“ There is no debate; the country needs bigger and stronger banks ”

Hatton National Bank (HNB) Chairman Dinesh Weerakkody said the bank’s financial results in the last three years reflect the significant role it now plays in the lives of millions of people and the national economy, as well as its commitment to the concept of ‘Partner in Progress’. The bank’s strong performance over the last three years amply demonstrates the ‘value’ of longstanding relationships that the bank has built over the years. In a wide-ranging interview, Weerakkody talks about the opportunities and challenges for HNB and the financial sector in general. Weerakkody is also the Chairman of the International Chamber of Commerce Sri Lanka. Following are excerpts:

By Nuwan Ranawake 

Q: You are possibly the first person to be Chairman of the largest two private banksin Sri Lanka?

A:I have not kept score. For me I consider it an honour and privilege to have had the opportunity to serve as Chairman of the two biggest private banks in the country.

Q: What next?

A:I am driven by a higher purpose. For example, when we had that dengue crisis, the Prime Minister asked me to lead an initiative with the Health Ministry. Then when the garbage collection and the city services needed a push up, we stepped in as volunteers to guide the CMC.Therefore I will continue to influence our two leaders with whom I engage often to do what is good for the people and the country. A lot remains to be done. And that too can be done if and only if, weall work together for a common purpose.

Q: Both being home grown banks, are there big differences in the way they operate?

A:Both banks are doing something unique that competitors cannot easily copy and which their customers’ value. Both banks have always focused on the fundamentals – strengtheningthe balance sheet, building bench strength, ensuring stability and maintaining a strong current and savings account base, to deliver service levels that are the best in the industry. And of course nation building. 

Q: There is pessimism about the economy. What is the key factor driving the pessimistic outlook on Sri Lanka’s rating?

A:I believe that persistently high Government expenditure and external vulnerability risks will continue to pressure Sri Lanka’s credit profile. Specifically, measures to build reserves and smooth the profile of external payments may be insufficient to stem Government liquidity and balance of payments pressures.This year and the next, large international debt repayments will come due and Sri Lanka’s three-year International Monetary Fund (IMF) Extended Fund Facility (EFF) program will finish soon.We need to focus on reform, drive up FDI, increase Tourism earnings and ensure policy consistency. Also we need look at our tax and incentive structures to ensure we remain competitive in the region. 

Q: 2017 was a challenging year for all banks with PAT under pressure down for most banks in 2018. How would you describe HNB’s performance in 2017 and 2018 1st half?

A:HNB turned in a strong performance in 2017. Total group assets crossed the Rs. 1,000 b mark, while bank assets reached Rs. 955 b, reflecting a growth of 11%. Deposits from customers and loans and advances grew by 13% and 9% to reach Rs. 701 b and Rs. 639 b respectively. Net interest income and non-fund based income recorded reasonable growth in line with the growth in business volumes and the profit before tax for the group and the bank improved to Rs. 23.1 b and Rs. 22 b respectively while the bank’s net profit for the year grew by 16% to reach Rs. 16.5 b,further reinforcing our position as one of the largest and the most profitable private sector banks in the country. 

In Q1 the group PBT improved to Rs. 7.2 b while the bank achieved a PBT of Rs. 6.3 b.The group and bank recorded PAT of Rs. 5 b and Rs. 4.5 b during the quarter growing by 24% and 22% respectively. Deposits from customers and loans and advances grew by 3% and 5% to reach Rs. 721 b and Rs. 672 b respectively while our CASA base recorded a strong growth of 10% during the first three months of 2018. 

We continue to be ranked among the World’s Top 1000 Banks. We were also recognised as the Best Bank in Sri Lanka by the prestigious Banker magazine. HNB was ranked No. 2 and No. 3 respectively in the Business Today and LMD all sector rankings and the top bank in those rankings. In 2018, we were awardedthe ‘Best Retail Bank in Sri Lanka’ for the 10th time by the Asian Banker, while also being recognised as the ‘Best Forex Bank’, ‘Best Cash Management Bank’ and ‘Best Payment Bank’ in Sri Lanka. The ‘Best SME Bank’, ‘Best Digital Bank’ and ‘Best Cash Management Bank’ awards were bestowed upon us by the Asiamoney magazine in 2018. Our Islamic banking window was the only Islamic banking operation in Sri Lanka to be recognised at The Banker Islamic Banking Awards 2018 and was recognised as the ‘Sharia Compliant window of the year’. The operation also bagged the Gold award for ‘Islamic Entity of the year’ at the SLIBFI awards. 

Q: What is the foundation for this strong performance? 

A:I would saythe passion and contribution of all our employees, our loyal and valued customer base and all our valued partners, both State and private.

Q: Internet banking and mobile banking are changing the way service is gettingdelivered. How are banks responding?

A:Most Lankan banks now offers applications using WAP, USSD, iPhone, and Android. This has provided ‘fresh’ user experiences as the underlying telecommunications and handset technology has evolved with the result there are thousands using these channels.P2P mobile payments also incorporates ‘lifestyle’ content to provide a rich user experience to enhance the customer value proposition at customer touch points. The focus should be on reducing the turnaround time for serving customers and also to free time at the counter to improve service delivery and customer acquisition. So broad technology themes like cloud, mobility, social media and big data apply across 90% of alltransactions.

Q: Do Sri Lankan banks leverage data analytics to deliver greater revenue per customer and value for customers?

A:I don’t think they do enough. With competition intensifying banks would however need to serve their existing customers even better by deepening existing relationships and by adding new customers. This requires proper analysis of how customers use their products and services, and try to identify how they can improve their experience. This analysis also needs to determine what products and services they are not offering their customers as these are clearly lost revenue opportunities. Therefore effective cross-sell strategies are critical to improve revenue per customer, and to do that, banks need to know their customers at a deeper level.

Q: What is the bank’s strategy for employee development?

A:Our strategy is to deepen the bank’s talent pool by investing in training and development, and by fostering their leadership abilities to build a leadership brand that reflects the expectations of the customers and other stakeholders. 

Q: Moving on, your views on sector consolidation?

A:There is no debate – the country needs bigger and stronger banks.Therefore the Consolidation of financial institutions in my view will be beneficial for the stability of the financial sector in the long term and for the country. Consolidation will enhance the size of the banks and strengthen their ability to source oversees opportunities and enhance risk taking capacity to enable private banks to participate in large state and private sector projects to a greater degree than at present and derive benefits of scale with regard to transaction and operational costs and finally deliver greater value to all stakeholders.One cannot say that the industry is not over crowded.Therefore some smaller banks may find it exceedingly difficult to compete without scale. The capital requirements for the future due to regulatory requirements will put pressure on the smaller players who would be forced either to go to their shareholders for more capital or find a partner to merge. 

Q: You are saying consolidation is good. But it was your committee that stopped the DFCC and NDB merger?

A:We said it is a good thing and must be encouraged, but it must be voluntary, not be forced.It is three years since we gave our recommendations to the Government.

Q: Are there lessons that we can borrow from other countries?

A:There are manyexamples of financial sector consolidation initiatives carried out in countries such as Malaysia and Singapore. Especially after the Asian financial crisis there was a big push to merge weak financial institutions with the strong ones. In Malaysia for example, impaired assets of the weak institutions were moved out to be managed separately and financial and technical assistance was provided for recapitalisation of undercapitalised financial institutions. In general, acquisitions worked faster and the integration was not as complex as what was thought. 

Q: What are the challenges for the banking sector in the next few years?

A:With pricingunder pressure and increasing competition, banks will be under pressure to smart size their operations for tighter performance management, centralised transaction processing, deeper relationships and also grow their fee-based revenueto ensure that they continue to enjoy the double-digit profit growth that they have been seeing over the past few years. Another key challenge the banks will face is the new Basel standards while maintaining the attraction of their shares to investors. The new rules in Basel III will negatively impact Return on Equity (ROE). The ratio widely used by equity and bond investors alike. The profitability of banks will beimpacted by reduced lending capacity, higher cost of funds and increased cost of liquid assets.

Banks will also need to curtail dividend pay-outs in the future to preserve and build capital buffers. Then on the long run, the potential threat of competition from unrelated industries such as telcos, fintechs, etc. can put pressure on banks’ margins. The challenge for banks in this area would be broadening their delivery channels through innovative technology to cater to Gen Y and Millennials who will quickly opt for digital and mobile channels and demand for more user friendly technology to do their banking. Also, the increasing cost of compliance wouldbe a challenge and increasing disclosure requirements will require new investments in data and IT infrastructure. 

Q: Credit growth, is it satisfactory this year?

A:The conditions with regard to bank borrowing is not near ideal for a few reasons, althoughbanks have enough liquidity to cater to credit demand. However the wait and see attitude of some of drivers in the business sector needs to gradually change. Saying that we also need to give the business community time to take decisions relating to expansion and venturing into new areas. There is however a positive movement in credit, which would gather momentum in the next few months.

One also may have to look at the other side, which is the decrease of the monthly income of people due to the new tax structure. Many would have seen their disposable income reducing over the last few months and this may be having an impact on their spending patterns, and through that to the demand side of the economy. The other factor is the confidence of the private sector on the consistency and the continuity of Government policy, which is a sine qua non for venturing into new projects. My view is that this waiting game should come to an end sooner than later and the private sector should look to expand. I am confident that credit growth would pick up during the remainder of the year and may reach around 14% credit growth by the end of the year. The FTAs will also open up new markets for the private sector.

Q: Are you satisfied with the regulation levels currently? What would like to see different?

A:The banking industry is very well regulated and the regulators have always been keeping up with the changes that take place globally. More online monitoring would be more effective rather than the traditional audits which are generally post event. However the longstanding conservative supervisory approach with even greater emphasis on prudence underpinned by proactive and forward looking supervisory will continue to work. The Central Bank now has a strong bench. So they have people who can step up in.

Q: How mature is the industry currently? 

A:The industry though well established and stable has ample opportunity to move in to new areas especially in equity, debt and leverage financing,which obviously has to be backed up by long term deposits and venturing in to other areas such as investment banking, advisory and offering new wealth management products. 

Q: Is the traditional banking model is still valid?

A:I am firmly of the view it is and will continue to be so. But the agenda does not solely revolve around pricing any more. There are others like efficiency, partnership and security.

Q: What is needed to grow the industry further? 

A:A strong capital market with long-term investments and opportunity to hedge your risks. Also Banks will need new skills, will need to invest in the technology that have positive outcomes for customers and also require a bold private sector and political stability. I firmly believe that banks will have to identify the future drivers of profitability and modify their business model to remain relevant in the future.

Q: Do you feel SL banks are too risk averse?

A:All business is about risk and managing risk – and particular so in banking. Given the existing market conditions one cannot say that the SL banks are risk averse. It is not possible to compare operating in different economies. It is safe to say there is no ‘one size fits all’ answer to what kind of business model banks should adopt as a universal rule. Each country must reflect and determine on its own what of kind of banking model works that would suit them best. But the foundation remains largely unchanged. The large banks also needs to focus more on financial inclusion.

Q: How strong is risk management in the banking industry?

A:There is certainly a need for a more rigorous approach to risk management because the industry is going through such a huge transformation. The ability of a bank to understand the business model and adapt depends on the insights and guidance that risk management provides. Therefore, managing risk requires judgment and that requires people who are credit literate, have deep industry exposure and risk management mindset.

Q: Your assessment of the State corporate governance in the financial sector?

A:So many performing companies have been destroyed by bad governance. Almost always it is the board and the top management of these companies that ruin these firms and take them rapidly down.Golden Key is a classic example.These are classic examples of boardroom and top management failure in discharging their fiduciary responsibility to depositors, shareholders and their failure to ensure the long-term viability of the institutions. Most legislative and regulatory action by governments all over is geared towards preventing such a crisis. 

The board’s job is to provide oversight and perspective to the executives running the business. They have to make sure things are done by-the-book, but they are also expected to bring their own experience, from other businesses and other industriesto the table, to help the enterprise make better decisions. The trouble is, these two roles are uneasy bedfellows, so the real challenge facing a board member is being able to move between the roles seamlessly – checking up on the enterprise one minute, and providing trusted advice the next.

Q: How practical is the Banking Act direction setting term limits for directors and shareholding?

A:Term limits provide an easy way for people to retire gracefully and automatically. Admittedly, this is a pragmatic argument—and the downside is that a director who is doing a great job may get forced out early. My view is term limits reduce the likelihood that a few individuals dominate board decisions forever and they also help to provide periodic injections of new energy and ideas. However finding the right director is no easy task. Therefore the question is whether term limits should be decided by the shareholders or by the regulator acting in the best of the public and depositors. We need some kind of balance. Shareholding there are many schools of thought. The public - private sector committee appointed by the Government in 2015 recommended a uniform structure and suggested limits.

Q: What is the delay in the implementation of those proposals?

A: These were recommendations given to the Government and not to the CBSL.

Q: How do you manage shareholder expectations of dividends now with all the restrictions?

A:In my view most shareholders don’t merely invest for short-term returns. Most shareholders in my view are looking for sustainable long term, consistent returns over time. They recognise that this comes only when you have sound relationships with your customers, the broader stakeholder base and engaged employees. So broadly I am very supportive of that stakeholder model, especially for financial institutions that mobilises public deposits. 

Q: What is your outlook for 2018 and beyond for the financial sector?

A:Sri Lanka can become a regional and an international services hub with the right policy interventions and political leadership. That would create new opportunities for public-private partnerships.The Government is keen to have a low-interest environment. That can spark growth in manufacturing, construction the property market, with an increase in both commercial real estate financing and consumer housing loans. We need to see new life and a general buoyancy in our capital markets. 

With the new financial city ready to do business in less than three years, we need larger and stronger financial institutions that are well-capitalised, with a strong regional presence. With that the banking sector would derivebenefits of scale with regard to operational cost and also be able to participate in large-scale infrastructure projects, both public and private, to a greater degree than now. 

We also need to build our skills base. As Chairman of the National Human ResourcesDevelopment Council, I have been highlighting the need to invest in the TEVT sector and put in place the required policy framework to develop a future ready workforce. Some of the changes are happening.

Q: Finally, where would you like to see HNB in three years?

A:I would say by 2020 the largest and the most profitable bank in the country and beyond 2020 to become a truly regional bank with a solid footprint in Asia.

(The writer is a graduate in business administration.)