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Thursday Dec 12, 2024
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The serious economic and political challenges confronting Sri Lanka exert intense pressure on the country’s banks which are required to fulfil their obligations to customers and shareholders, support the national economy, meet statutory requirements and be good corporate citizens while grappling with the effects of policy changes and macro-economic adversity.
In this exclusive interview with Daily FT, Commercial Bank’s new Managing Director and CEO Sanath Manatunge speaks candidly about the challenges and how the country’s largest private sector bank is responding to them to generate equitable growth.
Excerpts:
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Commercial Bank MD and CEO Sanath Manatunge |
Q: How is the current situation in Sri Lanka impacting banks in general and Commercial Bank in particular?
All banks are affected by foreign currency liquidity issues due to the current situation in Sri Lanka. This is compounded by some exports related earnings and remittances bypassing the regulated channels, the downgrade of the country rating affecting trade lines, the sharp increase in foreign currency rates pushing up costs and working capital requirements, and an increase in risk-weighted assets in the balance sheets of banks in rupee terms.
Additionally, the fuel crisis and power supply interruptions are affecting industrial output and business operations of customers. Payment delays to various industries such as construction, renewable energy, fertiliser etc., are exerting pressure on their cash flows and affecting their debt repayment capacity.
The situation affects the retail segment as well; with the rapid rise in inflation, the purchasing power of consumers has reduced significantly and the bulk of disposable income goes for food and other essential expenses, leading to debt repayment being delayed or abandoned.
All these factors translate to potential elevated levels of delinquency across the board, compelling banks to increase impairment provisions, which reduces their profitability, reducing investor confidence and prompting a capital flight by foreign investors. This is already evident in the banking sector.
Reduced profits lead to lower retained profits for the banks, and reduced investor confidence makes raising capital in the local or international market a challenge. Declined profits also affect the retained earnings and thus the capital adequacy ratios, which in turn reduces a bank’s ability to support customers by way of new loans.
Operationally, banks are facing difficulties in supporting importers of even essential goods due to the foreign exchange shortage. With time, more and more industries will be identified with elevated risk features and banks will have to be proactive in identifying such industries in order to maintain sufficient buffers to counter possible industry level delinquencies.
Meanwhile, SMEs will demand more working capital financing due to stress in the supply chains, especially from delays in debtor recoveries and demands for early settlement by creditors. Accommodating these demands would be a major challenge to banks as higher delinquencies are already being observed in the SME sector.
At the same time, the reduced purchasing power of consumers will prompt them to maintain their money in liquid form rather than in demand savings and time deposits. Therefore, we can expect an increase in the drawing out of deposits, increasing pressure on rupee liquidity. With the economy being under severe stress, demand for borrowing is also expected to be low, impacting the income of banks.
Internal costs of the banks meanwhile can be expected to rise exponentially, especially due to the escalated costs of IT maintenance, technological investments, and managing facilities, staff and recoveries. With lower income, lower profits, and lack of future prospects, the escalation of internal costs would be a serious concern.
Nevertheless, banks would be required to make more governance-related investments in order to be locally and internationally competitive by conforming to new business governance mechanisms such as the Environment, Sustainability and Governance (ESG) framework, Anti Money Laundering (AML) compliance etc., which are getting tighter in the rest of the world.
As far as Commercial Bank of Ceylon is concerned, we are fortunate to be endowed with greater resilience due to the strength of our overseas operations in Bangladesh, Maldives and Myanmar. Our Bangladesh operation for example, now contributes 15% to 20% of our bottom line, and the depreciation of the rupee benefits the Bank’s financials in translation of foreign currency reserves and investments from dollars to rupees.
We also continue to maintain our strength as a major player in the export sector and the remittances sphere. While overall remittance volumes have declined, Commercial Bank has increased its market share. However, we too are impacted by the uncertainty of the economic environment, the changes in interest rates and the depreciation of the rupee.
Maintaining foreign currency at an acceptable level has become a challenge, and impacts volumes in our Trade Finance businesses. Additionally, we continue to carry the impacts of mandated moratorium support to certain sectors impacted by the pandemic.
Maintaining a quality portfolio in the post pandemic era affected by the current economic concerns is also challenging, but we have the expertise and the financial strength to walk the fine line between supporting business and maintaining the overall stability of the Bank. Having said that, in my opinion it is very important to protect the stability of the entire banking and financial sector for the economy to be resilient to face future challenges.
Q: What, in your opinion, are the three biggest challenges for the banks going forward?
The three biggest challenges that banks in Sri Lanka are facing now and will face going forward are foreign currency liquidity, pressure on capital adequacy and portfolio quality, all of which are interconnected and are attributed to issues in the macro-economic environment.
Q: What can the banks do to minimise the impact of these challenges?
We have to manage liquidity, both in foreign currency and rupees extremely carefully. The overall rupee shortfall alone is estimated at Rs. 600-700 billion. We have to ensure that already committed LCs and loan repayments to multilateral agencies are not defaulted. We also have to prioritise new foreign currency obligations, allocating available excess dollars for imports of pharmaceuticals, fuel and essential food items and for education payments.
We have to carefully manage portfolio quality with empathy on customer issues. Different customer segments and different sectors have different issues, and some would need handholding more than others. We have to especially protect the SME sector and the business community, or else some industries may not be able to survive the restructuring.
At Commercial Bank, we are working closely with the all stakeholders to mitigate the impact on the financial sector from a policy perspective as well as to support to our customers. We are focusing on business to grow the Bank’s foreign currency liquidity position. We are working on early warning systems, delinquent management systems and such to manage portfolio quality and we have strengthened the Bank’s credit policy parameters to suit the present context.
Capital augmentation plans are being evaluated and discussed. Long-term cost optimisation plans are being evaluated, with branch rationalisation, automation, digitalisation and process optimisation initiatives. We will not increase our loan book aggressively and are focusing on managing our risk weighted assets. We are also focusing on supporting exporters, industries in manufacturing, import substitutes, renewable energy and SMEs on a prioritised basis.
Q: How can the Bank’s overseas operations contribute to the Group’s prospects in the current context?
Our overseas operations are already contributing significantly to the Group and their value has increased in the prevailing situation. Our operations in Bangladesh and the Maldives in particular are generating significant earnings in foreign currency and represent valuable Sri Lankan assets in foreign countries.
Both economies are relatively strong, and our microfinance operations in Myanmar may now be increased as we achieve the critical mass required to be effective. Additionally, our remittance operations in the Middle East, especially in Oman, Qatar, Dubai, Abu Dhabi, as well as in South Korea, are bringing in foreign currency.
These overseas operations have helped us to diversify the country risk. With the currency depreciating by 77% since January 2022, our overseas operations have contributed significantly to the exchange profit of the Bank.
Q: What can the Bank do to maintain shareholder returns at an equitable level?
Strengthening the fundamentals of the Bank and prudently managing the downside risks are the key priorities in growing shareholder value. The Bank will continue to diversify the risk of the Bank’s portfolio by exposing the Bank’s return to overseas markets and operations. I believe that some of the initiatives already mentioned will also contribute towards growing the Bank’s intrinsic value in these turbulent times and help the Bank focus on growth in the future.
Emphasis will also be given to growing our top line while reducing costs. We are looking at reaching out to more customers using low cost models. This could come from expanding digital platforms, and revisiting branch models. We will redeploy lending officers and credit teams to support customers and boost recoveries.
We will continue with our commitments to ethical compliance, risk management, the environment and the community which increases our attraction to potential shareholders. Additionally, the Bank is committed to maintaining the dividend policy we have continued over time.
In summary, we believe in the “shared value” concept in creating shareholder value. As an organisation we are committed to create value for all our stakeholders, so that the Bank can create sustainable long-term value for its shareholders.
Q: In terms of policy direction, what is on your wish list for the short- and medium-term?
Over the short-term, my wish list would be:
Over the medium-term, what is most urgently required are:
Q: What significant strategic changes do you foresee for the Bank in this period?
Commercial Bank’s strategic approach in the short- and medium-terms will prioritise strengthening of capital, increasing foreign currency-based cash flows by encouraging exports, new initiatives to manage portfolio quality, rationalising our cost structures over the medium-term, increasing the bank’s digital footprint in the domestic Fintech market through channel migration, and increased use of analytics to drive sustainable growth and bring in efficiencies.
