ANNUAL REPORT OF THE BOARD OF DIRECTORS

Annual Report of the Board of Directors on the Affairs of the Company and Statement of Compliance of the Contents of the Annual Report as Required by Section 168 of the Companies Act No. 07 of 2007

1. General

The Directors have pleasure in presenting to the shareholders 48th Annual Report of your Company together with the Audited Financial Statements of the
Group and the Bank for the year ended December 31, 2016 and the Auditors’ Report on those Financial Statements conforming to all relevant statutory requirements. This Report provides the information as required by the Companies Act No. 07 of 2007, Banking Act No. 30 of 1988 & amendments thereto and the Directions issued thereunder including the Banking Act Direction No. 11 of 2007 on ‘Corporate Governance for Licensed Commercial Banks in Sri Lanka’ and subsequent amendments thereto, the Listing Rules of the Colombo Stock Exchange (the CSE) and the recommended best practices.

This Report was approved by the Board of Directors on February 22, 2017. The appropriate number of copies of the Annual Report will be submitted to the CSE and to the Sri Lanka Accounting and Auditing Standards Monitoring Board within the statutory deadlines.

Commercial Bank of Ceylon PLC (the Bank) is a licensed commercial bank registered under the Banking Act No. 30 of 1988 and was incorporated as a public limited liability company in Sri Lanka on June 25, 1969 under the Companies Ordinance No. 51 of 1938 and was re-registered as per the requirements of the Companies Act No. 07 of 2007 on January 23, 2008, under Registration No. PQ 116. The registered office of the Bank is at No. 21, ‘Commercial House’, Sir Razik Fareed Mawatha, Colombo 01, Sri Lanka, where the Bank’s Head Office too is situated.

The ordinary shares (both voting and non-voting) of the Bank are quoted on the Main Board of the CSE since March 1970. The unsecured subordinated redeemable debentures issued by the Bank are also listed on the CSE. Fitch Ratings Lanka Ltd. has re-affirmed the Bank’s National long-term rating at ‘AA(lka)’ with a stable outlook and subordinated debentures at ‘AA-(lka)’.

As required by the Section 168 of the Companies Act No. 07 of 2007, the following information is disclosed in this Report prepared for the year ended December 31, 2016:

Information Required to be Disclosed as per the Companies Act No. 07 of 2007		Reference to the Companies Act		Annual Report Page Reference for Compliance and Necessary Disclosures
(i) The nature of the business of the Group and the Bank together with any changes thereof during the accounting period.		Section 168 (1) (a)		Refer Section 1.3 on ‘Principal Business Activities, Nature of Operations of the Group and Ownership by the Bank in its Subsidiaries and Associates’ on pages 191 and 192.
(ii) Signed Financial Statements of the Group and the Bank for the accounting period completed in accordance with Section 152.		Section 168 (1) (b)		The Financial Statements of the Group and the Bank for the year ended December 31, 2016 have been prepared in accordance with the requirements of the Sri Lanka Accounting Standards (SLFRSs and LKASs) and comply with the requirements of the Companies Act No. 07 of 2007 and the Banking Act No. 30 of 1988 and which were duly certified by the Chief Financial Officer (the person responsible for the preparation of the Financial Statements) and were approved by three members of the Board and the Company Secretary as appearing on pages 183 to 352 form an integral part of this Report.
(iii) Auditors’ Report on the Financial Statements of the Group and the Bank.		Section 168 (1) (c)		Refer page 180 for the Independent Auditors’ Report.
(iv) Accounting Policies of the Group and the Bank and any changes therein.		Section 168 (1) (d)		Significant Accounting Policies adopted in the preparation of the Financial Statements of the Group and the Bank are given on pages 200 to 211. There were no changes to the Accounting Policies used by the Group and the Bank during the year.
(v) Particulars of the entries made in the Interests Registers of the Bank and its Subsidiaries during the accounting period.		Section 168 (1) (e)		The Bank and all its Subsidiaries maintain Interests Registers. All Directors have made declarations as required by the Sections 192 (1) and (2) of the Companies Act aforesaid and all related entries were made in the Interests Registers during the year under review. The Interests Registers are available for inspection by shareholders or their authorised representatives as required by the Section 119 (1) (d) of the Companies Act No. 07 of 2007.
(vi) Remuneration and other benefits paid to Directors of the Bank and its Subsidiaries during the accounting period.		Section 168 (1) (f)		Refer Note 21 to the Financial Statements on page 224. Also refer the ‘Board Human Resources and Remuneration Committee Report’ on pages 147 and 148.
(vii) Total amount of donations made by the Bank and its Subsidiaries during the accounting period.		Section 168 (1) (g)		Refer Note 21 to the Financial Statements on page 224.
(viii) Information on Directorate of the Bank and its Subsidiaries during and at the end of the accounting period.		Section 168 (1) (h)		Refer Items 12.1 and 12.2 on page 159.
(ix) Separate disclosure on amounts payable to the Auditors as Audit Fees and Fees for other services rendered during the accounting period by the Bank and its Subsidiaries.		Section 168 (1) (i)		Refer Note 21 to the Financial Statements on page 224.
(x) Auditors’ relationship or any interest with the Bank and its Subsidiaries.		Section 168 (1) (j)		Auditors do not have any other relationship or interest in contracts with the Bank, or any of its Subsidiaries or Associates other than being the Auditors for the Bank, Subsidiaries and Associates. Refer Item 22 on page 162.
(xi) Acknowledgement of the Contents of this Report/Signatures on behalf of the Board of Directors.		Section 168 (1) (k)		Refer Item 32 on page 163.

2. Review of Business

2.1 Vision, Mission and
Corporate Conduct

The Bank’s Vision and Mission Statements are exhibited on page 1 of the Annual Report.

The business activities of the Group and the Bank are conducted maintaining the highest level of ethical standards in achieving our Vision and Mission, which reflects our commitment to high standards of business conduct and ethics.

The Bank issues a copy of its Code of Ethics to each and every staff member and all employees are required to abide by the Bank’s Code of Conduct.

2.2 Review of Operations of the Group and the Bank

The Bank has established delivery points across all districts of the country. During the year under review, nine (9) new delivery points were added (seven [7] in 2015), bringing the total number of delivery points in Sri Lanka to 255 at the end of 2016 (246 at the end of 2015).

The Bank’s ATM network is the single largest ATM network in the country. During 2016, the Bank installed 36 new ATMs (15 in 2015) bringing the total number of ATMs in Sri Lanka to 657 by the end of 2016 (621 at the end of 2015). The Bank also had 19 delivery points and 20 ATMs
at the end of 2016 (18 and 19 respectively, in 2015), in Bangladesh.

Having received a license from the Maldives Monetary Authority (the MMA) and the approval from the Central Bank of Sri Lanka (the CBSL) during 2015, the Bank commenced commercial operations of its second foreign subsidiary in September 2016, namely, Commercial Bank of Maldives (Private) Limited, a fully-fledged Tier I Bank in the Republic of Maldives, in which the Bank holds a stake of 55% and the remaining stake of 45% being held by a leading Maldivian group
of companies.

In November 2016, the Bank launched its own money transfer service in Italy with the commencement of commercial operations of Commex Sri Lanka S.R.L., a fully-owned subsidiary of Commercial Bank of Ceylon PLC. Commex Sri Lanka S.R.L. was incorporated and registered in Italy under the supervision of the Bank of Italy, received the necessary regulatory approvals from both countries to engage in fund transfers on its own market. The Bank expects overtime, to open branches in other Italian cities with high potential for money transfer services to both Sri Lanka and Bangladesh.

The Bank also has a Representative Office in Yangon, Myanmar.

Besides Bangladesh, Maldives, Italy and Myanmar, the Bank also has placed its own Business Promotion Officers (BPOs) in key markets around the world where a significant number of Sri Lankans are employed to provide money transfer facilities via the Bank’s e-Exchange remittance service.

Further, local operations of the Bank have been segmented in to Personal Banking, Corporate Banking and Treasury Operations in order to provide personalised customer experience and for better strategy formulation, implementation as well as performance evaluation.

The ‘Chairman’s Review’ on pages 18 to 21 the ‘Managing Director’s Review’ on pages 22 to 27, and the ‘Management Discussion and Analysis’ on pages 37 to 122, together with the Audited Financial Statements provide an overall review of business performance and the state of affairs of the Group and the Bank together with important events that took place during the year as required by the Section 168 of the Companies Act No. 07 of 2007 and the recommended best accounting practices.

Segment-wise contribution to the Group’s revenue, results, assets and liabilities is disclosed in Note 63 to the Financial Statements on page 310.

2.3 Directors’ Responsibility
for Financial Reporting

The Directors are responsible for the preparation of the Financial Statements of the Group and the Bank, which reflect a true and fair view of the financial position and performance of the Group and the Bank. The Directors are of the view that the Income Statement, Statement of Comprehensive Income, Statement of Financial Position, Statement of Changes in Equity, Statement of Cash Flows, Significant Accounting Policies and Notes thereto appearing on pages 183 to 352 have been prepared in conformity with the requirements of the SLFRSs and LKASs as mandated by the Sri Lanka Accounting and Auditing Standards Act No. 15 of 1995 and the Companies Act No. 07 of 2007. Further, these Financial Statements also comply with the requirements of the Banking Act No. 30 of 1988 and amendments thereto and the Listing Rules of the Colombo Stock Exchange. The ‘Statement of Directors’ Responsibility’ appearing on pages 164 and 165 forms an integral part of this Report.

3. Future Developments

The Bank intends expanding its network of delivery channels both in Sri Lanka and in overseas by employing client-focused strategy with effective management of capital, liquidity and risks. The Bank will continue to develop its customer-centric model for doing business with the objective of delighting its customers. Please refer Sections on ‘Chairman’s Review’, ‘Managing Director’s Review’ on pages 18 to 27 and ‘Management Discussion and Analysis’ on pages 37 to 122 for initiatives taken in this regard.

The Bank endeavours to capitalise online and Mobile banking facilities enabling customers to easily access to most banking services 24/7.

In line with our theme ‘Future of Banking’, we will continue to focus on evolving customer aspirations and invest of
state-of-the art technology to serve our customers with a ‘good dose’ of heart while strengthening our risk and compliance framework.

4. Gross Income

The gross income of the Group for 2016 was Rs. 93.726 Bn. (Rs. 78.225 Bn. in 2015) while the Bank’s gross income was Rs. 93.143 Bn. (Rs. 77.868 Bn. in 2015).

The sources of external operating income, net operating profit and asset allocation of the Group among different business segments together with their proportions are given in Note 63 to the Financial Statements on page 310.

5. Results and Appropriations

5.1 Performance of the Group and the Bank and Transfers to Reserves

The net profit before tax of the Group and the Bank amounted to Rs. 20.115 Bn. and Rs. 20.051 Bn., respectively in 2016 (Rs. 17.136 Bn. and Rs. 17.144 Bn. in 2015) and this was an increase of 17.38% and 16.96%, (8.05% and 8.94% respectively in 2015). Further, the net profit after tax of the Group and the Bank amounted to Rs. 14.466 Bn. and Rs. 14.513 Bn., respectively in 2016 (Rs. 11.859 Bn., and Rs. 11.903 Bn. respectively in 2015) and this was an increase of 21.98% and 21.92%
(5.48% and 6.47% respectively, in 2015).

Details of appropriation of Profit of the Bank are given below:

		2016 Rs. ’000	2015 Rs. ’000
Profit for the year after payment of all expenses of management, provision for depreciation, impairment on loans and advances, VAT on financial services and contingencies		20,051,183	17,143,610
Less: Provision for taxation		(5,538,672)	(5,240,386)
Net profit after taxation		14,512,511	11,903,224
Balance brought forward from previous year		3,883	7,459
Net actuarial gains/(losses) on defined benefit plans		139,762	(150,048)
Super gains tax paid on profit after tax of 2013		–	(2,576,355)
Profit available for appropriation		14,656,156	9,184,280
Less: Appropriations
Transfer to the statutory reserve fund		(725,626)	(595,161)
Transfer to the general reserve		(8,130,525)	(2,885,000)
Dividends on Ordinary Shares
1st interim dividend paid – Rs. 1.50 per share in cash (Rs. 1.50 in 2015)		(1,335,928)	(1,315,251)
2nd interim dividend paid – Rs. 3.00 per share in cash (Nil in 2015)		(2,674,799)	–
Final dividend proposed/paid – Rs. 3.00 per share in cash in 2015		–	(2,630,991)
Rs. 2.00 per share in shares (Rs. 2.00 in 2015)		(1,783,199)	(1,753,994)
Balance carried forward		6,079	3,883

On this basis, the cash dividend payout ratio amounts to 27.64% of the profit after tax of 2016, compared to 33.15% for 2015, while total dividend payout ratio amounts to 39.92% for 2016, compared to 47.89% for 2015. This is well above the minimum dividend payout ratio of 10% (10% in 2015) stipulated in the Deemed Dividend Tax Rule.

5.2 Dividends on Ordinary Shares

Details of Information on dividends are given in Note 24 to the Financial Statements on page 228.

Two interim dividends of Rs. 1.50 and Rs. 3.00 per share were paid out of the profits of the Bank, hence, were subjected to a 10% withholding tax.

The Directors recommend to pay a final dividend of Rs. 2/- per share which will be paid partly out of dividends received and partly out of exempt/taxable profits of the Bank. Further, the aforesaid final dividend is proposed to be satisfied by issue and allotment of new shares, subject to a 10% withholding tax.

The Board of Directors provided the Statement of Solvency to the Auditors and obtained Certificates of Solvency from the Auditors in respect of each dividend payment in terms of Section 56 (2) of the Companies Act No. 07 of 2007.

The Board of Directors also fulfilled the requirement of the Solvency Test in terms of Section 56 (3) of the Companies Act No. 07 of 2007 immediately after the payment of interim dividends and will ensure the compliance of Solvency Test after the payment of aforesaid final dividend proposed to be paid in April 2017.

5.3 Reserves

A summary of the Group’s reserves is given below:

		2016	2015
		Rs. ’000	Rs. ’000
Statutory reserve fund		5,647,993	4,922,367
Revaluation reserve		6,250,554	6,258,939
General reserve		43,490,003	35,359,478
Foreign currency translation reserve		860,502	432,489
Available-for-sale reserve		(7,208,805)	(3,955,376)
Employee share option reserve		420,282	223,330
Retained earnings		4,553,778	4,467,807
Total		54,014,307	47,709,034

Information on the movement of reserves is given in the Statement of Changes in Equity on pages 188 and 189 and in Notes 55 to 57 to the Financial Statements on pages 300 to 303.

6. Corporate Social Responsibility

The CSR Trust established in 2004, which is funded by the Bank, undertakes most of the Bank’s CSR initiatives and activities. The trust manages a range of initiatives that strengthen one of the Bank’s key principle of acting responsibly towards its stakeholders while generating measurable and sustainable social dividends for different segments of society, in particular those which require empowerment. The CSR initiatives of the Bank are detailed under ‘Social and Network Capital’ in the section on ‘Management Discussion and Analysis’ in the Annual Report on pages 52 to 63.

7. Property, Plant & Equipment, Intangible Assets and Leasehold Property

Information on Property, Plant & Equipment, Intangible Assets and Leasehold Property of the Group and the Bank are given in Notes 39, 40 and 41 to the Financial Statements on pages 265, 277 and 279, respectively.

Investment properties of any Group companies when significantly occupied by the other companies in the Group are classified under Property, Plant & Equipment in the Consolidated Financial Statements in accordance with the Sri Lanka Accounting Standard – LKAS 40 on ‘Investment Property’.

Specific information on extent, location, valuations of the land and buildings held by the Bank are given in Notes 39.5 (a) and (b) to the Financial Statements on pages 270 to 275.

The details of capital expenditure approved and contracted for are given in Note 59.3 to the Financial Statements on page 306.

8. Market Value of Properties

The Bank carried out a revaluation of all its freehold land and buildings as at December 31, 2014 as required by Section 7.1 (b) of the Central Bank Direction No. 01 of 2014 on ‘Valuation of Immovable Property of Licensed Commercial Banks’ and recognised the surplus on revaluation in the Financial Statements.

The revaluation of the land and buildings of the Bank was carried out by professionally-qualified independent valuers as per the aforesaid Direction and the Board of Directors of the Bank is of the opinion that the revalued amounts are not in excess of the current market values of such properties.

Details of market value (revalued amounts) of freehold properties of the Bank are given in Note 39.5 (b) to the Financial Statements on pages 271 to 275.

The next revaluation exercise on the freehold land and buildings of the Bank will be carried out as at December 31, 2017.

9. Issue of Shares and Debentures

9.1 Issue of Shares and Debentures by the Bank

Details of the shares issued by the Bank are given in the table below:

				2016		2015
Reason for the Issue		Details of the Share Issue		Voting Ordinary Shares	Non-Voting Ordinary Shares	Voting Ordinary Shares	Non-Voting Ordinary Shares
Part of final dividend for 2015 amounting to Rs. 2/- per share (Rs. 2/- per share in 2014) satisfied in the form of issue and allotment of new shares		Number of shares issued		11,818,040	912,967	8,118,773	719,740
		Consideration (Rs. ’000)		1,477,179	101,415	1,459,666	100,134
Exercise of options by employees under the employee share option plans		Number of shares issued		1,136,732	N/A	2,170,613	N/A
		Consideration received (Rs. ’000)		144,804	N/A	237,304	N/A

The Bank made two debenture issues during the year on March 09, 2016 and October 28, 2016, respectively. All debentures are listed on the CSE. The summarised details on both these debenture issues are given below:

		1st Issue		2nd Issue
Issue Date		March 09, 2016		October 28, 2016
Par Value		Rs. 100/-		Rs. 100/-
Number of debentures issued (’000)		Total – 61,794,300		Total – 70,000,000
		Type A – 44,303,400		Type A – 50,718,000
		Type B – 17,490,900		Type B – 19,282,000
Consideration received (Rs. ’000)		6,179,430		7,000,000
Tenure		Type A – 5 Years		Type A – 5 years
		Type B – 10 Years		Type B – 10 years
Interest rate and payment		Type A Fixed interest rate of 10.75% p.a. (AER* 11.04%) payable semi-annually		Type A Fixed interest rate of 12.00% p.a. (AER 12.36%) payable semi-annually
		Type B Fixed interest rate of 11.25% p.a. (AER 11.57%) payable semi-annually		Type B Fixed interest rate of 12.25% p.a. (AER 12.63%) payable semi-annually
Instrument rating		AA- (lka) by Fitch Ratings Lanka Ltd.		AA- (lka) by Fitch Ratings Lanka Ltd.

*AER – Annual Effective Rate

9.2 Issue of Shares and Debentures by the Subsidiaries and Associates

During the year 2016 Serendib Finance Ltd. issued 9,128,252 shares at Rs. 21.91 per share for a total consideration of Rs. 200 Mn. to the Bank in order to raise required funds for the expansion of lending activities.

Except for the above share issue, the other Subsidiaries and Associates of the Bank did not make any share or debenture issues during the year.

9.3 Stated Capital and Debentures

The details of the Stated Capital are given in Note 53 to the Financial Statements on page 296. The details of debentures including the redemptions during the year are given in Note 52 to the Financial Statements on pages 294 and 295.

10. Share Information

10.1 Distribution Schedule of Shareholdings

Information on the distribution of shareholding and the respective percentages are given in the Section on ‘Investor Relations’ on pages 108 to 122.

10.2 Information on Earnings, Dividend, Net Assets and Market Value

Information relating to earnings, dividend, net assets and market value per share is given in ‘Financial Highlights’ on page 14. Information on the trading of the shares and movement in the number of shares represented by the Stated Capital of the Bank is given in the Section on ‘Investor Relations’ on pages 108 and 122.

10.3 Substantial Shareholdings

Names of the twenty largest shareholders for both voting and non-voting ordinary shares, percentages of their respective holdings and percentage holding of the public, etc. are given in the Section on ‘Investor Relations’ on pages 114 and 115.

11. Equitable Treatment to Shareholders

The Bank has at all times ensured that all shareholders are treated equitably.

12. Information on the Directors of the Group and the Bank

12.1 Information on Directors as at December 31, 2016

The Board of Directors of the Bank as at December 31, 2016 consisted of Ten (10) Directors [Eight (8) Directors as at December 31, 2015] with wide knowledge and experience on economic, banking, financial, commercial and engineering as detailed in the ‘Board Profiles’ on pages 11 to 13.

Names of the Directors of the Bank during and as at the end of 2016, as required by the Section 168 (1) (h) of the Companies Act No. 07 of 2007 are given below:

Name of the Director		Executive/ Non-Executive Status		Independent/ Non-Independent Status
Mr. K.G.D.D. Dheerasinghe (Chairman)		Non-Executive		Independent
Mr. M.P. Jayawardena (Deputy Chairman)		Non-Executive		Independent
Mr. J. Durairatnam (Managing Director/CEO)		Executive		Non-Independent
Mr. S. Swarnajothi		Non-Executive		Independent
Mr. S. Renganathan		Executive		Non-Independent
Prof. A.K.W. Jayawardane		Non-Executive		Independent
Mr. K. Dharmasiri		Non-Executive		Independent
New Appointments made during 2016
Mr. L.D. Niyangoda (Appointed w.e.f. August 26, 2016)		Non-Executive		Independent
Ms. N.T.M.S. Cooray (Appointed w.e.f. September 19, 2016)		Non-Executive		Independent
Mr. G.S. Jadeja (Appointed w.e.f. September 19, 2016)		Non-Executive		Non-Independent
Resignations/Cessations during 2016
Mr. H.J. Wilson (Resigned w.e.f. August 29, 2016)		Non-Executive		Independent

Names of the Directors of all Subsidiaries and Associates are given in ‘Group Structure’ on page 442.

12.2 Recommendations for
Re-election

(i) In terms of Article 85 of the Articles of Association, two Directors are required to retire by rotation at each AGM. Article 86 provides that the Directors to retire by rotation at an AGM shall be those who (being subject to retirement by rotation), have been longest in office, since their last election or appointment.

(ii) The Board recommended the re-election of the following Directors, after considering the contents of the Affidavits and Declarations submitted by them and all other related issues:

(a) Directors to retire by rotation

Mr. M.P. Jayawardena

Prof. A.K.W. Jayawardane

(b) Directors appointed to fill casual vacancies

Mr. L.D. Niyangoda

Ms. N.T.M.S. Cooray

Mr. G.S. Jadeja

(iii) Directors who served on the Board for over nine years

(In terms of the Banking Act Direction No. 11 of 2007 (Corporate Governance for Licensed Commercial Banks in
Sri Lanka), the total period of service of a Director (other than a Director who holds the position of Chief Executive Officer) shall not exceed nine years).

None

12.3 Directors’ Meetings

Details of the meetings of the Board of Directors are presented on page 127.

12.4 Board Subcommittees

The Board of Directors of the Bank formed four mandatory Board Subcommittees namely, Nomination Committee, Remuneration Committee, Integrated Risk Management Committee and Audit Committee as required by the Banking Act Direction No. 11 of 2007 on ‘Corporate Governance for Licensed Commercial Banks in Sri Lanka’ issued by the CBSL.

The Board formed a Related Party Transactions Review Committee in 2014 to assist the Board in reviewing all related party transactions carried out by the Bank and its listed subsidiaries in the Group by early adopting the Code of Best Practice on Related Party Transactions as issued by the Securities and Exchange Commission of Sri Lanka (the SEC) which became mandatory from January 01, 2016.

The Board of Directors also has formed three other voluntary Board Subcommittees to assist the Board.

These committees play a critical role in order to ensure that the activities of the Bank at all times are conducted with the highest ethical standards and in the best interest of all its stakeholders. The Terms of Reference of these Subcommittees conform to the recommendations made by various regulatory bodies, such as the CBSL, The Institute of Chartered Accountants of Sri Lanka (the CA Sri Lanka), the SEC, and the CSE.

The composition of both mandatory and voluntary Board Subcommittees, as at December 31, 2016 and the details of the attendance by Directors at Meetings are tabulated on pages 127 to 129 while the reports of these Subcommittees are found on pages 140 to 152.

13. Disclosure of Directors’ Dealing in Shares and Debentures

13.1 Directors’ Interests in Ordinary Voting and Non-Voting Shares of
the Bank

Individual ordinary voting and non-voting shareholdings of persons who were Directors of the Bank at any time during the financial year are as follows:

		Ordinary Voting Shares			Ordinary Non-Voting Shares
As at December 31,		2016	2015		2016	2015
Mr. K.G.D.D. Dheerasinghe (Chairman)		21,159	20,859		Nil	Nil
Mr. M.P. Jayawardena (Deputy Chairman)		Nil	Nil		Nil	Nil
Mr. J. Durairatnam (Managing Director/CEO)		470,770	412,056		Nil	Nil
Mr. S. Swarnajothi		Nil	Nil		8,738	8,599
Mr. S. Renganathan		197,647	191,936		10,488	10,321
Prof. A.K.W. Jayawardane		Nil	Nil		Nil	Nil
Mr. K. Dharmasiri		Nil	Nil		Nil	Nil
Mr. L.D. Niyangoda (Appointed w.e.f. August 26, 2016)		Nil	N/A		Nil	N/A
Ms. N.T.M.S. Cooray (Appointed w.e.f. September 19, 2016)		Nil	N/A		Nil	N/A
Mr. G.S. Jadeja (Appointed w.e.f. September 19, 2016)		Nil	N/A		Nil	N/A
Mr. H.J. Wilson (Resigned w.e.f. August 29, 2016)		Nil	Nil		Nil	Nil

Directors’ shareholdings in ordinary voting shares and ordinary non-voting shares have not changed subsequently to the date of the Statement of Financial Position up to February 08, 2017, the date being one month prior to the date of Notice of the Annual General Meeting.

13.2 Directors’ Interests in Debentures

During the year, Mr. S. Renganathan purchased 20,000 debentures of the Bank and as at December 31, 2016, he held 20,000 debentures. Except
Mr. S. Renganathan there were no debentures registered in the name of any other Director as at the beginning and at the end of the year.

14. Employee Share Option Plans and Profit Sharing Plans

The Bank implemented an Employee Share Option Plan (ESOP) for the Corporate Management and the Executive Officers in Grade III and above in 2008, based on the Bank achieving certain pre-determined performance criteria. The approval of the shareholders was obtained for this scheme to offer share options up to 3% of the ordinary voting shares of the Bank.

The Bank also obtained the approval of the shareholders to introduce another ESOP for all Executive Officers in Grade 1A and above in 2015, based on the Bank achieving certain pre-determined performance criteria. The approval of the shareholders was obtained for this scheme to offer share options up to 2% of the ordinary voting shares of the Bank. 1st Tranche of this ESOP was vested on September 30, 2016.

The details of the ESOPs are given in Notes 53.2 and 54 to the Financial Statements on pages 297 to 300.

The Group and the Bank do not have any employee profit sharing plan, except the Variable Bonus Scheme.

15. Directors’ Interests in Contracts or Proposed Contracts

Directors’ interests in contracts or proposed contracts with the Bank, both direct and indirect are disclosed on pages 170 and 171. The Directors have also disclosed transactions, if any, that could be classified as Related Party Transactions in terms of the Sri Lanka Accounting Standard – LKAS 24 on ‘Related Party Disclosures’. Please refer Note 64 to the Financial Statements on page 313 for those transactions disclosed by the Directors. These interests have been declared quarterly at Directors’ meetings.

As a practice, Directors have refrained from voting on matters in which they were materially interested. Directors have no direct or indirect interest in any other contract or proposed contract with the Bank.

There are no arrangements enabling the Non-Executive Directors of the Group and the Bank to acquire shares or debentures of the Bank or its subsidiaries, other than via the market.

Tabulated below are the details of Options Available/Exercised by the Executive Directors under the ESOPs:

		2016			2015
		Mr. J. Durairatnam	Mr. S. Renganathan		Mr. J. Durairatnam	Mr. S. Renganathan
Total options available to exercise as at January 01,		163,457	140,162		164,247	116,389
Options vested during the year		45,721	36,148		28,095	23,773
Options exercised during the year		52,781	22,948		28,885	Nil
Options expired during the year		Nil	Nil		Nil	Nil
Total options available to exercise as at December 31,		156,397	153,362		163,457	140,162

Directors’ remuneration and other benefits in respect of the Group and the Bank for the financial year ended December 31, 2016 are given in Note 21 to the Financial Statements on page 224.

As per Section 217 of the Companies Act No. 07 of 2007, there are no restrictions on the approval of loans to Directors in the Bank’s ordinary course of business, subject to compliance with all applicable regulations.

16. Directors’ and Officers’ Insurance

The Bank has, during the financial year, paid an insurance premium in respect of an insurance policy for the benefit of the Bank and the Directors, secretaries, officers and certain employees of the Bank and related body corporates as defined in the insurance policy. In accordance with commercial practice, the insurance policy prohibits disclosure of the terms of the policy, including the nature of the liability insured against and the amount
of the premium.

17. Environmental Protection

The Group and the Bank have not, to the best of their knowledge, engaged in any activity, which was detrimental to the environment. Specific measures taken to protect the environment are given on pages 76 to 81.

18. Statutory Payments

The Directors, to the best of their knowledge and belief are satisfied that all statutory payments (including all taxes, duties and levies payable by the Bank and its subsidiaries) due to the Government, other regulatory institutions and related to the employees have been made on time or where relevant provided for.

19. Events after the Reporting Period

No event of material significance that require adjustments to the Financial Statements, has occurred subsequent to the Reporting period, other than those disclosed in Note 70 to the Financial Statements on page 352.

20. Going Concern

The Directors have made an assessment of the Bank’s ability to continue as a going concern and is satisfied that it has the resources to continue in business for the foreseeable future. Furthermore, the Directors are not aware of any material uncertainties that may cast significant doubt upon the Bank’s ability to continue as a going concern, such as restrictions or plans to curtail operations.

21. Appointment of Auditors
and their Remuneration

The Board of Directors of the Bank resolved to adopt a Policy of Rotation of Auditors, once in every five years, in keeping with the principles of good Corporate Governance, although the mandatory requirement is only partner rotation once in every five years. Accordingly, the present auditors, Messrs KPMG were appointed as Auditors of the Bank at the Annual General Meeting held in March 2012 to carry out the audit of the Bank for the year ended December 31, 2012. Thereafter, they were reappointed as Auditors of the Bank at the Annual General Meetings held in March 2013, 2014, 2015 and 2016 to carry out the audits of the Bank for the years ended December 31, 2013, 2014, 2015 and 2016 and due to be rotated in 2017. However, the Board with the recommendation of the Board Audit Committee resolved to extend the period of service of the Auditors by an additional one year, subject to terms and conditions of the Banking Act Directions, since the Bank has sought the services of Messrs KPMG to assist in carrying out a gap analysis and provide guidance in implementation of the requirements under the Sri Lanka Accounting Standard – SLFRS 9 on ‘Financial Instruments’.

The retiring Auditors, Messrs KPMG have signified their willingness to continue to function as the Auditor to the Bank.

A resolution to reappoint KPMG as Auditors and granting authority to the Directors to fix their remuneration will be proposed at the forthcoming Annual General Meeting to be held on March 30, 2017 for Shareholder approval.

Expenses incurred in respect of Audit Fees and Fees for other services rendered during the accounting period are given in Note 21 to the Financial Statements on page 224.

22. Lead Auditor’s Independence

Independence Confirmation has been provided by Messrs KPMG as required by the Section 163 (3) of the Companies Act No. 07 of 2007, in connection with the audit for the year ended December 31, 2016 confirming that KPMG is not aware of any relationship with or interest in the Bank or any subsidiaries audited by KPMG that in their judgement, may reasonably be thought to have a bearing on their independence within the meaning of the Code of Professional Conduct and Ethics issued by The CA Sri Lanka, applicable as at the Reporting date.

No prohibited non-audit services have been provided by Messrs KPMG as per the Direction issued by the Central Bank of Sri Lanka on ‘Guidelines for External Auditors relating to their statutory duties. The Directors are satisfied because the Board Audit Committee has assessed each service, having regard to auditor independence requirements of applicable laws, rules and regulations, and concluded in respect of each non-audit service or type of non-audit service that the provision of that service or type of service would not impair the independence of Messrs KPMG.

23. Information on Ratios, Market Prices of Shares and Credit Ratings

Information that requires disclosures as per Rule 7.6 (xi) of the Listing Rule of the CSE are given in the Section on ‘Investor Relations’ on pages 108 and 120.

24. Risk Management and
System of Internal Controls

The Bank has an ongoing process in place to identify, evaluate and manage the risks that are faced by the Bank. The Directors continuously review this process through the Board Integrated Risk Management Committee. Specific steps taken by the Bank in managing both banking and non-banking risks are detailed in the Section on ‘Managing Risk: An Overview’ on pages 172 to 175, in the ‘Board Integrated Risk Management Committee Report’ on pages 143 and 144 and in Note 69 to the Financial Statements on ‘Financial Risk Review’ on pages 321 to 352.

An effective and comprehensive system of internal controls is in place in the Bank comprising of internal checks, internal audit and financial and other controls required to carry out the business of banking in an orderly manner and to safeguard the assets. The Directors’ Statement on Internal Control and the Auditors’ Report thereon are given on pages 166 to 168.

25. Corporate Governance

Directors’ Declarations

The Directors declare that –

(a) the Bank complied with all applicable laws and regulations in conducting its business and have not engaged in any activity contravening the relevant laws and regulations. Officers responsible for ensuring compliance with the provisions in various laws and regulations, confirm compliance in each quarter to the Board Integrated Risk Management Committee.

(b) the Directors have declared all material interests in contracts involving the Bank and refrained from voting on matters in which they were materially interested.

(c) all endeavours have been made to ensure that shareholders in each category have been treated equitably in accordance with the original Terms of Issue.

(d) the business is a Going Concern with supporting assumptions or qualifications as necessary, and that the Board of Directors has reviewed the Bank’s Corporate/Business plans and is satisfied that the Bank has adequate resources to continue its operations in the foreseeable future. Accordingly, the Financial Statements of the Bank, its Subsidiaries and Associates are prepared based on the Going Concern assumption, and

(e) they have conducted a review of internal controls covering financial, operational and compliance controls, risk management and have obtained a reasonable assurance of their effectiveness and proper adherence.

The measures taken and the extent to which the Bank has complied with the Code of Best Practice on Corporate Governance issued by The CA Sri Lanka and the SEC, the CSE and the CBSL are given in on pages 354 to 371.

26. Sustainability

The Bank is an early champion of adopting sustainability practices and sustainability reporting. The Bank has considered the sustainability aspects when formulating its business strategies and details of which are presented on pages 414 to 419.

27. Human Resources

The Bank continues to invest in Human Capital Development and implement effective Human Resource Practices and Policies to improve workforce efficiency, effectiveness and productivity and also to foster collaborative partnerships that enrich the work and learning environment for our staff.

Specific measures taken in this regard are detailed in the ‘Board Human Resources and Remuneration Committee Report’ appearing on pages 147 and 148.

28. Technology

As encapsulated in the Vision and the Mission, our business processes are underpinned by technology. All of our processes involve information technology, and we use technology to deliver superior products and services to our customers. Correspondingly, the nature of the business is more heavily intertwined with technology than ever before.

Key achievements for the year are detailed in the ‘Board Technology Committee Report’ appearing on page 152.

29. Operational Excellence

To increase efficiency and reduce operating cost the Bank has ongoing initiatives to drive policy and process standardisation and to optimise the use of existing technology platforms.

30. Outstanding Litigation

In the opinion of the Directors and in consultation with the Bank’s lawyers, litigation currently pending against the Group and the Bank will not have a material impact on the reported financial results or future operations. Details of Litigation Pending against the Group and the Bank are given in Note 61 to the Financial Statements on pages 306 and 307.

31. Annual General Meeting
and the Notice of Meeting

The 48th Annual General Meeting of the Bank will be held at Cinnamon Grand Hotel, ‘Oak Room’, No. 77, Galle Road, Colombo 03, on Thursday, March 30, 2017 at 2.00 p.m.

Notice relating to the 48th Annual General Meeting of the Bank is enclosed at the end of the Annual Report.

32. Acknowledgement of the Contents of the Report

As required by the Section 168 (1) (k) of the Companies Act No. 07 of 2007, the Board of Directors does hereby acknowledge the contents of this Annual Report.

Signed in accordance with a resolution adopted by the Directors.

K.G.D.D. Dheerasinghe

Chairman

M.P. Jayawardena

Deputy Chairman

J. Durairatnam

Managing Director/CEO

S. Swarnajothi

Director

S. Renganathan

Director

Prof. A.K.W. Jayawardane

Director

K. Dharmasiri

Director

L.D. Niyangoda

Director

Ms. N.T.M.S. Cooray

Director

G.S. Jadeja

Director

Mrs. J.R. Gamage

Company Secretary

Colombo
February 22, 2017