Merchant Bank of Sri Lanka & Finance : AUDITED FINANCIAL STATEMENTS OF THE COMPANY AND THE GROUP FOR THE YEAR ENDED 31ST DECEMBER 2023

MERCHANT BANK OF SRI LANKA & FINANCE PLC

FINANCIAL STATEMENTS

31 DECEMBER 2023

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NATIONAL AUDIT OFFICE

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Chairman

Merchant Bank of Sri Lanka and Finance PLC

Report of the Auditor General on the Financial Statements and Other Legal and Regulatory Requirements of the Merchant Bank of Sri Lanka and Finance PLC and its subsidiary for the year ended 31 December2023 in terms of Section 12 ofthe National Audit Act, No. 19 of2018.

l. Financial Statements

1.1 Opinion

The audit of the Financial Statements of the Merchant Bank of Sri Lanka and Finance PLC (the "Company") and the Consolidated Financial Statements of the Company and its subsidiary (the "Group") for the year ended 31 December 2023 comprising the statement of financial position as at 3 I December 2023 and the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and notes to the Financial Statements, including material accounting policy information , was carried out under my direction in pursuance of provisions in Article 154(1) of the Constitution of the Democratic Socialist Republic of Sri Lanka read in conjunction with provisions of the National Audit Act No. 19 of 2018. My report to Parliament in pursuance of provisions in Article 154 (6) of the Constitution will be tabled in due course. To carry out this audit I was assisted by a firm of Chartered Accountants in public practice.

In my opinion, the accompanying financial statements give a true and fair view of the financial position of the Company and the Group as at 3l Decembff 2023 afi of their financial performance and their cash flows for the year then ended in accordance with Sri Lanka Accounting Standards

1.2 Basis for Opinion

I conducted my audit in accordance with Sri Lanka Auditing Standards (SLAuSs). My responsibilities, under those standards are further described in the Auditor's Responsibilities for the Audit of the Financial Statements section of my report. I believe that the audit evidence I have obtained is sufficient and appropriate to provide a basis for my opinion.

1.3 K€y Audit Matters

Key audit matters are those matters that, in my professional judgment, were of most significance in my audit ofthe financial statements ofthe current period. These matters were addressed in the context of the audit of the financial slatements as a whole, and in forming my opinion thereon, and I do not provide a separate opinion on these matters. For each matter below, my description of how my audit addressed the matter is provided in that context.

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I have tul|lled the responsibilities described in the Auditor's responsibilities for the audit of the financial statements section ofmy report, including in relation to these matters. Accordingly, my audit included the performance of procedures designed to respond to my assessment ofthe risks of material misstatement ofthe financial statements. The results ofmy audit procedures, including the procedures performed to address the matters below, provide the basis for my audit opinion on the accompanying financial statements.

Key audit matterAllowance for Impairment Losses on Loans & Receivables at Amortised Cost

Allowance for impairment losses on loans & receivables at amortised cost as slated in Note l2 & 23. respectively. is determined by management based on the accounting policies described in Note 3.5.1 1.

This was a key audit matter due to

. the involvement of significant management judgements, assumptions and level of estimation uncertainty associated in estimating management expectation of future cash flows to recover such loans & receivables; andthe materiality of the reported amount of allowance for impairment losses and use of complex calculations in its determination.

Key areas of significant judgements, assumptions and estimates used by management in the assessment of the allowance for impairment losses on loans & receivables at amortised cost included: assumed future occurrence of events and conditions relating to the forwardJooking macroeconomlc scenarios and their associaled weightages, which are subject to inherently heightened levels of estimation uncertainty.

How mv audit addressed the key audit matter

In addressing the adequacy of the allowance for impairment losses on loans & receivables at amortised cost, my audit procedures included the following key procedures:

• o I assessed the alignment of the Company's allowance for impairment loss computations and underlying methodology including responses to current economic conditions with ils accounting policies, based on the best available information up to the date of my report.

• o I evaluated the design, implementation, and operating effectiveness of controls over estimation of allowance for impairment losses, which included assessing the level of oversight, review and approval of allowance for impairment losses, policies and procedures by the Board and management.

• o I checked the completeness, accuracy and reasonableness of the underlying data used in the allowance for impairment loss computations by agreeing details to relevant source documents and accounting records of the Company.

• o I evaluated the reasonableness of credit quality assessments and related stage classifications.

. In addition to the above, the following procedures were performed:

For loans snd receivables assessed on an individual basis for impairment:

. I checked the arithmetical accuracy of the underlying individual impairment calculations-

. I evaluated the reasonableness ofkey inputs used in the allowance for impairment losses made with particular focus on curent economic conditions. Such evaluations

Page2l6

were caxried out considering the value and timing of cash flow forecasts particularly relating to elevated risk industries and status ofrecovery action ofthe collaterals.

. For loans & receivables assessed on a collective basis for impairment: . I tested the key inputs and the calculations used in the allowance for impairment

Iosses.

. I

assessed the reasonableness of

judgements, assumptions and estimates used by the Management in the underlying methodology and the management overlays.

My testing included evaluating the reasonableness of forwardJooking information used, economic scenarios considered, and probability weighting assigned to each ofthose scenarios.

I assessed the adequacy of the related financial statement disclosures set out in notes 3 .5 .l | ,12,23 and 47.2.

Information Technology (IT) systems related internal controls over {inancial reporting

Company's financial reporting process is significantly reliant on multiple IT systems with automated processes and intemal controls. Further, key financial statement disclosures are prepared using data and reports generated by IT systems, that are compiled and formulated with the use of spreadsheets.

Accordingly, IT systems related intemal controls over financial reporting were considered a key audit matter

My audit procedures included the following key procedures:

.

I obtained an understanding of the internal control environment of the processes and test checked relevant controls relating to financial reporting and related disclosures.

. .

I involved our intemal specialized resources and;

I identified, evaluated and tested the design and operating effectiveness of IT systems related intemal controls, including those related user access and change management, arfd

.

I obtained a highJevel understanding of the cybersecurity risks affecting the Company and the actions taken to address these risks primarily through inquiry.

.

I tested source data of the reports used 10 generate disclosures for accuracy and completeness, including review ofthe genera) ledger reconciliations.

Page 3l6

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1.4 Other information included in the Company's 2023 Annual Report

The other information comprises the information included in the Company's 2023 Annual Report, but does not include the financial statements and my auditor's report thereon, which is expected to be made available to me after the date of this auditor's report. Man€ement is responsible for the other information. My opinion on the financial statements does not cover the other information and I do not express any form ofassurance conclusion thereon.

In connection with my audit of the financial statements, my responsibility is to read the other information identified above when it becomes available and, in doing so, consider whether the other informalion is materially inconsistent with the financial statements or my knowledge obtained in the audit or otherwise appears to be materially misstated.

When I read the Company's 2023 Annual Report, if I conclude that there are material misstatements therein, I am required to communicate that matter to those charged with govemance for correction. If further material uncorrected misstatements are existed those will be included in my report to Parliament in pursuance ofprovisions in Article 154 (6) ofthe Constitution that will be tabled in due coulse.

1,5 Responsibilities of Management and Those Charged with Governance for the Financial Statements

Management is responsible for the preparation of Financial Statements that give a true and fair view in accordance with Sri Lanka Accounting Standards, and for such intemal control as management determine is necessary to enable the preparation of Financial Statements that are free from material misstatement, whether due to fraud or enor.

ln preparing ihe Financial Statements, management is responsible for assessing the Group's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concem basis ofaccounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Group's financial reporting process.

As per Section 16(1) of the National Audit Act No. 19 of 2018, the Company and the Group is required to maintain proper books and records ofall their income, expenditure, assets and liabilities, to enable annual and periodic Financial Statements to be prepared ofthe Company and the Group.

1.6 Auditor's Responsibilities for the Audit ofthe Financial Statements

My objective is to obtain reasonable assurance about whether the hnancial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes my opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Sri Lanla Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material

Page4l6

//

if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions ofusers taken on the basis ofthese financial statements.

As part ofan audit in accordance with Sri Lanka Auditing Standards, I exercise professionaljudgment and maintain professional scepticism throughout the audit. I also:

o

Identi& and assess the risks of material misstatement ofthe financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for my opinion. The risk of not detecting a material misstatement resulting fiom fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of intemal control.

. obtain an understanding of intemal control relevant to the audit in order to design audit procedures that are appropriate in the circumstarces, but not for the purpose of expressing ar opinion on the effectiveness ofthe intemal control ofthe Company and the Group.

o

Evaluate the appropriateness of accounting policies used ard the reasonableness of aocounting estimates and related disclosures made by the management.

.

Conclude on the appropriateness of the maragement's use of the going concem basis of accounting and based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group's ability to continue as a going concem. If I conclude that a material uncertainty exists, I am required to draw attention in my auditor's report to the related disclosures in the Financial Statements or, ifsuch disclosures are inadequate, to modify my opinion. My conclusions are based on the audit evidence obtained up to the date of my auditor's report. However, future events or conditions may cause the Group to cease to continue as a going concem,

.

Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

.

Obtain sufficient appropriate audit evidence regarding the financial information ofthe entities or business activities within the Group to express an opinion on the consolidated financial statements. Iam responsible for the direction, supervision and performance ofthe group audit. I remain solely responsible for my audit opinion.

I communicate with those charged with governance regarding, among other matters, significant audit findings, including any significant deficiencies in internal control that I identify during my audit.

2. Report on Other Legal and Regulatory Requirements

2.1

National Audit Act, No. 19 of 2018 and Companies Act, No. 7 of 2007 include specific provisions for following requirements.

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7

I

2 1 1 I have obtained all the information and explanation that required for rhe audit and

as far as

appears from my examination, proper accounting records have been kept by the Company as

per the requirement of section 163 (2) (d) ofthe Companies Act, No. 7 of2007 section l2 (a) ofNational Audit Act, No. l9 of20l8.

and the

2 1'2 The financial statements of the company comply with the requirement of section r51 of the

Companies Act, No. 07 of 2007.

2l'3

The financial statements presented is consistent with the preceding year as per the requiremenr of section 6 ( I ) (d) (iii) ofthe National Audit Act, No. l9 of2018.

2'1 4

The financial statements presented incrudes a[ the recommendations made by me in theprevious year as per the requirement of20l8.

of section 6 (l ) (d) (iv) ofthe Nationar Audit Act, No. r g

2'2 2'2'l

Based on the procedures performed and evidence obtained were limiled to matters that are material, nothing has come to my attenlion;

to state that aay member of the goveming body of the company has any direct or indirect interest in any contract entered into by the company which are out of the normal course of business as per the requirement ofsection t2 (d) ofthe National Audit Act, No. l9 of20lg.

2.2.2 to state that the Company has not complied with any applicable written law, general and special directions issued by the goveming body ofthe Company as per the requirement ofthe section l2 (f) ofthe National Audit Act, No. l9 of20l8 ;

• 2'2'3 to state that the company has not performed according to its powers, functions and duties per the requirement of secrion l2 (g) ofthe Nationar A;dit Act, No. l9 of20l8.

  as

• 2'2'4 to state that the resources of the company had not been procured and utirized economica,y, efficiently and effectivery within the time frames and in compriance with the appricabre laws as per the requirement ofsection l2 (h) ofthe National Audit Act, No. lg of20lg.

W.P.C. Wlckramaratne

Page6l6

Merchant Bank of Sri Lanka & Finance PLC STATEMENT OF PROFIT OR LOSS

For the year ended 31 December 2023

Company

Group

Note	2023	2022
Rs.'000	Rs.'000
Income	4	7,478,049	6,542,593
Interest and similar income	6,559,123	6,451,083
Interest and similar expenses	(4,918,658)	(4,695,684)
Net interest income	5	1,640,465	1,755,399
Fee and commission income	123,292	129,157
Fee and commission expenses	(16,757)	(19,205)
Net fee and commission income	6	106,535	109,952
Insurance premium income	7	-	-	-
Net claims and benefits	8	-	-	-
Net trading income	9	120,243	3,658	3,187.4
Net gain/(loss) on financial instruments at fair value through	10	559,224	(132,131)	523.2
profit or loss
Other operating income	11	116,167	90,826	27.9
Total operating income	2,542,634	1,827,704	39.1
Allowance for impairment losses charge for loans and other	12	25,094	16,504	52.0
assets
Net operating income	2,567,728	1,844,208	39.2
Personnel expenses	13	(1,289,690)	(1,333,268)	(3.3)
Depreciation and amortisation	14	(272,869)	(265,420)	2.8
Other operating expenses	15	(739,416)	(660,683)	11.9
Total operating expenses	(2,301,975)	(2,259,371)	1.9
Operating profit/(loss) before VAT on financial services	265,753	(415,163)	164.0
and impairment of investment in group companies
Impairment reversal/(charge) of investment in subsidiary	28	95,065	(113,773)	183.6
Profit/(loss) from operations after impairment of	360,818	(528,936)	168.2
investment in group companies
Taxes on financial services	16.1	(292,911)	(127,978)	128.9
Share of associate company's profit/(loss) before tax	27.1	-	-	-
Profit/(loss) before income tax	67,907	(656,914)	110.3
Income tax (expense)/reversal	16.2	(47,019)	161,306	(129.1)
Profit/(loss) for the year	20,888	(495,608)	104.2
Profit/(loss) for the year attributable to:
Equity holders of the parent	20,888	(495,608)	104.2
Non-controlling interests	-	-	-
Profit/(loss) for the year	20,888	(495,608)	104.2
Earnings per share:
Basic/diluted earning per share (Rs.)	17	0.04	(0.94)	104.2
Figures in brackets indicate deductions.

Change	2023	2022	Change
%	Rs.'000	Rs.'000	%
14.3	8,356,704	7,284,346	14.7
1.7	6,915,047	6,704,775	3.1
4.7	(4,897,486)	(4,688,064)	4.5
(6.5)	2,017,561	2,016,711	0.0
(4.5)	157,295	136,861	14.9
(12.7)	(3,774)	(1,432)	163.5
(3.1)	153,521	135,429	13.4
494,462	381,735	29.5
(503,761)	(323,862)	55.5
120,243	3,658	3,187.1
561,446	(139,460)	502.6
108,211	196,777	(45.0)
2,951,684	2,270,988	30.0
25,094	16,504	52.0
2,976,778	2,287,492	30.1
(1,491,147)	(1,527,073)	(2.4)
(309,308)	(298,623)	3.6
(943,349)	(848,194)	11.2
(2,743,804)	(2,673,890)	2.6
232,974	(386,398)	160.3
-	-	-
232,974	(386,398)	160.3
(292,911)	(127,978)	128.9
29,182	56,131	(48.0)
(30,755)	(458,245)	(93.3)
(55,106)	148,757	(137.0)
(85,861)	(309,488)	(72.3)
(82,098)	(325,059)	(74.7)
(3,763)	15,571	(124.2)
(85,861)	(309,488)	(72.3)
(0.16)	(0.62)	74.7

The accounting policies and the notes on pages 12 to 117 form an integral part of the Financial Statements.

Merchant Bank of Sri Lanka & Finance PLC STATEMENT OF COMPREHENSIVE INCOME

For the year ended 31 December 2023

Profit/(loss) for the year

Other comprehensive income/(expenses)

Other comprehensive income to be reclassified to profit or loss in subsequent periods (net of tax):

Gains/(Losses) on re-measuring financial investments at fair value through other comprehensive income

Net other comprehensive income/(expenses) to be reclassified to profit or loss in subsequent periodsOther comprehensive income not to be reclassified to profit or loss in subsequent periods (net of tax):

Actuarial gains/(losses) on defined benefit plans Reclassification reserve recognized during the year

Share of associates company's other comprehensive incomeDeferred tax effect relating to components of other comprehensive income

Net other comprehensive income/(expenses) not to be reclassified to profit or loss in subsequent periodsOther comprehensive income/(expenses) for the year, net of tax

Total comprehensive income/(expenses) for the year, net of tax

Total comprehensive income/(expenses) attributable to: Equity holders of the parent

Non controlling interests

Total comprehensive income/(expenses) for the year, net of tax

Figures in brackets indicate deductions.

CompanyNote

2023 Rs.'000

2022 Rs.'000

Change %

20,888

• (495,608) 104.2

  (1,515)

• (10,735) (85.9)

(1,515)

(10,735)

40 27.1

(63,207)

47,045 - -(234.4)

38.1

- - 18,962

(14,113)

- - 234.4

(44,245)

32,932

(234.4)

(45,760)

22,197

(306.2)

(24,872)

(473,411)

(24,872)

(473,411)

-

-

(24,872)

(473,411)

The accounting policies and the notes on pages 12 to 117 form an integral part of the Financial Statements.

Group

2023 Rs.'000

2022 Rs.'000

Change %

(85,861)

• (309,488) (72.3)

  2,965

• (10,562) 128.1

(85.9)

2,965

(10,562)

128.1

• (63,551) 49,032 (229.6)

• - 121 (100.0)

• (60) 406 (114.8)

18,962

(14,103)

234.5

(44,649)

35,457 (225.9)

(41,684)

24,895 (267.4)

(94.7)

(127,545)

(284,593) (55.2)

(94.7) -(125,693) (301,223) (58.3)

(1,852) 16,630 (111.1)

(94.7)

(127,545)

(284,593) (55.2)

Merchant Bank of Sri Lanka & Finance PLC STATEMENT OF FINANCIAL POSITION

As at 3l December 2023

Cash and cash equivalents

Placements with banks & financial institutions Financial investments at fair value through profil o; losslrars & receivables al amorlis.d cost

Fin cial investmerts at fair value throuSh other compreh€nsive income

Erancial iDv€stmena at amonis€d cost lnvestment in associat€ company lnvestment in subsidiary hvesrftent prcperties ftoperty, equipmenl and righl-of-use assets

Lisbilities

Du€ to banks

Due to customeN at amorthed cost

Debt iEsued and borowed tunds at arnortised cost lnsuruce cont?ct liabilities-life lnsurance cont"ct tiabiliti€s-ron life

Other liabilities

R€tirement benefi tx obligations

Total liabllttler

Equlty

Slaled capital

R€tained earl ngs

OCI reserve

Total equity attributable to €q iry holders of the parent Non controlling jnleresls

Total equity

Totlr fiabiliti€s and equity

Commitments

andcontingertliabilities

N€t assets value per share (Rs.)

2t23

Rs.'000

m22 Rs.'000

Chanq€ 2023

9a

Rs.'000 Rs.'000

20 2t 22

574,588 8,i61,368

'748,724 (3.8) 87,t26 9M,7U (7.8) t03.682 454.2 645.823 13',1,t62 3?0.8 287,510 2,738.6 8,t69.927 293,84t 2,680.3

23

24

19,O54.7t5 24,4233N (22.O) t9.059,962 24,370.850 15,863 (9.6)

t4.348

25

3;721.940 4,307,394 (13.5) 5,304,189 5,883,995 (9.9)

26

58,158 ,937 (40.0) 58.158 96,937 (40.0)

27

81,084 81,084 - 168.908 172,84 (2.3)

28

152,6q6 257,61 36.9

29

95.446 10,1,798 (8.9) 95,446 104,198 (8.9)

30

3l

585,436 504,669 16.0 695,691 63,780 6',1.117 103.208 (35.0)

38

32

_!Lsg!2:-_44!J!L-19- _SIaC59-i4q!-----i4

69,49t 106,396 (34.1) 64,355 42,893 50-O 150.878 __-]!!lL 0.5 490.541 s29.24o O.3)

54,951 33.824 45

33 34 25A44,119 23j24@9 8.2 25,245,868 23.354,493 8.1

2,599,970 2,925,953 (11.r) 2.603,003 2.935.t7O (11.3)

35

36.r

36.2

741.030 69,082 912;t - -

37

30.055 49.029 (38.7) (38.7)

39

858,908 686,361 25.1 1.406,010 1.215.186 15.7

40 41 42.1 42-2 42.3

354.368 281.203 26.0

30$24s0 27536,237 9.1 34s7,A7 28,913:t05 *a

4,276A48 4,n6A48 0.0 4.276,448 4,276,448

3u,1?4 339,996 1.2

0,289,648) (944,964) 36.5 0,042,034) (594,119) 75.4 37r,590 54,441 582.6

42.4 ___-_3).@_______@AJ! s.0

',741,O30 69.082 972.',1

393,030 355,190 lO.1

671,728 643,229 4.4

366;703 292,326 25.4

3M,174 339,996 r-2 371,590 54,44t 582.6 (33.607) (34.502) (2.6)

3,670,672 3,695,5{4 (0.7) 3.916,57t 4,042,264 (3.1)

- 436,852 4{0.705 (0.4)

3,670,612 3,6955U (t.7) 4355,A3 4,482969 (2.8)

47.8

42.093

103,938 (59.5) 128,909

?.00

7.05 (0.7)These Finucial Stalements have been p.ep.red iD compliarce with the r€quiremenls of the companies act no.7 of 2007.

w. R. C. S. Vithana Chief

Ai M. A. P€rera

Cbainnan

Figures in bm.kets indicate deductions.

The accounting policies ard lhe notes on pages 12 to I l7 form an integral pan ofthe Fmancial Stalem€nb.

25 MwchZO24

20n

Change

Er

(21.8)

tr9,22l

78,151 52.6

9.6

30,055

49,029

131,377 (1.9)

'7.47

't.71 (3.1)

-9-