demand for the "Mul Gala" product. While the campaign succeeded in generating notable interest for the product, LBF continued to face practical challenges due to restricted operations across many regulatory bodies. Processing delays of this nature meant conversion was at a much slower pace than usual, which in turn affected overall portfolio growth during the year.

After showing promising results following its launch in 2019, the demand for the mortgage-backed educational loan also fizzled out due to pandemic related challenges in the year under review.

Performance outcome

The mortgage loan portfolio recorded a year-on-year decline of 28.85%

Outlook for the future

As the economic environment regains a sense of normalcy over the coming months, construction activity is thought to be one of the first to restart. This scenario presents some clear opportunities for the mortgage loan operation to drive growth of its "Mul Gala" product in the FY 2021/22.

Key macroeconomic challenges COVID-19 pandemic impact

Competition among peers

Regulatory controls

PERSONAL LOANS

It was a highly successful year for LBF's personal loan operation, which reported solid growth on the back of a compelling demand for its core product the "Krutha Hastha`' pension loan offered to senior citizens. The robust demand for pension loans in the current financial year was attributed to the nature of the product which makes it a highly practical and manageable borrowing proposition during uncertain economic conditions.

Taking preemptive action to combat emerging competitive pressure in this growth conducive environment, LBF initiated a series of targeted promotional campaigns to make inroads into several untapped market segments. The main aim of these focused efforts was to enable LBF`s "Krutha Hastha" pension loan product to claim first mover advantage among these segments. These promotional strategies were further supported by extensive training to enhance product knowledge of frontline branch teams.

Improvements to backend systems were also expedited, with steps being taken to introduce a greater degree of automation to reduce procedural complexity and improve the efficiency of end-to-end processes, leading to faster service delivery.

L B Finance PLC | Annual Report 2020/21

Performance outcome

Quick action to capitalize on the market demand led to an incremental growth in the monthly volumes. On this basis LBF's personal loan portfolio as at 31st March 2021, succeeded in registering a commendable 6.44% year on year growth over the previous year. Similarly the customer base too reported growth compared to the previous year.

Outlook for the future

Going forward LBF will seek to further build on the success of this past year to ensure the "Krutha Hastha'' pension loan product can make a steady contribution to the Company's performance. Strengthening island-wide product coverage is seen as the key catalyst in achieving these objectives.

FACTORING

LBF. Continuing with the strategy adopted for the past few years, the main thrust for this year too was to improve the quality of the portfolio.

Outlook for the future The focus for the immediate future would be to consolidate the cheque discounting portfolio in order to minimise potential default risk to the Company. Meanwhile should there be an improvement in the macroeconomic conditions, LBF would also likely recommence Invoice discounting on a selective basis.

Maintain a quality portfolio

Actively promote the product in other regions of the country

POWER DRAFT

LBF offers flexible, tailor-made factoring solutions catering mainly to the SME sector by offering cheque and invoice discounting facility at very competitive rates. The key differentiator that sets apart LBF's factoring solution is the Company's undertaking to follow up debtor collections, thereby freeing the customer to focus entirely on executing their business plans. Despite stiff competition from the banking sector, LBF's factoring solutions continue to experience a strong market uptake especially in the Western Province.

Given the challenging economic environment, no aggressive promotional activities were carried out in the year under review. Instead all efforts were focused on managing the existing portfolio, with specific control policies being implemented to minimise LBF's risk exposure in the cheque discounting operation. Accordingly cheque discounting was only undertaken on condition that the customer maintains a lien over savings account balance with LBF, with a stipulated monthly amount assigned to the lien account from their savings account. In addition discounting of higher value cheques was undertaken only on the strength of an asset mortgaged to

The power draft was introduced in April 2011 to enable individuals and SMEs to obtain an overdraft facility against asset-backed collateral, with the value of the facility being used to determine the duration, usually up to maximum twelve months.

Performance outcome The power draft portfolio grew from Rs. 3,841.50 million in 2019/20 to Rs. 3,864.17 million in 2020/21.

Outlook for the future Portfolio growth of 30% in 2021/22

Increase market share to achieve market leadership

L B Finance PLC | Annual Report 2020/21

DELIVERING OUR STRATEGY THROUGH OUR BUSINESS CLUSTERS Financing

BUILDING FOR FUTURE Term Objectives

Related strategic focus

Related material drivers

Related stakeholders

Short term

Differentiate LBF's value proposition through a more personalised, relationship based approach

GOALS

Medium term

Enhance the customer experience through the CIM wallet integration

Long term

Holistically improve the customer relationship management model

SDGs impact

L B Finance PLC | Annual Report 2020/21

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