NDB eyes systemically important private bank status by 2020

Armed with a new strategic plan, National Development Bank PLC’s (NDB) new Director/CEO Dimantha Seneviratne says he and his team are ready to take the bank to the next level and transform NDB to one of the systemically important private sector banks by 2020. Before joining NDB, Seneviratne was Director/CEO at Pan Asia Banking Corporation PLC (PABC). He was instrumental in turning around PABC and transforming it into a high-performing mid-sized player in the industry. He brings in a wealth of experience to NDB having worked for over 15 years with the HSBC Group where he held key senior management positions, including several senior overseas postings covering Thailand, Bangladesh and Saudi Arabia. Recently, Mirror Business met up with Seneviratne to gain insights into his plans for NDB and the opportunities and challenges the Sri Lankan banking sector may experience going forward. 

First of all, how has the change been? NDB is a much larger bank with a development banking side compared to PABC.

I must say that the experience so far has been exciting and rewarding. As you said, NDB is a much bigger bank. The first thing I did was taking stock of the existing situation—what has gone wrong and what we can do to take the bank forward. In that process, I realized that there is a lot of internal value that is being created as we have an extremely talented set of people. My focus area was getting them to work as a team and I think I’ve achieved that to a greater extent. 

The second thing I did was to develop a new strategy for the bank. We started that last June and by July-August it was finalized and received the board approval. We got some help from an IFC advisory team in developing this. The plan is to become one of the systemically important private sector banks by 2020. And also to be more SME and retail focused compared to the corporate and project loan focus strategy we had.

We also want to broad base our customer base to reach out to a larger population while looking to develop our deposit base. This way you can minimize your exposure risk and spread the real activities of the bank to a wider public and become part of the country’s economy. With that in mind, this strategic plan was devised, which we call ‘Transformation 2020’.

‘‘Yes, the plan is to have a rapid growth in the retail and SME banking. Corporate and project financing currently accounts for about 50 percent. We want corporate and project financing to come down to around 45 percent and retail and SME to come up to about 55 percent from the current 42 percent

Are you saying with the new strategic plan, the bank will be shifting gears more towards retail banking activities from development banking?  

Yes, the plan is to have a rapid growth in the retail and SME banking. Corporate and project financing currently accounts for about 50 percent. We want corporate and project financing to come down to around 45 percent and retail and SME to come up to about 55 percent from the current 42 percent. We have seen quite a good growth coming from the SMEs in the last six months.

But I must mention that we are still left with few vestiges of legacy structural aspects of the earlier DFI. Asset focus as opposed to liability focus, dependence on credit line funds and institutional borrowings resulting in a high loans-to-deposits ratio, less focus on CASA deposits and lack of retail orientation are some such aspects that we inherited 10 years back when converting into a commercial banking entity from a DFI.

NDB started as a development bank and moved to the commercial space only from 2005 onwards. Thus, we are talking about 12-13 years of history as a commercial bank. It’s not fair to compare NDB with some of the established players, who have been there for longer periods in the commercial space. However, NDB has made great strides over the past in correcting these aspects and becoming more competitive among the peer commercial banks.

The strategic plan you mentioned—how much of it is dedicated to taking NDB to the digital future?

We are very serious about the technological advancements sweeping through the banking industry and we want to be part of it. I believe in the current context, digital banking is going to play a major role. That is why we recently recruited a head directly reporting to CEO for digital banking. That shows the importance we have placed on digitization. 

Our strategy is two-pronged. We cannot completely do away with the brick and mortar model as we need some physical presence to reach our customers. But I would says that the growth rate in terms of physical presence would be not high—may be 10 to 15 additional branches over the next two years. We are focusing a lot on reaching our customers through digital channels. 

We have the branchless banking platform that has been developed in-house, which was tested in about 24 branches last year. We want to expand this to the other branches. We are even thinking of introducing physical digital branches. Some of the branches we are looking to open will come in as digital branches. As of now, we have close to 2,200 staff and a network of 107 branches and 121 ATMs.  

We also have a mobile app and last year more than Rs.4 billion worth of transactions were recorded through the app. The number of clients using the app is around 40,000, which saw a 100 percent growth last year. Recently, we also opened a cash recycling machine at Hemas Hospitals. This particular machine allows for real-time withdrawals as well as deposits. 

According to the interim financial accounts filed with the Colombo Stock Exchange, FY17 was a very good year for NDB despite the challenging operating conditions. Would you like to elaborate on the numbers? 

Yes, 2017 was an exceptional year, where we recorded a sound growth record in profitability and business scale, at certain instances, surpassing the industry-wide growth. A lot of other KPIs such as the cost-to-income ratio, NPL ratio and loans-to-deposits ratio also made vast improvements.

The bank’s PBT grew by an impressive 41 percent to Rs.7.5 billion. PAT surpassed Rs.4 billion for the first time in the bank’s history, sans any one-off gains and was Rs.4.35 billion. The net interest income (NII) grew by an impressive 27 percent to Rs.10.75 billion, supported with the dual impact of an enhanced net interest margin (NIM) of 3 percent and increased loan volumes due to the strategic balance sheet management and prudent repricing of assets and liabilities.

The operating expenses increased by 14 percent in 2017 over 2016 to Rs.7,346 million. The year saw three new branches and five ATMs added on to the network, two branch relocations along with four new product launches and one product relaunch. The staff strength also increased in tandem with the business expansions. The increase in expenses was well managed amidst such expansions, with a largely improved cost-to-income ratio of 45.51 percent in 2017, where it was 49.04 percent in 2016.

The total assets of the bank stood at Rs.383 billion at the end of the year, with a healthy growth of 15 percent over the prior year. The total assets were fortified by the highly satisfactory growth in the loan book by 20 percent to reach Rs.274 billion. The growth rate surpassed the growth recorded by the industry for 2017. Loan book growth was a quantum increase of Rs.46 billion. 

Amidst the loan book expansion, the total impairment charges for loans and other losses was Rs.1,259 million, which was a reduction of 8 percent over 2016. Within the total impairment, the individual impairment saw a reduction of 47 percent to Rs.586 million. Prudent risk management and timely provisioning on the individually impaired loans led to this reversal. The non-performing loan (NPL) ratio of the bank was 1.83 percent as of end-2017, a remarkable improvement from 2.63 percent of 2016 and much better than the industry average of 2.5 percent.

Customer deposits grew by 34 percent in 2017, which is the highest deposits growth recorded by the bank over the last five years. Accordingly, customer deposits reached Rs.273 billion, with an impressive quantum increase of Rs.70 billion. 

The loans-to-deposits ratio vastly improved to 102 percent from 115 percent in 2016.     

The return on shareholder funds (ROE) at the bank level improved to 16.22 percent, up from 13.36 percent in 2016. The bank ROE was closer to the industry average as of November 2017. The group ROE was 11.73 percent, an increase from 9.23 percent in 2016. The earnings per share (EPS) increased in relation to the ROE with the EPS at the bank level being Rs.25.57, compared to Rs.19.19 in 2016 and the EPS at group level being Rs.21.84, compared to Rs.16.29 in 2016. 

The year’s performance was also ahead of the budgets set for the year. As such, we are pleased with the results we have generated for our valued shareholders and other stakeholders and look forward for another fruitful year in 2018.

‘‘There is still a large unbanked population in the country. Therefore, I would say that more granular level growth and banks moving into these spaces would be a key change you’d see in the next couple of years

How is NDB planning to beef up its capital to meet the regulatory requirements and fund future growth? 

As of now, we are quite OK with our capital position. But very soon we will tap the equity market for capital to satisfy the Basel III requirement and to fund our growth plans for the next three years. We are looking at about the second half of this year to raise this capital. Within this year we need to raise capital, looking at our growth plans. 

In general, I must say our regulator is quite proactive setting the tone in terms of bank capital. I’m saying this with the experience I have had working in various regional markets in the past. As a result, a lot of capital formation has happened and even last year we saw several banks going and tapping the equity market. They were all successful and that is very good for the industry. That actually shows how resilient the banking sector is. 

Do you think the higher capital requirements will push the Sri Lankan banking sector towards consolidation? 

Considering the large number of banks that is serving a population of just over 20 million in the country, sector consolidation makes sense as an optimizing choice for certain banks in the industry. Otherwise in this overcrowded market margins will continue to compress. That is the way forward for a country of our size. 

In that context, some banking institutions will find difficult to raise capital or raise that capital at an optimum level. The regulator is also aware of that and I think that’s why the capital requirement was raised to Rs.20 billion from Rs.10 billion. 

Meanwhile, consolidation in the non-banking space should happen. That may be the reason why capital requirements for non-banking institutions have also increased. I would say that the framework for non-banking sector should be strengthened. Banks and finance companies have different standards, regulatory frameworks. They are taking higher risks but the way they are being regulated, even the NPL classification, is more lenient. I believe one has to take a holistic view about it. 

In this context, will there be any acquisitions by NDB down the line? 

It’s too early to talk about any acquisitions. First, what we wanted was to get the house in order, which we did last year. That was my priority. The potential was there and we weren’t tapping it full. What I did last year was to make it agile and getting it well oiled. We are trying to align everybody to think commercially. 

Some of the residual things of the development banking era needed to be rectified. That is what I was doing and will continue to do for another six months. Our branch network is quite agile and my current focus is making the whole NDB team work as one agile team. Then we can look at other things.

‘‘The other area is the digitization. With the digitization, the challenge we face is cyberattacks. We have to be very mindful of that. You can grow exponentially through digital channels

Several Sri Lankan banking groups and even some finance companies ventured out to the South and East Asian regions for expansion. Any plans on the cards for NDB in this direction? 

Of course we have our investment in Bangladesh—NDB Capital, which is one of our subsidiaries. Through we have done some significant deals concerning the Asian region, we haven’t really ventured out. We are looking for avenues in that space, initially for investment banking space. But we are open for other banking opportunities as well.

What is the next growth wave for Lankan banks? Where do you see the credit growth coming from? 

NDB is currently involved in the construction segment and power generation sectors. Construction seems to be an area growing. That will be there for one to one and half years. There will be growth from tourism also. 

But I would say, ideally, the next wave of growth should come from the agriculture sector—specifically from the value-added agriculture sector. Turkey is earning more than what Sri Lanka is earning from tea. The essence of cinnamon has more value. Thus, there is something we are not doing right. We need to have some paradigm shift in our agriculture. 

You mentioned construction. But there were some concerns about a bubble forming in the local construction scene.

Well, we have been careful of who are these parties that we are financing. We have ensured that who we are lending are reputed parties. That way we are very comfortable with our entire portfolio of construction financing. But I don’t know whether that is true for some of the other institutions. 

In conclusion, what are the key changes the Lankan banking sector may see in the next three years?   

Well, one major area would be funding – how the banks are going to fund their growth. Everybody will be looking at low-cost funding. You may have to go to a more granular level to raise funds because larger corporate funding is hot money. If you go granular, reaching out to the masses, there is untapped segments by the banking sector but exploited by the non-banking sector. 

There is still a large unbanked population in the country. Therefore, I would say that more granular level growth and banks moving into these spaces would be a key change you’d see in the next couple of years. That’s where the digital technology can help the banking industry. That will improve your margins but you have to make sure that those funds are deployed to the benefit of everybody. We have been doing it very well. Our spread is across the country. That’s the funding side.

The other area is the digitization. With the digitization, the challenge we face is cyberattacks. We have to be very mindful of that. You can grow exponentially through digital channels. But you have to be very careful with your customer onboard side, KYC aspects and ensuring all that requirements are maintained. Internally we are getting ready for that. We have conducted an internal assessment looking at all the firewalls and the controls we have. It’s a continuous process. There is a cost element also along with a risk element. We have to be aware of all these. 

Another phenomenon we may see in the next few years would be the moving of the fintech companies into the banking arenas. We may have to embrace some of their good practices rather than going head on and making sure that we ride the wave along. The competition will not come within the banking sector in the future but from outside. 

The banks should develop strong middleware, where all fintech services can be obtained. Through middleware and APIs (application processing interfaces), we deal with vendors. That way we don’t have to touch our core banking operations. One very good example for this is Singapore’s DBS Bank. Strategy wise, the Lankan banks will have to get themselves fintech aligned.