Technology-driven banking will be critical driver of future industry growth: HNB CEO

This is the fifth interview under the Mirror Business S&P SL20 Insights series where top CEOs of the companies in the S&P SL20 index are interviewed. The interview series is done in collaboration with the Colombo Stock Exchange. Following are the excerpts of an interview with Hatton National Bank MD/CEO Jonathan Alles.

What key milestones has the Bank achieved during 2016?
It has been a record-breaking year for HNB during which we have been able to demonstrate outstanding improvements across all of key performance indicators. During the first 6 months of 2016, HNB group was able to achieve a PBT and PAT in excess of Rs. 10 billion and Rs. 7 billion respectively. 

Our group’s excellent results were mirrored by a strong performance from the Bank which posted a PBT of Rs 9.1 billion and a PAT of Rs 6.4 billion respectively. Similarly, HNB was able to successfully drive down NPA ratio to 2.25 percemt in 2016, reflecting an overall 100 bps improvement when compared with our results in June 2015 while our cost-to-income ratio has also come down to the lowest levels in HNB’s history. 

During the same period, we have also made significant progress in terms of securing investments into the Bank following the recent approval by our Board of Directors for an equity investment worth approximately US$ 50 million from the Asian Development Bank (ADB). This investment is of course subject to regulatory and shareholder approval and will require the issuance of new shares that will lead to ADB holding a 9 percent – 10 percent stake in the Bank. This is a truly landmark transaction for HNB and it will serve to substantially boost our Tier I Capital position and improve the Bank’s overall risk profile while opening up many new avenues for growth both locally and regionally.

In that regard, this fresh infusion of capital will also help to further refine HNB’s robust risk management framework and drive a comprehensive digital transformation process across our Bank and branch-network and enable business process re-engineering initiatives that will draw from the ADB’s extensive technical assistance programme. 

HNB was also able to successfully raise Rs. 7 billion in funding by way of a subordinated debenture issue which was successfully concluded in early 2016 having been oversubscribed on the date of issue. This has further augmented our Tier II capital base. 

We have also made substantial progress in relation to the upgrade of HNB’s electronic banking platform. These improvements have enabled the Bank to offer unmatched payment and cash management, distributor financing and online trade financing propositions. 

Another significant milestone during this period was when HNB was recognized as the ‘Best Retail Bank in Sri Lanka’ for the 8th time by the prestigious ‘Asian Banker’. This award represents an acknowledgment of our unparalleled commitment to serving more our customer base of over two million Sri Lankans and in recognition of the consolidated leadership position we continue to enjoy in the retail banking space. Furthermore HNB was bestowed with the ‘Silver Award’ for ‘Best Investor Relations’ at the CFA Sri Lanka Capital Market Awards 2016 in recognition of our efforts in shareholder engagement, governance and transparency.

What are the growth prospects prevalent in the financial services industry?
Overall we remain highly confident of growth prospects in the financial services industry despite the highly competitive nature of the Sri Lankan industry. 

The government has geared its efforts towards driving sustainable, broad-based economic growth in Sri Lanka and naturally, the financial services industry will have a vital role to play in driving such growth. Given the more recent revival of infrastructure development programmes by the government, which are paralleled by similar private sector-led developments in addition to plans for the development of the Megapolis project, we believe that outlook for the financial services industry remains very promising. As a result of such developments, we see strong opportunities for growth in terms of infrastructure funding, and equally importantly, in relation to funding the growth and expansion of SMEs and micro entrepreneurs.

We also anticipate a growth in Foreign Direct Investment (FDIs) into Sri Lanka flowing from the formation of economic zones, industrial parks and the various initiatives being set in place to drive value added exports. All of these factors hold the potential to significantly boost Sri Lanka’s export sector and augur well for the medium to long-term economic stability of the country. 

In that context, it is our opinion that technology-driven banking will be a critical driver of growth in our industry moving forward. Sri Lankans are becoming increasingly tech and brand savvy and the usage of digital media among millennials is creating new opportunities for banks to engage and interact with new customer demographics. This is a phenomenon that is already being witnessed around the globe and it is based on these dynamics that HNB is re-aligning itself to be future-ready in order to better serve the needs of a new generation of customers. 

In that context however, it must be said that consolidation within the industry must also be re-visited. Particularly when considering the anticipated establishment of an international finance centre in Colombo, we believe that banks need to explore such strategies in order to build the financial capacity necessary to compete in regional markets.

How does the Bank intend to capitalize on these growth opportunities?
To begin with, I would have to say that HNB’s well-established presence across all market segments and our position as one of the premier banks in Sri Lanka provide an excellent foundation from which to capture new growth opportunities. 

However we also aim to go beyond these strong fundamentals. By leveraging our market leadership position in corporate banking, the strength of our balance sheet, numerous technological advancements and superior service delivery, we will work to finance many of Sri Lanka’s most vital infrastructure developments while providing support to large-scale investments for the private sector as well. Backed by the concerted efforts of our dedicated and experienced ARMs, we are extremely confident that HNB will be able to capture an even larger share of the market in the year to come. 
Conversely, we will also continue to channel substantial resources into Sri Lanka’s Micro, Small and Medium (MSME) sector. HNB has been a true pioneer in this field having partnered the SME segment from its inception and having continued to add value through our service proposition. In that regard, we have been able to offer significant improvements in our proposition by introducing new functionalities such as distributor and supplier financing while driving faster delivery through initiatives such as regionalization of SME credit.  

HNB has been active in the microfinance business for nearly 30 years through our flagship ‘Gami Pubuduwa’ programme, which incidentally represents the first such foray in the sector by a commercial bank in Sri Lanka and this has over time provided the Bank with invaluable insights and unparalleled experience in the sector. Our leading position across all those segments was considerably strengthened by the acquisition of HNB Grameen (earlier Prime Grameen) which is a very successful micro finance business catering to the grass roots of the segment. Hence we are once again extremely well positioned to be at the forefront of revolution in Sri Lanka’s MSME sector.
On the technology front, we pride ourselves on being the most future-ready Bank in Sri Lanka. HNB has invested significantly in its ‘New World Banking’ concept, involving the roll out of many first-to-market technology-led banking channels and products.

In the recent past, we launched a cutting-edge mobile banking platform in four different flavours, mobile POS solution in the form of HNB MOMO, a cardless ‘Inland Remittances’ solution, a highly sophisticated and specialized series of ATMs including bulk cash deposit machines, bill payment kiosks and recyclers to name a few. The Bank is therefore very well positioned to avail itself of the opportunities that the digital revolution brings and we will continue to invest in state-of-the-art technologies in order to further consolidate our technology leadership position.

By leveraging on these alternate technology-led channels in addition to our wide spread brick-and-mortar network of 250 branches island-wide, and the comprehensive range of products and services, we anticipate that the Bank will be able to better serve the personal financial needs of retail clients across the country. 

In your opinion, what challenges do you anticipate in the financial services industry going forward, especially when taking global factors into consideration?
There are a few factors that need to be considered when looking at the current global context. The impending elections in the US and Brexit are two key events that increase global uncertainty leading to volatility in exchange rates with notable implications for many emerging and frontier markets including Sri Lanka and its banking industry. 

In the event of a rate increase by the US Federal Reserve, foreign investors are likely to seek higher yields and possibly consider moving out of emerging and frontier markets. This would result in limitations to sourcing debt capital from foreign sources at attractive rates, ultimately exerting pressure on the loan-deposit ratio of Banks. 

Furthermore with the drying up of international borrowings, the government will have to resort to leveraging greater domestic funding, which in turn could result in volatility across domestic interest rates. Nevertheless, the government’s commitment to bring down the interest rates over the medium to long term will result in narrowing of interest margins. 

In an environment of uncertainty, FDI’s into the country could also be deferred, thus hampering the country’s growth prospects and consequently that of the country’s financial services sector. 

More generally, the rapid evolution of technology, changes in customer lifestyles and preferences and the digital disruption being created by telcos and fintechs could serve to create unprecedented new dynamics in the financial services sector while the threat of cyber-attacks could also pose a serious challenge to financial services companies both locally and globally in future. 

With regard to the local environment, at present there is a shortage of required talent while retention and overseas migration of talent have been key challenges faced by the industry. I also believe that the changing mindset of the emerging labour force in relation to long term vs short term employment will pose a major threat going forward. 

What is your assessment on the readiness of your organization to meet these challenges?
HNB’s ability to meet these challenges stem from our financial strength, business model and strategic direction. In that context, it must be noted that HNB continues to attract substantial investments, which was touched upon earlier. 

In 2015, HNB raised US$ 185 million from multilateral institutions and DFIs at attractive rates and in early 2016 the Bank raised Rs. 7 billion by way of a listed debenture issue. Nevertheless deposits are the key source of funding and mobilization of deposits especially low cost deposits (current accounts and savings accounts – CASA) remain one of our key focus areas. A number of strategies are already in place to strengthen our CASA base while the transaction that we will be entering into with the ADB will also open up more opportunities for HNB to source funding. 

With regard to movement in local interest rates, majority of our loan book being on variable terms will minimize our exposure to interest rate volatility. 

Meanwhile, we will also work to address the challenge of compressing margins through a continuous effort to improve fee income, aggressive recovery of loans installments due, and stringent management of costs in order to drive a leaner and more agile organisation.

As I mentioned previously, continuous investments into the latest technological innovations will play a key role. Similarly we will also continue to drive business growth and further refine our risk management processes to identify and mitigate local and global risks.

What efforts and initiatives have the Bank taken to drive shareholder value?
The maximization of shareholder value is of utmost importance to HNB and our approach in this regard is two-fold. Firstly we strive to deliver superior returns as reflected by our above average ROAs and ROEs. These returns drive the share price and thereby capital gains for investors while we consistently pay out high dividends. 

The main initiatives undertaken to drive ROAs and ROEs include prudent assets and liability management, business process reengineering (BPR) and aggressively driving down NPAs through continuous improvement in underwriting standards and intensifying the focus on recoveries. 
With regard to BPR initiatives, in 2013 the Bank set up a dedicated BPR unit to drive process efficiency, and this led to  centralization and stream lining of several  back office functions thereby releasing resources. As a result we have been successful in improving the Bank’s cost to income ratio by nearly 800 bps from the levels recorded in 2012.

Secondly, we also deliver implicit investor value in terms of our governance efforts where we ensure transparency and regulatory compliance of the highest degree. A robust risk management function further aids our governance function while also serving to enhance our reputation as a safe, secure and high performing Bank. In that context, the proposed investment by the ADB will enable us to drive further improvements on this front. 

How has listing on the CSE been beneficial to HNB?
The listing on the CSE in the early 1970s has proven to be highly beneficial to HNB in multiple ways. Today, HNB is one of the largest market cap companies on the stock exchange while also being listed on the S&P SL 20 index. This has naturally played an important role in elevating our status in the eyes of both local and foreign investors. As a result, the top 20 shareholders of the Bank presently consist of foreign institutional investors holding nearly 13 percent of our voting capital.  

The listing on the CSE while broad basing the shareholder base over the years has enabled improvement in our governance standards and disclosure requirements thereby enabling the investors make informed decisions. As a result we have been able to raise funds successfully on many occasions through public issues of debt and equity to bridge the funding gap.