National Development Bank PLC Financial Summary and Investment Analysis

Executive Overview

National Development Bank PLC is a Sri Lankan listed commercial bank founded as a development-finance institution in 1979. It provides retail, small and medium enterprise (SME), wholesale, trade, project and infrastructure, treasury, Islamic and digital banking services. Through its subsidiaries, the Group also participates in investment banking, fund and wealth management, stockbroking, private equity and commercial property. Its Colombo Stock Exchange ordinary voting share code is NDB.N0000.

Assessment date: 2026-10-21. Latest financial reporting date: 2026-09-30 (unaudited). Coverage: Q4 2023 through Q3 2026 (12 natural-calendar quarters); CY2023–CY2025 annual comparisons where reported, with particular emphasis on the audited CY2025 annual report; and subsequent material disclosures included in the merged documents. Latest supplied share-price observation: LKR 103.75 at the close on 2026-10-21. All monetary amounts are Sri Lankan rupees unless another currency is expressly identified.

The central investment issue is the difference between the Bank's recovering underlying operations and the major accounting, governance and capital consequences of a fraud discovered in April 2026. The final forensic amount disclosed on 2026-09-29 was LKR 13,639,664,684. The September interim report allocates LKR 1.463 Bn to periods before 2025, 9.617 Bn to CY2025 and 2.560 Bn to Q1 2026. It restates historical profits and equity. Consequently, the CY2025 annual report's originally published Bank PAT of LKR 11.040 Bn is not the current comparable figure: restated Bank PAT is LKR 5.896 Bn. Restated CY2024 Bank PAT is LKR 8.135 Bn, not the originally published LKR 9.030 Bn.

For 9M 2026, Bank gross income increased 10.6% YoY to LKR 80.585 Bn and fraud-adjusted PAT increased 51.4% to LKR 7.711 Bn. Excluding the fraud charge in both periods, PAT increased 21.1% to LKR 9.094 Bn. The distinction matters: underlying improvement is genuine in the reported figures, but reduced impairments rather than stronger interest spreads provided a substantial part of the support. Net interest income declined 2.2%, the net interest margin fell to 3.57%, and underlying operating cost efficiency weakened slightly. Q3 2026 PAT of LKR 2.886 Bn was 8.9% below Q3 2025 and 4.2% below Q2 2026.

Balance-sheet and credit indicators present a mixed picture. At 2026-09-30, Bank assets were LKR 975.357 Bn, deposits LKR 717.468 Bn, net customer loans LKR 599.735 Bn, and shareholders' equity LKR 82.757 Bn. Stage 3 net impaired-loan ratio improved to 3.00%, with Stage 3 coverage rising to 65.36%. However, loan and deposit growth in 2026 has been modest, low-cost deposit share has fallen, the Bank's CET1/Tier 1 capital ratio is 9.48%, the disclosed credit rating moved to A-(lka)/Negative Outlook, and the cash portion of the CY2025 dividend remains suspended by regulatory direction.

Overall evidence-based position: profitable banking operations, improved credit quality, an established deposit and customer franchise, and valuable subsidiaries must be assessed against the exceptional fraud/control failure, restated historical returns, declining margins, tighter Tier 1 capital headroom, funding-mix pressure and dividend uncertainty. Neither the apparently low price-to-book ratio nor the improved 9M reported profit alone resolves those risks.

Reporting Scope, Definitions and Restatements

• Calendar-quarter convention: Q1 = January–March, Q2 = April–June, Q3 = July–September, Q4 = October–December. All periods below are classified by their actual reporting end dates, not fiscal-year labels.
• Bank versus Group: Unless labelled *Group*, primary lending, deposits, capital and earnings figures concern the separately reported Bank. Group figures are consolidated and include subsidiaries and, where specified, non-controlling interests.
• Units: Most tables use LKR Mn, converted from the statements' LKR '000 and rounded to one decimal. LKR Bn and share prices are separately labelled. Totals may differ minimally from summed rounded quarters. Percentages are derived from unrounded values where possible.
• Auditing: The CY2025 annual financial statements were originally audited and approved on 2026-02-25. The subsequent Q1–Q3 2026 statements and their restated prior-period comparatives are unaudited interim disclosures. The restated CY2025 profit is therefore not an unchanged presentation of the February annual report.
• Bank accounting: Conventional industrial-company gross profit, GP margin, inventory turnover and EBITDA are not decision-useful bank measures. The analyses instead use gross income, net interest income (NII), net interest margin (NIM), net fees, credit impairment, PAT, cost-to-income, lending/deposit funding ratios, asset quality, regulatory capital and liquidity. PAT / gross income is shown only as a descriptive, nonstandard income-conversion measure, not as a statutory bank margin.
• Quarter derivations and compatibility: Q4 2025 restated PAT is derived as restated CY2025 less restated 9M 2025; Q1 2026 final PAT is derived from the latest 9M 2026 and the disclosed Q2 and Q3 quarters. CY2024 quarter-specific numbers remain as originally published where the later fraud restatement was not allocated to individual 2024 quarters; hence those four historic quarters do not reconcile to the restated CY2024 total. Earlier 2026 interim balance sheets used successively updated forensic estimates. Do not treat them as perfectly homogeneous audited time-series observations.

Reconciliation of exceptional fraud and historical profit

The final report allocates the gross fraud amount of LKR 13,639.665 Mn as follows: 1,462.665 Mn to periods preceding 2025-01-01, 9,617.000 Mn to CY2025 and 2,560.000 Mn to Q1 2026. These allocated gross losses should not be equated directly with the lower after-tax PAT adjustments. The Bank's comparative profit reconciliation presents a CY2025 PBT impact of LKR 9,565 Mn, a CY2024 PBT impact of 1,462.665 Mn, and a 9M 2025 PBT impact of 4,477 Mn. The final amount exceeds the initial April estimate of LKR 13.20 Bn and the interim forensic estimate of LKR 13.580 Bn.

Implication: The February 2026 management description of CY2025 PAT as an all-time record and +22.25% YoY reflected results before fraud recognition. On the subsequently restated accounting basis, Bank PAT fell 27.5% from CY2024 to CY2025. The originally presented trend is useful as an *ex-fraud operating comparison*, but not as the latest statutory profit trend. The 2024 sovereign-debt restructuring also introduced unusual income and impairment effects, further reducing simple comparability.

Financial Performance

Revenue and Profitability Trends: 12 Calendar Quarters

Bank gross income, NII and Bank/Group PAT; LKR Mn. *PAT/gross* is a descriptive ratio, not a conventional industrial net-profit margin. Gross profit and GP margin are not applicable to a bank.

\* Q4 2024 is the originally published quarter; the pre-2025 fraud adjustment is only disclosed on an annual/cumulative basis. \*\* 2025 quarterly PAT uses the later restated 2026 comparative financial information. \*\*\* PAT is calculated from disclosed cumulative/quarterly figures using the latest available forensic adjustments, rather than directly republished as a standalone final-restatement quarter. Small differences in older Group quarter comparatives arise from later comparative presentations.

Interpretation of the sequence:

• CY2024 quarterly PAT, especially Q4 2024, was distorted by the International Sovereign Bond (ISB) restructuring. The original Q4 2024 statement includes an exceptional LKR 14.344 Bn restructuring impact and substantial impairment reversals. The Q4 2024 headline result should therefore not be treated as recurring quarterly earning power.
• CY2025 gross income gradually recovered from Q1 to Q4, but restated earnings were highly uneven. Q1 2025 PAT collapsed to LKR 37.6 Mn after allocation of historic fraud losses; Q4 2025 restated PAT was only LKR 803.3 Mn, versus LKR 3,532.1 Mn originally published. This is chiefly a restatement effect, not evidence by itself of an equivalent ordinary banking deterioration in Q4.
• Q2 2026 was the best reported PAT quarter within 2026 through September, at LKR 3,012.7 Mn; Q3 2026 declined 4.2% QoQ to LKR 2,885.5 Mn. Gross income declined 2.0% QoQ, while NII declined 4.8% QoQ.
• Compared with Q3 2025, Q3 2026 gross income rose 6.5%, but NII fell 11.5% and Bank PAT fell 8.9%. Interest income rose 8.9%, while funding interest expense rose faster, 22.9%, in that same quarter. This identifies spread/funding-cost pressure as a major profitability constraint.
• Q3 2026 included LKR 417.8 Mn of impairment reversals, contrasting with LKR 1,406.4 Mn of impairment charges in Q3 2025. Such releases materially cushion profits but need not recur indefinitely.

Annual and Year-to-Date Performance

\* CY2023 PAT and some CY2024 income/cost figures are from original historic disclosures; the CY2024 PAT and CY2025 PAT rows incorporate the later fraud adjustment. CY2024 loan/investment impairment included unusual sovereign restructuring gains/reversals and is not comparable with ordinary credit costs. Pre-2025 fraud expenditure has not been fully reconstructed into historical individual income-statement line items.

9M 2026 earnings bridge and quality:

• Interest income grew but interest expense grew materially faster, while net fees benefited from credit, cards, operations, trade and payments. Other non-fund income includes trading and investment disposals; reported forex revaluation gains were LKR 953.0 Mn in 9M 2026 versus LKR 396.8 Mn in 9M 2025. These noninterest items can be volatile.
• Personnel expenses increased from LKR 7.410 Bn to LKR 7.578 Bn (+2.3%), and depreciation/amortisation from LKR 0.851 Bn to LKR 1.115 Bn (+31.2%). Removing the fraud element from other expenses, underlying other costs increased from approximately LKR 5.609 Bn to LKR 6.264 Bn (+11.7%). Reported total cost reduction thus substantially reflects the smaller comparative fraud charge; it is not a general reduction in all ordinary operating costs.
• Group 9M 2026 PAT of LKR 7.644 Bn is below the Bank's LKR 7.711 Bn. By contrast Group 9M 2025 PAT was above the Bank's. This shows that subsidiary/consolidation contributions did not provide a profit uplift in the latest nine months, despite augmenting consolidated fee revenue. The disclosures do not establish that this pattern must persist.
• Income taxes and levies remain significant: CY2025 Bank financial-services taxes were LKR 5.048 Bn and income-tax expense LKR 5.295 Bn in the originally audited statement. The CY2025 tax number should not be inserted unadjusted into a restated PBT/PAT reconciliation.

Long-Run Growth and Profitability Interpretation

• Bank gross-income CAGR, CY2023–CY2025: approximately -13.9% annually on the published figures. This mainly spans a sharply changing interest-rate environment; it is not a measure of physical sales-volume contraction.
• Bank reported-to-restated PAT CAGR, CY2023–CY2025: arithmetically +4.8% annually using original CY2023 PAT and restated CY2025 PAT, but not reliably comparable because the full pre-2025 fraud allocation has not been assigned to CY2023 and because of CY2024 restructuring gains.
• Restated CY2025 versus restated CY2024: Bank PAT -27.5% and Group PAT -24.3%, despite Bank NII +2.2% and net fee income +3.5% before the later exceptional recognition.
• 9M 2026 versus 9M 2025: core PAT before fraud +21.1%; after fraud +51.4%. The 51.4% improvement partly reflects that the comparative nine months absorbed a larger allocated fraud charge. Neither growth rate should be mechanically annualised into a long-term forecast.

Balance Sheet Analysis

Financial Position Trend

LKR Bn, end-of-period. 2024-12-31 and 2025-12-31 use the *latest restated* balance sheets. Intermediate 2026 quarter figures are the respective disclosed interim-period snapshots; fraud estimates and comparative adjustments evolved between those publications.

The fraud restatement reduced CY2025 closing Bank assets by LKR 9.671 Bn, from LKR 935.809 Bn to LKR 926.137 Bn, and Bank equity by LKR 6.039 Bn, from LKR 86.021 Bn to LKR 79.982 Bn. Equivalent adjustments affected Group assets and equity. The 2024-12-31 opening-equity restatement was LKR 895.0 Mn after tax.

Business-model shifts:

• In CY2025, gross customer loans grew 26.3% to LKR 643.860 Bn and net customer loans grew approximately 28.8%, against customer deposits rising 11.9%. The net-loan/deposit ratio moved from approximately 72.9% at 2024-12-31 to 83.9% at 2025-12-31; loan growth substantially outpaced funding-base growth.
• At 2026-09-30, gross loans reached LKR 653.096 Bn (+1.4% from December), net loans +1.0%, deposits +1.5%, and Bank assets +5.3%. Loan/deposit ratio was broadly unchanged at 83.6%. The business has not maintained CY2025's loan-growth pace during 2026.
• Net loans peaked at LKR 623.108 Bn at 2026-03-31, declined to LKR 595.279 Bn at 2026-06-30, and recovered modestly to LKR 599.735 Bn in September. Deposits followed a similar pattern (731.725 → 712.497 → 717.468 Bn). This chronology coincides with the fraud investigation, but the reports do not isolate how much balance-sheet change it caused.
• Investment in debt and other instruments at amortised cost rose from LKR 181.340 Bn in December to LKR 207.502 Bn in September (+14.4%), materially faster than customer lending. Bank cash equivalents rose from LKR 17.566 Bn to LKR 20.026 Bn. On the liability side, due to banks rose from LKR 12.448 Bn to LKR 28.637 Bn, while debt securities issued rose from LKR 23.331 Bn to LKR 41.170 Bn. A greater proportion of incremental assets is represented by investments rather than loans, with increased wholesale/market funding.
• End-September Bank shareholders' equity represents approximately 8.5% of total assets on a simple book basis. Because banks are risk-weighted and deposit-funded, regulatory capital and leverage ratios, not generic industrial debt/equity, determine capital adequacy.

Customer Loan Mix, Commitments and Asset Quality

Pawning, consumer credit and foreign-currency term lending increased strongly, offset by contraction in several other credit products. Growth in these pockets can support yield and diversification but also creates collateral-price, affordability, currency, geographic, tenor and borrower-concentration risks. The reports do not provide sufficient matching detail to quantify net open foreign-currency exposure from foreign-currency loan growth alone.

At 2026-09-30 the Bank disclosed LKR 307.900 Bn of guarantees, performance bonds, documentary credits, acceptances and undrawn commitments considered for impairment, compared with LKR 296.815 Bn at 2025-12-31. These are material contingent/undrawn exposures, not ordinary drawn loans to add to on-balance-sheet loan totals. The aggregate of drawn loans plus such commitments was LKR 960.996 Bn, before relevant impairment allowances.

Stage 3 impairment allowance on the broader loans/commitments schedule rose from LKR 42.034 Bn to LKR 44.769 Bn, while Stage 1 and Stage 2 provisions were LKR 7.275 Bn and LKR 3.878 Bn respectively at 2026-09-30. Enhanced underwriting, collections, early warning, risk segmentation and recovery support are management's stated drivers of improving asset quality. However, a large stock of impaired credit remains and the cyclical reduction in fresh impairment charges may not be durable if macro conditions or borrower stress deteriorate. Some 2025 narrative credit-stage ratios use definitions differing from the later regulatory comparative table; the above table deliberately uses the latter's matched bases.

Deposit Composition and Liquidity Management

At 2026-09-30 domestic-currency customer deposits were LKR 509.651 Bn (nearly flat from December), while foreign-currency deposits increased to LKR 207.817 Bn from LKR 197.437 Bn. Domestic demand deposits fell from LKR 51.944 Bn to LKR 43.411 Bn and domestic savings from LKR 92.794 Bn to LKR 82.591 Bn; domestic time deposits increased from LKR 363.192 Bn to LKR 382.216 Bn. Foreign-currency time deposits likewise increased from LKR 152.405 Bn to LKR 173.784 Bn, but foreign-currency demand deposits contracted substantially.

Management's normalised CASA ratio declined from 23.9% at 2025-12-31 to 20.7% at 2026-09-30. The unadjusted demand-plus-savings product amounts would imply roughly 26.8% and 22.3%, respectively; the 2025 annual report elsewhere states 27.0% before the later normalisation. These are different definitions and should not be mixed. Both series indicate the same adverse shift away from low-cost transactional funding and toward term deposits.

Absolute liquidity ratios remain above statutory floors, but buffers have declined considerably. The low-cost deposit erosion, growing term-deposit dependence and greater market funding should be reviewed alongside the unchanged net-loan/deposit ratio rather than treated as contradictory findings.

Cash Flow Analysis

Bank cash flows; LKR Mn. The 9M values are cumulative January–September, not Q3-only.

\* This is a transparent mechanical calculation, not a standard bank free-cash-flow valuation measure. Lending, deposits, interbank positions and security portfolios form the Bank's day-to-day financial business. Their classification in operating/investing/financing cash flows makes industrial-company FCF, EBITDA and capex-payout conventions unreliable when applied mechanically.

• Operating cash flow turned substantially positive in 9M 2026, but investing outflows of LKR 48.195 Bn exceeded this inflow, producing a net reduction in cash equivalents. Activity in financial securities and balance-sheet allocations, not just physical capex, materially drives investing cash flow.
• 9M 2026 PPE purchases were LKR 2.592 Bn and intangible-asset purchases LKR 0.929 Bn, compared with LKR 0.862 Bn combined in 9M 2025. The sharp increase is consistent with the Bank's infrastructure, technology and process-modernisation programme but increases the importance of eventual efficiency returns.
• Financing cash flow was +LKR 14.657 Bn in 9M 2026, compared with -LKR 10.042 Bn in 9M 2025, consistent with the significant March 2026 bond issuance and debt-funding changes. The separately disclosed unpaid cash dividend means cash distributed to shareholders does not match dividends approved.
• Group 9M 2026 operating/investing/financing cash flows were approximately +LKR 24.622 Bn / -LKR 48.086 Bn / +LKR 14.657 Bn. The Group's difference from Bank cash flow was comparatively small.

Key Financial Ratios and Growth Indicators

Interpretive points:

1. Profitability recovery is not a margin recovery. ROE and reported PAT improved on a fraud-adjusted comparison, while NIM contracted and underlying cost-to-income rose to 41.96% from 41.04% for CY2025. For the closer 9M comparison, pre-fraud operating cost/income rose from approximately 40.44% to 41.96%. Better credit impairment outcomes and noninterest earnings are doing important work.
2. Tier 1 capital is the binding issue to watch. At 2026-09-30, CET1 of 9.48% compares with a stated 7.0% regulatory minimum, a cushion of 2.48 percentage points. The same 9.48% Tier 1 ratio compares with a higher 8.5% Tier 1 minimum, a cushion of only 0.98 percentage points. Total CAR 14.77% exceeds its 12.5% minimum by 2.27 points. Tier 2 issuance helped overall capital, but did not prevent narrowing of Tier 1 headroom.
3. Leverage and funding should be analysed as banking ratios. The debt-security related disclosure shows debt/equity of 10.59x and interest cover of 1.57x at September, versus 10.36x and 1.68x in the later December comparative. The disclosed interest-cover definition is *interest income/interest expense*, not ordinary industrial EBIT/interest expense.
4. Low-credit-cost sustainability matters. A 48.4% reduction in 9M impairment charges is a major income catalyst. Maintaining that benefit requires continued Stage 3 improvement, provisioning discipline and no adverse reversal of macroeconomic conditions.
5. Formal current ratio, inventory turnover and receivables-days calculations are not meaningful bank valuation tools. Basel III LCR/NSFR, loan quality, funding mix and credit underwriting are more pertinent; no invented EBITDA margin or industrial gross profit is assigned.

Share Valuation and Market Indicators

Using the provided 2026-10-21 close of LKR 103.75 and 432,197,834 ordinary shares disclosed at 2026-09-30 (with no later share-count change shown in the supplied material):

P/B below 1x is a description, not proof that the shares are undervalued: recoverability of assets, regulatory capital constraints, funding costs, future profits, control remediation and distributions determine whether stated equity can produce shareholder returns. Similarly, annualised 9M EPS assumes the nine-month rate extrapolates to a full year; the results and fraud allocation are not seasonal-proof forecasts. The CY2025 originally disclosed P/E of 5.45x at 2025-12-31 used unrestated EPS 25.90 and is not comparable without recalculation.

Banking Segments, Subsidiaries and Operating Growth

Bank Business Lines

The Bank's FY2025 business-line disclosures use internal fund-transfer pricing for segment income shares and different denominators for loan/deposit contributions. They should not be added together as if all are consolidated net-revenue percentages.

Retail and private banking: Vehicle imports resumed in 2025, supporting leasing demand; retail banking pursued personal loans, housing loans, gold-backed pawning, cards, merchant acquiring and remittances. Partnerships included vehicle importers, education consultants and a 100% financing proposition for a designated residential development with John Keells Properties. The pawning offering expanded across 39 additional branches, bringing coverage to approximately 35% of branches. Privilege Banking reported 78% YoY pre-tax profit growth in 2025 and opened a second dedicated centre in Havelock Town, supporting high-net-worth deposits and fee opportunities. Lower lending rates helped volumes but increased competitive pricing pressure.

SME/business banking: The SME book reached approximately LKR 124.7 Bn at CY2025 end and LKR 133.5 Bn at September 2026 (+7.1% since December), representing a slower expansion phase in 2026. Management reported over LKR 30 Bn growth in the SME book during CY2025, focused on exports, manufacturing, trade, agriculture and tourism. The 2025 SME geography was concentrated in the Western Province (53.8%); trading was the largest SME sector at approximately 35.5%. SME restructuring, advisory and working capital support continued after the national economic crisis and Cyclone Ditwah. The Bank provided LKR 4,621.3 Mn of refinance loans in 2025 through schemes supported by government/development partners. The National Credit Guarantee Institution supported collateral-constrained customers and preferential guarantee terms for women-led firms. Management's stated goal is to help create 50 female exporters by 2030, not a guaranteed outcome.

Wholesale/trade: Improving imports, trade flows and foreign-exchange availability supported corporate banking. NDB TradeLinc, the proprietary supply-chain finance platform, and NEOS Corporate/host-to-host integrations target better transaction capture, working-capital financing and higher fee income. Tea-sector supply-chain financing against broker advances/inventory was extended toward paddy/rice; the Bank expanded its correspondent relationships in Europe and Southeast Asia. Construction-sector payment delays and global apparel demand/tariff uncertainty remain credit and transaction-volume risks.

Project/infrastructure and offshore: The PIF business grew its 2025 loan portfolio 33.8%, with 134% offshore lending growth and emphasis on renewable power, water and sanitation, infrastructure and South/East Asian transactions. The PIF unit cited a renewable-energy portfolio of approximately LKR 8.997 Bn. The larger Bank-wide renewable-energy exposure and cumulative financing figures use different definitions; they are not additive. Cross-border growth potentially increases foreign-currency earnings but introduces sovereign, execution, jurisdictional and concentration risk.

Digital distribution: CY2025 saw NEOS 2.0, NEOS Pay, the NEOSBIZ business application, TradeLinc and an upgraded loan-origination system. The Bank reported 19% YoY growth in digital transaction value and approximately 13% growth in digitally transacting users. NEOSBIZ active customers increased from 2,999 to 4,900, transactions from 412,740 to 768,900, and transaction value from LKR 73.3 Bn to LKR 127.2 Bn in CY2025. Retail NEOS active application users increased 23%. These are concrete distribution/retention indicators, though their ultimate net fee or cost-savings contribution is not separately quantified. Customer satisfaction increased from 4.5/5.0 to 4.7/5.0.

Principal Subsidiaries and Group Synergies

The Bank's financial-services group structure offers cross-selling among deposits, private banking, unit trusts, brokerages and corporate transactions. Nevertheless, the latest 9M 2026 consolidated PAT did not exceed Bank-only PAT, so the value of the combination should be assessed using realised incremental profits, not just subsidiary scale or awards.

Economic and Market Context

The annual report depicts Sri Lanka's recovery in CY2025 as supported by disinflation, monetary easing, tourism, remittances and private-sector credit, accompanied by lingering structural and climate vulnerabilities:

• Growth: Sri Lankan GDP grew 5.4% YoY in Q3 2025, versus 5.3% in Q3 2024; reported growth for the first nine months of CY2025 was approximately 5.0%. Construction, manufacturing and services activity improved, but construction liquidity problems and apparel/global trade uncertainty remained uneven sector headwinds.
• Rates and inflation: The Central Bank reduced its Overnight Policy Rate to 7.75% in May 2025; reported end-2025 monthly weighted prime lending and average deposit rates were approximately 8.87% and 6.78%, respectively. Inflation returned from deflation early in 2025 to low positive rates later in the year. Lower rates stimulated lending and asset quality but reduced asset yields and created challenges securing low-cost deposits.
• External sector: The report presents approximately USD 6.8 Bn gross official reserves (including the People's Bank of China swap), 3.8 months import cover, USD 8.1 Bn workers' remittances (+23% YoY), USD 3.2 Bn tourism earnings and 2,362,521 tourist arrivals in 2025. Increased vehicle imports widened the merchandise trade deficit and accompanied an approximately 5.6% LKR depreciation against USD in 2025.
• Industry and markets: Banking-sector assets reportedly grew approximately 13% in 2025 and private-sector credit 26%. The reported system-wide Stage 3 gross-loan ratio improved to 9.8%. The ASPI gained 41.9% and S&P SL20 26.6% over CY2025, supporting capital-market subsidiaries and investor sentiment. These are historical observations, not assurances for CY2026.
• Fiscal and reform context: IMF-supported fiscal and financing reforms, sovereign-debt restructuring and planned banking supervision/industry consolidation influence lending and funding conditions. Further supervisory emphasis includes asset classification, cyber resilience, sustainable finance and national payment infrastructure.
• Cyclone Ditwah: Management reports a major November 2025 disaster affecting almost 2 million people and about 500,000 families, with physical damage estimated at over USD 4 Bn (roughly 4% of GDP). The Bank states its directly affected loan exposure was minimal and no material portfolio-level financial loss was identified; it nevertheless granted selected moratoria and participated in relief/reconstruction activity. Extreme-weather risk remains material for agriculture, fisheries, SMEs, collateral values and the broader economy.
• 2026 uncertainties: Management highlights interest-rate and funding-cost volatility, geopolitical conflict and trade tariffs, slower borrower recovery in vulnerable segments, climate events and the operational/regulatory aftermath of the Bank's own fraud. The interim ECL methodology includes overlays for risk-elevated industries and an assessment of the Middle East conflict's credit effects.

Future Potential and Outlook

Management's Strategy Through 2030

The Bank's five-year transformation programme is organised around Strengthen Core Franchises; Expand Growth Segments; Future-Ready Foundations; Operational Efficiency; and Customer Centricity, implemented through the practical imperatives Strengthen, Simplify, Scale-Up. Strategic ambitions include gaining market share, improving sustainable profitability, expanding retail/SME and fee-income exposure, diversifying trade/offshore activity, improving credit decisioning and delivering faster, integrated customer experiences. No sufficiently specific verified forecast of earnings, dividends, ROE or share price is disclosed, and none is assumed here.

Potential catalysts conditional on execution include improved private-sector credit demand, renewed vehicle/consumer finance, SME export financing, green project finance and cross-border infrastructure projects; stronger NEOS/TradeLinc payment volumes; cross-sales into NDB Wealth and investment banking; and data/AI-assisted credit screening, straight-through processing and fraud detection. The Bank plans greater digital account onboarding, AI-enabled scoring and next-generation data infrastructure, supported by a modernised treasury/asset–liability platform and enhanced cyber controls. Faster onboarding and automation could improve cost-to-income, but their payback has not yet been demonstrated numerically.

GSS+ sustainable-finance bond: On 2026-03-16, the Bank allotted 160 million listed Basel III Tier 2 green, social, sustainable and sustainability-linked financing bonds at LKR 100 each, raising LKR 16.0 Bn after an oversubscribed offering opened on 2026-03-10. The instruments are unsecured, subordinated, redeemable, include a non-viability conversion feature and have five- or seven-year maturities. Main cited coupon rates are 11.50%, 11.04% and 11.85% across their respective tranches. The stated uses are regulatory capital strengthening and eligible GSS+ financing. At 2026-09-30, LKR 8.694 Bn (54%) had been deployed to eligible project financing against the LKR 16 Bn allocation; the remaining funds were held in the Bank's treasury liquidity portfolio, with project utilisation targeted within 24 months of allotment. The issue helps Tier 2 capital and eligible financing capacity but creates coupon cost, maturity/refinancing requirements, restricted-use monitoring and potential conversion-related equity dilution under a non-viability event.

Strategic portfolio transaction: The Bank disposed of 26,631,495 Seylan Bank PLC shares at LKR 104 each, a gross consideration of approximately LKR 2.770 Bn, completing the transaction on 2026-05-11. It now reports no remaining shareholding in that investee. The relevant disposal result was recognised in other comprehensive income, not ordinarily as Bank PAT; no gain or loss is inferred without carrying-value information.

Execution checkpoints for the next reporting periods: sustainable NII versus funding costs; CASA stabilisation; Stage 2/3 migration and credit impairment; retained profit and Tier 1 CAR; recoveries and governance remediation related to the fraud; the credit rating/outlook; the fate of withheld dividends; digital product monetisation net of higher technology spending; and conversion of green/infrastructure project pipelines into performing loans with adequate return on risk-weighted assets.

Risks and Challenges

The risk conclusions are not a recommendation to transact. Rather, they identify what must remain true for recent operating improvements to convert into durable shareholder returns.

Shareholder and Corporate Information

Share Structure, Ownership and Trading

Other disclosed top-20 accounts include Hatton National Bank PLC A/C No. 1 (2.76%), Perpetual Treasuries (2.44%), SBI VEN Holdings (2.42%), BNYM Re-Terra Global Opportunity Fund (1.73%), Hatton National Bank/Phantom Investments (1.72%), Akbar Brothers (1.35%), the specified HNB Investment Bank nominee account (1.25%), Namunukula Plantations (0.95%), People's Leasing & Finance/Mr D. Schaffter (0.80%) and Perpetual Equities (0.71%). These are registered holders/account names and must not be casually merged into ultimate beneficial-owner categories.

• Ordinary voting shares increased from 426,889,457 at 2025-12-31 to 432,197,834 at 2026-09-30, principally reflecting approximately 5.3 million CY2025 dividend scrip shares listed on 2026-04-10; total share-count increase is about 1.24%.
• Regulatory public shareholding at 2026-09-30: 81.77%, 18,560 public shareholders; float-adjusted market capitalisation LKR 38.698 Bn at the then reporting-date share price LKR 109.50. This public-float percentage is not the complement of top-20 registered ownership: major institutional accounts can qualify as public.
• The earlier CY2025 annual report recorded 15,055 total shareholders at 2025-12-31, of whom 99.16% were residents by number, and approximately 19.65% of shares were registered to non-residents. The different total/public-holder definitions limit direct comparisons with the September public-holder count.
• Among disclosed changes, Sri Lanka Insurance Corporation General Fund held 23.983 Mn shares in September 2026 compared with about 26.145 Mn in June 2026, while HNB/Phantom Investments rose to 7.423 Mn September shares. Ownership should be monitored for continuing institutional concentration and foreign-flow changes.
• The Bank's 2026-09-30 report lists no Bank shares held directly by the named serving directors in its directors'-interest schedule. The report includes Mr. Nandika Buddhipala, appointed effective 2026-10-13, as not applicable in that reporting-date schedule. This is a direct-shareholding disclosure, not a statement about every possible indirect interest or connected person.

Supplied 90-session share-trading snapshot, 2026-06-11 to 2026-10-21: starting close LKR 107.75, latest close LKR 103.75 (-3.71% price return); observed range LKR 103.50–114.25; median daily turnover LKR 5.85 Mn; mean turnover LKR 10.96 Mn; median daily volume 53,504 shares. Recorded foreign holding declined from 77.068 Mn shares (17.83%) to 74.492 Mn (17.24%), a decline of 2.576 Mn shares or approximately 0.60 percentage points. This snapshot is not a live intraday quote, and its foreign-holding measure follows the supplied market-data convention.

Dividends and Capital Returns

At 2026-09-30, the Bank reported LKR 2.861 Bn dividends payable (versus LKR 0.124 Bn in the restated 2025 balance sheet). The Board continues to seek a regulatory resolution. An approved dividend is not the same as cash received; investors should not treat the FY2025 LKR 6.46 cash component as already distributed or assign it an assured payment date. The LKR 8.50 total represented about 61.5% of restated CY2025 Bank EPS (LKR 13.83) on a simple per-share basis, but that comparison does not resolve regulatory payout capacity or scrip valuation.

Governance, People and Sustainability

• The CY2025 leadership reports name Mr. Sriyan Cooray as Board Chair and Mr. Kelum Edirisinghe as Director/CEO. NORFUND nominee Mr. Sanjaya Mohottala joined the Board in 2025; Mr. Shanil Fernando was appointed in early 2026, and a later interim shareholding schedule records that he resigned effective 2026-04-27. New Board appointments and the forensic findings deserve continuing governance scrutiny.
• The Bank operated 113 branches, 29 ATMs and 92 cash recycler machines in its CY2025 disclosure, with 2 dedicated Privilege Banking centres and 12 hubs. It reported 2,864 employees at 2025-12-31 and 2,898 by 2026-09-30. CY2025 employee costs were approximately LKR 9.563 Bn, and training/development investment was LKR 81.0 Mn. Female representation was 45% overall, 29% in senior management.
• CY2025 cumulative renewable energy financing/disbursements, including relevant equity finance, were LKR 24.1 Bn versus LKR 22.9 Bn previously; associated funded capacity was approximately 364 MW versus 347 MW and cumulative reported avoided emissions 840,587 tCO2e. The Bank separately disclosed LKR 19.4 Bn in renewable-energy sector lending within its value-creation metrics. These figures describe different stocks/flows and should not be added.
• The Group's CY2025 quantified Scope 1 and Scope 2 carbon footprint was 3,775 tCO2e. The reporting boundary was expanded during the year, so a simple YoY emissions reduction claim is unsupported. Reported sustainability and community spending was LKR 70.0 Mn, including a LKR 50.0 Mn donation to the government's cyclone relief fund; the ordinary programme component was approximately LKR 20.0 Mn. The Bank reports environmental/social screening of 100% of relevant loans, and expanded SLFRS S1/S2 climate/sustainability disclosures with limited assurance.
• ESG-finance, insurance, consumer protection and cybersecurity introduce real regulatory and credit-portfolio obligations as well as marketing and funding opportunities. The green-bond label should not substitute for analysing actual loan credit quality, yields and use of proceeds.

Investment Decision Indicators

Strengths Supported by the Reports

• Established financial-services franchise: diversified lending, deposits, trade finance, treasury and wealth-management capabilities, with nationwide customer reach and multiple digital delivery platforms.
• Improving measured credit quality: falling Stage 3 ratios, improving coverage and lower credit impairment expense through September 2026.
• Positive underlying profitability: 9M 2026 pre-fraud PAT +21.1% YoY and restated reported PAT +51.4%, alongside higher fee and commission income.
• Regulatory liquidity and capital compliance: all cited ratios at September remained above disclosed statutory requirements, assisted by successful LKR 16 Bn Tier 2 funding.
• Quantifiable growth initiatives: SME/trade transaction adoption, fintech platforms, renewable/project finance, offshore lending and wealth-management distribution.

Weaknesses and Open Questions

• Material control failure: final fraud loss LKR 13.640 Bn and large comparative restatements substantially altered the meaning of previously celebrated record profits; recoveries are not established.
• Margin deterioration: faster funding-cost growth, NIM 3.57%, falling CASA and Q3 2026 NII -11.5% YoY.
• Capital sensitivity: Tier 1 CAR of 9.48% gives only 0.98 pp headroom over its 8.5% minimum, notwithstanding stronger Tier 2 capital.
• Not all profit growth is recurring: credit-impairment decline, Q3 releases, investment/FX contributions and asymmetric fraud adjustments affect reported comparisons.
• Slower credit/deposit expansion: 2026 gross loans and deposits increased only about 1.4%–1.5% through September after rapid 2025 growth.
• Regulatory and distribution uncertainty: Negative Outlook rating disclosure, suspended dividend cash payment, technology/control remediation obligations and a pending recovery process.

Opportunities and Threats

Overall Financial Assessment — No Transaction Recommendation

The latest disclosures support three simultaneous conclusions. First, National Development Bank PLC has an operationally meaningful banking franchise: fees are growing, impaired-loan metrics are improving and the Bank remained profitable after recognising the exceptional loss. Second, the company's earnings quality and valuation cannot be assessed from the original CY2025 annual headline figures; the final fraud allocation materially reduced CY2024/CY2025 profit, affected equity and created ongoing regulatory/governance consequences. Third, future shareholder return depends less on the isolated P/B multiple and more on restoring trustworthy controls, sustaining credit quality without relying on releases, rebuilding interest margins and low-cost deposits, retaining sufficient Tier 1 capital, and restoring lawful cash dividend capacity.

At LKR 103.75, the supplied data imply 0.54x Bank book value, 7.50x restated CY2025 EPS, or 4.28x annualised 9M 2026 EPS; the final figure is not a verified trailing or forward P/E. These low headline multiples may compensate for substantial risk, reflect concerns already priced into the shares, or both. The reports alone cannot establish a fair value or the likelihood/timing of recoveries and dividend reinstatement.

Most decision-useful next confirmations: evidence of completed post-forensic control remediation; the credit rating/outlook; disclosure of actual fraud recoveries; Tier 1 capital and risk-weighted-asset evolution; Q4 2026 NIM, CASA and credit impairment; and explicit regulatory permission/status for the suspended cash dividend. Investment decisions should be based on how those measurements develop, rather than on an assumed recommendation to buy, sell or hold.