One trillion balance sheet: The Bank of Ceylon story

With the dawn of the 20th Century, Ceylonese business was growing at a rapid pace. Financing of trade was informal, dominated by Natucottai Chettiars, exposing traders to highly unfavourable credit terms. International banks had a presence, but exposed a blank wall to local traders. In order to attend to this timely need, in 1932, state council adopted a resolution by George E. de Silva to appoint a Banking Commission. In 1935, the State Council approved the Commission proposal unanimously to establish a state aided bank.

Acting without delay, three years later, the council enacted Ordinance Number 53 of 1938 and the Bank of Ceylon (BoC) was ceremonially opened on 1 August 1939 by Governor Sir Andrew Caldecott at 41, Bristol Street, Colombo Fort. With full understanding of the mission entrusted to it, BOC soon reached Ceylonese business hubs. Starting from Kandy in 1941, then covering Galle, Pettah, Jaffna, Trincomalee, Panadura, Kurunegala, Badulla and Batticaloa within the island, BoC opened its 13th branch in London by the end of its first decade of operation.

The bank continued to grow steadily as the economy adjusted to the post-independence challenges. BoC was nationalised in July 1961 by Finance Act Number 65 of 1961. The second State bank, People’s Bank, was incorporated in the same year. By that time, BOC employed 1,511 staff members, operating in 35 geographical locations.

By the beginning of 1973, BoC had branch network of 86. In February 1973, the bank ventured into lending to the rural agricultural sector with opening of first Agricultural Service Centre (ASC) branch at Giragama. In the following decade of operation, bank opened 600 more branches, while the number of staff increased from 3,000 to 10,163 as the agricultural revolution flourished across the country.

With the growing need, legislative amendments were made in 1974 in order to grant more autonomy to the bank management while bank’s administrative structure decentralised, with the setting up of 11 regional offices. The bank entered housing finance in 1973, financing of Small and Medium Industries (SMI) in 1978, and off-shore banking in 1979. The mission entrusted to it continued to be in the bank’s heart, and it responded by pioneering the setting up of the first leasing company in 1980, first merchant bank in 1982 and first credit card centre in 1989. In 1987, the bank’s head office moved to a 32-storeyed building at Colombo Fort, the largest building at that time.

As the Sri Lankan economy took a 90 degree turn in 1981 with the introduction of open economic policies, the bank had to align its strategies. Accordingly, in 1986, the bank amalgamated its customer service points and closed down 353 branches, reducing the number to 349 from 702. It was evident that the bank had to adjust to its organic growth momentum.

The bank has further strengthened its operations by opening branches in Male, Chennai, Karachi, and Nepal. The Karachi and Nepal units were subsequently closed down due to operational difficulties while the branch in London was converted to a fully owned subsidiary. The bank had to undergo severe hardships during the period from 1988 to 1990 and was re-capitalised in 1993 in order to absorb losses.

The competitive environment

BOC’s immediate peer group in the industry comprises of five large domestic banks, viz. People’s Bank, Commercial Bank, Hatton National Bank, Sampath Bank and Seylan Bank.

Apart from the extensive competition, the local financial services industry is severely affected by the varying fiscal position of the country. Economic development has been hampered by the civil war and the growth of indigenous industries affected by cheap imports. High interest rate scenarios contained money flowing to capital markets, but constant pressure to the interest margin is being applied by variety of stakeholders. A stringent tax regime prevails in the country – both consumer taxation such as Value Added Tax, Withholding tax, stamp duty and corporate taxation.

Although BoC introduced IT-based operations later than their competitors, today, they operate the largest online network with real-time processing facility, compared with the other Sri Lankan banks. BOC started its implementation of a core banking system in 2004, and by the end of 2006, 303 branches, 117 extension offices, totalling 420 service points were connected online.

Present trends

Business process re-engineering

The bank established a business process re-engineering division in 2001, under a separate Assistant General Manager. The division identified the following as major weaknesses, steadily becoming threats:

nLack of a core banking system

nDecentralised operations

nAging population

nModernisation of branch interface

Introduce value added products

Over the next decade, the bank addressed these weaknesses which led to achievement of the ‘One Trillion Goal’ long before expected.

Introduction of core banking system

Apart from the HR front, the lack of a core banking system was hindering growth of many activities. As society entered a dynamic phase, customers required less time-consuming service. Decentralised operations not only delayed the information generating process, but also contributed to cost escalation as competitors such as Commercial Bank and Sampath Bank excelled with a low cost-to-income ratio.

In 2002, the bank called for quotations for the core banking system. Its first live operation was in 2004 September, and by June 2005, 100 branches were live on the core banking system. Within the next 18 months, the system covered the entire domestic branch network, except three branches in the Wanni area. In December 2006, Bank of Ceylon won IBM award for the fastest implementation of an online core banking system in Asia Pacific region.

The core banking system provided many facilities to customers. With an online real time processing facility, customers could access funds anytime from anywhere. While this facility created opportunities, it enabled the bank to counter the competition and did much to nullify the competitive advantage which other members of the peer group had.

Centralising back office operations

As the first step of introducing centralised operations, back office functions were first centralised. This enabled branch staff to focus more on customer service. It also enabled centralised monitoring, which in turn reduced errors and minimised risks.

Many non-value-adding processes were removed while more emphasis was put on key processes. A separate risk management division was created, while the internal audit and research divisions were strengthened. The Chief Internal Auditor, Chief Risk Officer and Head of Research was recruited from outside, which brought new dimensions to the corporate management.

HR initiatives

Following branch rationalisation in the mid ’80s, BoC had excess staff during the ’90s. By 2001, the average age of a staff member was 48. BoC carried the recruitment drive next decade, to replace retiring staff. The bank neither offered any voluntary retirement schemes, nor encouraged staff to retire early, although the early retirement option at the age of 50 was available. BoC did recruit 900 management trainees, 2,850 trainee staff assistants, 50 trainee secretarial assistants and approximately 200 minor staff which include multi-duty assistants, security personnel and drivers during the 2002-2011 period.

Extensive training and development programs were made available to staff, both in-house and from external institutions, including overseas training.

Modernisation of branch network

A completely new look was introduced to the branch network. New furniture was supplied, air-conditioning was introduced to many branches, new branch layouts to suit the new environment were created and the entire atmosphere was changed from typical government office to modern bank branch. Branding was done to retain the BoC identity. The 5S principle was used as the key driver in this process.

Not only did this result in improved customer service, but also created a pleasant environment for the staff to work in. Although the initial investment was high, a tremendous achievement was obtained in reduced overhead costs.

New products

BoC introduced, investment banking, Islamic banking, internet banking, mobile banking and bank assurance as generic products for its product portfolio. These product lines enabled the bank to counter competition from smaller competitors, who tried to exploit certain niches. Apart from the main product lines described above, many products were introduced to conventional product lines to cater to specific market segments.

Moreover, product lines such as credit cards, pawning and leasing were refocused, again to stay in competition.

Business strategies for the 2010-2012 period

nEvery effort made to retain market leadership in the asset base, loans & advances, deposits and profits.

nTo be the largest local financial conglomerate

nParadigm shift in customer service culture

nImprove selling culture

nTo technologically upgrade the bank’s process and customer delivery channels.

nTo develop an investment banking strategy with our subsidiaries.

nIncrease overseas presence both in number of branches and through business alliances and new ventures.

nRenewed organisation structure to the overall direction and align strategy into business.

Analysis of findings

Amongst the strategic choices available for BoC, the chosen option was differentiation - without a price premium.

With the introduction of a centralised automated environment, bank differentiated both asset & liability products to cater to the requirements of the untouched markets. As the premier state bank, one of the prime objectives of the BoC is to inculcate banking habits amongst the general public which holds back premium pricing.

The bank has successfully captured a diversified customer portfolio of 11 billion, holding the market leadership position in several aspects.

The following statistics demonstrate the achievements made by the bank throughout past decade.

Though it is difficult for BoC to be the cost leader, the bank was able to maintain lowest margin in its peer group.

It is apparent that Commercial Bank’s strategy was cost leadership. Having an operating environment which maximises social welfare ahead of profit maximisation, it was difficult for BoC to compete in terms of cost.

Growth of the asset base, in comparison to the peer group can be illustrated as shown in the graph. According to the graph, it is clearly evident how strategic initiatives helped BoC to counter competition. During the period from 2000 to 2004 BoC was struggling, while other banks in the peer group achieved substantial growth. In the period from 2004 to 2009, when re-engineering initiatives took place, BoC was somewhat closer to market average growth. But its main competitors, Commercial Bank, Sampath Bank and People’s Bank were ahead in terms of asset growth.

By the period from 2009 to 2012, powered by new strategies, BoC was able to restore lost momentum. Not only did these initiatives help to regain growth momentum, but also enabled BoC to improve efficiencies, thereby reducing costs.

Conclusion

Bank of Ceylon has been Sri Lanka’s premier bank throughout the last seven decades since its inception. It has been challenged during the last decade and responded promptly. First BoC improved its efficiencies by introducing automation. Having identified that operational excellence was not the most effective strategy, BoC introduced strategic initiatives at the right time. This has led to a restoration of its dominance in the local banking arena. Achievement of one trillion assets, even before the expected time horizon, clearly symbolises BoC’s unmatched market leadership.