Competition, capital needs and higher taxes challenges for banking sector: NDB CEO

The Colombo Stock Exchange (CSE) in partnership with Daily Mirror is featuring a column on Mirror Business as an Investor Relations initiative. The column, which will be featured in a Q&A format, encourages S&P SL20 companies to bring attention to the developments in the industry, the company and discuss growth prospects. Following are the excerpts from the interview conducted with National Development Bank PLC Director and Group Chief Executive Officer Dimantha Seneviratne.

What are the key milestones that the bank has achieved so far in 2019? 
NDB so far has had a satisfactory year amidst the many challenges that the country and industry face. For NDB, 2019 has been one where we have been focusing on embracing digital technology for an enhanced customer experience, as well as internal process efficiencies. 

In January 2019, NDB launched its first flagship ‘phygital branch’ dubbed as NDB NEOS, with the objective of providing customers a new paradigm in banking convenience, where the physical presence of bank staff is coupled with a truly digitised experience. This adds value to the customer’s banking journey by ensuring human interaction for a personalised service in advisory while leveraging on sophisticated, state-of-the-art technology to deliver comprehensive information and high-quality customer support, some of them being first-time innovations to the local banking industry. 

We also furthered our digital footprint by establishing a network of cash recycle machines, which is now in excess of 40 units and extending our branchless banking proposition ‘Bank2U’ in over 80 localities across the country. 

We also successfully deployed digital capabilities in streamlining our internal processes for enhanced efficiency. Since late last year and the beginning of this year, the bank was able to automate a number of key processes through the use of workflow solutions and Robotic Process Automation (RPA) technology, becoming the first Sri Lankan bank to adopt Digital Workers, all of which have resulted in cost savings, effective deployment of human resources, reduced processing time and improved efficiency. 

In terms of business growth, NDB has managed an above industry average growth in the balance sheet, whilst also maintaining profitability. By the end of 1Q 2019, NDB’s total assets stood at Rs.483 billion, a moderated growth of 2 percent over 2018, which was subsequent to a total asset growth of 24 percent in 2018.

NDB marked the commencement of 2019 on a high note, by being recognised as the Best Bank in Sri Lanka 2019 by the AsiaMoney magazine, in recognition of NDB’s performance excellence. 

Please outline the three most important macro trends that you believe will impact the banking industry in 2019?
The cap on interest rates for deposits will have a considerable impact on the industry. This will skew the market for deposits in favour of the better rated banks with larger networks. Further, the low interest rates on deposits would encourage clients to deleverage their balance sheet on the back of lower demand. 

The risk rating agnostic clients will favour the higher deposit rate arbitrage opportunity provided by better rated non-banking financial institutions. The deposit market will take time to rebalance itself to a new norm. Lowered rates could mean clients with excess liquidity will seek alternate investment options including Repos, thus affecting the industry liquidity levels. 
On the other hand, lowering of lending rates is expected – we have seen the AWPLR reducing by over 100 bps in the last two months since the deposit cap was introduced. However, it will be slow in this challenging environment characterised by higher than normal NPLs and a higher tax rate (approx. 60 percent). The banks will also be conscious of pricing for higher risks.
The slower growth of the economy thus far will also have a significant bearing on the industry. We expect the economy to revive expeditiously post elections, which will provide greater policy visibility and political stability. This should stimulate consumption, which in turn will drive demand for credit.

The need for additional capital for banking institutions expedited by the new Basel III guidelines, SLFRS 9, additional taxes on the industry all coming at a time of low economic growth and increasing NPLs will have a significant impact on the industry in 2019. Currently the bank stocks trade far below its net asset value, which means that the banks will have to raise capital at discounted prices to the detriment of the existing shareholders in the case of private placements and unsuccessful rights issues.

What is your outlook for the bank in 2019? What growth initiatives can be expected in the medium to long term? 
In the near term, NDB will cross the Rs.500 billion mark in total assets and thereby achieve the status of a Domestic – Systemically Important Bank (D-SIB). Once this is achieved, we intend to further accelerate our growth based on scale advantages offered. For 2019, we will continue the streamlining of our internal process with the support of digital solutions and also an upgrade to our core banking system, which will position the bank on a sound launch pad for the next phase of growth. 

We will also strengthen the integration between the bank and NDB group capital market cluster companies and enhance our customer-centric offerings. This leads into the bank’s strategy to follow customer needs and aspirations, which will see the NDB group foraging beyond the shores of Sri Lanka to add value to its clients. 

In the long term, we believe collaboration is the way forward. We will leverage on our relationships and partners to provide our customers with value-added solutions positioning ourselves as leaders in each business vertical. This will be complemented by our digital platform and data analytics capabilities. 

In your opinion, what challenges do you anticipate in the Sri Lankan banking industry?
Competition in a low-growth segment is one of the major challenges that will continue to impact the industry. This will stem from peer banks, non-banking financial institutions and also fintech companies. Banks will be constantly challenged to customise their services as well as products to achieve edge over such competition and   ensure growth in market share, business volumes and profitability. 

The arbitrage opportunities available in regulations affecting the fintech companies deepen the challenge presented by such companies. On the other hand, this would lead to better services to the customers. In this competitive environment, the service element will be the key differentiator. 

The escalating need for additional capital, as previously discussed, is another challenge facing the industry. Banks are under pressure to lock in quality long-term funds at a time where many banks are on the lookout for capital augmentation. 

Higher taxes faced by the industry is yet another challenge. The banking industry is one of the most highly taxed industries in Sri Lanka and is under exceeding pressure to secure high levels of profitability for shareholders. 

The deteriorating credit quality is another recent challenge at the face of the banking industry. The stressed economic conditions are driving non-performing loans up thereby adversely impacting the profitability of banks. We earnestly hope this trend will reverse with a revival in the economy. A healthy banking sector characterised by well serviced loans is an indicator of a sound economy and a stable financial system at the end of the day. 

The above factors coupled with increasing costs of cybersecurity and regulatory compliance especially surrounding anti money laundering regulations will place significant pressure on the profitability ratios of banks. In this challenging environment, size and scale would play a significant role which should lead naturally to voluntary consolidation opportunities.
Attraction and retention of suitable and quality talent is also a major challenge faced by the industry. Gone are the days where bankers maintain long tenures of service with one employer until retirement. Career aspirations and needs of the current generation have largely transformed and in such a context much effort is required to ensure that we attract, develop and retain the right type of talent which make up skilful and committed bankers. 

How is your business taking a more sustainable approach to the financial system?
As a responsible financial intermediary, provision of sustainable financial solutions is key to us. We have a number of initiatives underway, which ensure this stance. Our microfinancing endeavours are instrumental in financial inclusion as well as supporting micro scale ventures, which have hitherto not been part of the formal banking stream. Our mission is to include as many people as possible in the banking population and bring them financial prosperity. 

Our digital financial solutions largely complement our commitment to financial inclusion. Our branchless banking proposition ‘Bank2U’ functions in such a model, where the banking services are taken to the doorstep of customers. Our staff members, equipped with digital capabilities take banking services to many nooks and corners, may they be trishaw stands, weekly markets, etc. This endeavour has demolished a barrier, where such niche segments in the economy have been reluctant to visit a bank. With Bank2U, the bank has visited them and now they are conveniently integrated to the formal banking stream. 

Furthermore, we have a dedicated proposition for female customers dubbed as NDB Araliya, which is with the aim of empowering aspiring females of the country. The proposition caters to three distinct female segments, namely female home makers, salaried employees and entrepreneurs. The proposition was launched in response to a market vacuum, where there was insufficient access to financials for females, compared to males, owing to a number of chronic reasons.

We also have non-financial service offerings centering micro entrepreneurs and also women entrepreneurs in supporting them thrive in their businesses. Such offerings often take place in mode of technical know-how sessions, personality development sessions, etc. and see the collaboration of third party resource contributors as well. 

NDB’s savings philosophy Ithuru Karana Maga (IKM), which was relaunched last year, is also making tremendous contribution towards inculcating the savings habit amongst Sri Lankans. IKM extends its scope beyond mere financial saving but stresses on saving as a life’s habit encompassing concepts such as time, energy, health, wildlife, etc. The bank is engaged in an attractive and effective campaign in taking the message of savings to the masses through IKM. 

Focusing on the shareholder, what efforts and initiatives are you taking to drive shareholder value? 
The shareholders are our biggest strength and generating consistent and sustained value for them is one of our core objectives. Our exceptional financial performance has enabled us to provide our shareholders with sound dividends over the years. 

The bank always strives to maintain a ROE above the industry average to facilitate this even amidst challenging conditions and in 2018, we booked in one of the highest ROEs in the industry at 17.4 percent.

We are conscious that shareholder funds are a limited resource and getting the highest return on this resource is of paramount importance. Hence, we have initiated risk-based pricing for our corporate loans with relative risk assessed through an internal ratings based model. 

Our increased alignment towards retail and SME sectors will provide a higher return on the risk assumed. We believe migrating towards an economic profitability model will help identify and transform those clients or products, which destroy value to those that create shareholder value.

NDB has a large potential in further enhancing its profitability. Though we are celebrating 40 years this year, we are a relatively younger commercial bank with only 14 years in commercial banking operations and a considerable number of our branches are new with vast capacity to generate greater profitability in the future. Our CASA base also has a large upside potential, which will yield cost of funds advantages as we improve the base.

The previously mentioned internal process efficiencies using digitised technology will benefit our costs, as such all in all, we are well geared towards enhancing overall profitability.
In terms of capital gains, we earnestly hope NDB’s share price will soon reflect its true book value, which, due to market conditions is currently trading at much less.

Finally, what is your message to the shareholders of NDB Bank? NDB is a great institution?
We are National Development Bank PLC with our origin in development banking. This year, as we mark our 40th year milestone, it is with much pleasure that we reflect on the contribution that we have made towards the prosperity of Sri Lanka and its people and also the exciting future lying ahead of us. With our conversion in to a fully-fledged commercial bank in 2005, our resolve and commitment in our mission for stakeholder success have only deepened. 

We take pride in the values we uphold, the unblemished ethics and good governance that we run by as a custodian of public funds. We have a talented and professional senior management team, with a young, diverse and energetic staff base, to take us to greater heights. We have a robust strategy guiding us towards greater results and so far, we have demonstrated precise execution of such strategic goals. So, have faith in us, as we are yet to deliver our best! 

We thank all our shareholders for the utmost trust they have placed in us and in partnering with us towards their success. Your bank is growing with you and more exciting times lie ahead and we look forward to the continued support of the shareholders.