Sampath Bank new MD upbeat on prospects

Aravinda Perera is the new Managing Director of Sampath Bank with effect from 1 January 2012. He brings with him a wealth of experience; his last post was as Deputy Managing Director. He will hold the reins when the bank celebrates 25 years since its inception in 1986. Perera is seeing in consolidation following a rapid expansion phase, which has seen the number of branches expand to nearly a 100.

Following are excerpts of an interview:

By Dinali Goonewardene

Q: Profits last year grew 51% in the nine months to September 2011. Can you elaborate on how this was achieved?

A: There are a few things we have to talk about; one is business expansion. We probably had the best growth rates for advances and deposits over 2010. If you take the whole industry we have done better than other banks in these two areas. In the area of other income, we have done well, especially the credit-related other income has been good. On top of that we have managed to bring our nonperforming advances to probably the industry’s second – much better than our closest competitors. These actions have given us better results than 2010.

Q: In the nine months to September 2011 interest income grew 10.4% and interest expenses 14.9%, indicating spreads are narrowing. Can you tell us about this?

A: It’s all about competition. Basically what is happening right now is that although there are a lot of lending opportunities for all banks, the amount of deposits that are coming through, that again for the whole banking industry, is not to the same level of growth as compared to the loans. There is obviously a tendency of all banks to offer increasingly higher rates to deposits, so that they can match their loan books with the deposits.

What I’m trying to say simply is that there is heavy competition for deposits, thereby increasing the rates. In fact even our Central Bank is aware of this and they have invited five big banks to go out of Sri Lanka to raise funds, because then probably the demand for the deposits will ease somewhat. Narrowing off the net interest margin by nearly one per cent, 100 basis points, by 2010 is a result of this.

Q: Noninterest income has grown 30.6%: foreign exchange income 10.7% and other income 34%. Can you speak on these lines of business?

A: When an economy is growing, it is imperative that certain credit-related functions expand. More and more credit related functions mean there will be other income coming our way. Be it in imports or be it in exports or construction guarantees. When there is a construction boom, there are a lot of opportunities for guarantees which will result in other income. And of course remittances have increased. That also gives us better non interest income.

2011 gave us opportunities in all sectors, all different sub sectors of non interest income. That is why it was growing so fast. We also have an advantage; we went for rapid expansion. We almost doubled our branches. We opened 40 in 2010, we opened three last week – with that 36 this year. In 2009 it was 19 – almost 100 branches, nearly doubling our branches. All these branches should result in additional noninterest income generation. That is what we see right now.

Q: How has business been for these branches in these new areas?

A: It’s a mixed result. We expect some branches to make money in one to two years. Some branches have even started making money in the eighth month, surprisingly. But some other branches take time; firstly because of the competition and secondly because there are location-specific issues.

Supposing the tea industry is doing well and you set up a branch in a tea-concentrated area, that branch should do well. That kind of issue can also come in. But by and large we can be happy about the progress some of our branches have made. In the north and east, Jaffna started making money in less than a year. Branches like Kalmunai in the Eastern Province, even in Colombo, some branches have started making money and in the North Central Province. Again other factors also come in.

A particular branch manager is also an interesting topic that one can take on. You have very, very aggressive branch managers who want to make their capabilities noticed by us so that again is another factor. By and large our new branches are doing reasonably well. In 2012 our main task is to ensure that the new branches we have opened will not be a burden to the existing branch network, meaning that they should make money. That is a priority for us in 2012.

Q: How do you see your bank ending 2011, the fourth quarter and what are your forecasts for the coming year?

A: We will have a strong 2011 fourth quarter; may not be as big as the first few quarters. As for 2012, we have just shown our budget to our board. We are very positive on the growth of our assets. We may not be going for a large number of branches in 2012 but we will be concentrating on consolidation. These branches that we have opened should make money.

We also have to ensure that people who have accepted higher responsibilities in the branch network, like the branch managers, assistant managers, they also need to grow with us. Having another 20-30 branches this year is going to stretch our management capabilities plus the HR function. Our main target for 2012 is to expand the branch network but keeping in mind the HR limitations that we have. We also need to ensure that the branches we have opened will make money in 2012.

Q: Your non performing loan ratio in 2010 was 3.9%, below the industry average of 5.3%. The International Monetary Fund said last year that there is a need to guard against relaxing lending standards and that the Sri Lankan Government was sending conflicting signals about the role of the private sector in economic development. What are your views?

A: Basically production in nonperforming loans might make some bankers relax, but we at Sampath Bank will definitely not do that. Our reduction in nonperforming was for two reasons. One is that we have ensured that strict discipline is maintained in granting facilities.

I am happy to say that the facilities that we have given, especially the large ones that we have given in the last two years, are doing quite well right now. We are not allowing any new ones to get into nonperforming. You term them nonperforming after three months. Every effort is made to ensure that customers pay.

Q: Even though your expansion has been rapid, you have maintained controls?

A: Towards that end, we have centralised our controls. Regional managers who are 20 in number are the approving authority. Not the 200 branch managers. You can have 20 experts but you can’t have 200 experts in credit. We have concentrated the approval process from regional manager upwards. That has given us good results.

When you do something like that, it is very important that you speed up the process. I’m happy to say that we are probably the only bank that has a system-based credit approval system. Only to the higher levels like the board do we send papers. Otherwise, the approval is through our computer system. We have sped up that process as well. That is to ensure that we give only good loans. What we have done is ensure that nothing that we give will go into nonperforming.

On the other hand, we have taken a very aggressive approach towards the recovery of nonperforming loans which are already in our books. In a four-year horizon it has come down by over 7%, right now it is 2.8%. It came down for two reasons; one is that non performing advances as an absolute value have reduced. Secondly, because of our aggressive approach in credit approval and that granting the total loans have grown, obviously as a percentage it drops.

Due to both reasons we have managed to bring down the nonperforming loans. Not only are we aggressive in recovery and granting facilities, but we are also very aggressive in monitoring and controlling the credit process. We get reports very often on who is about to get into trouble. We give responsibility to different delegated authorities in the approval system, you better recover this. That also has played a big role.

The second part of your question – yes, we believe the private sector is the engine of growth for this country and we are very happy to say that our credit growth is much ahead of the industry average. We believe that we have contributed towards the growth in the Gross Domestic Product in a significant manner.

Q: What corporate social responsibility initiatives will you be engaging in next year? You have had some interesting initiatives in the past.

A: We became the top CSR company in 2009 when we won the highest award from the Chamber of Commerce. In the last two years we did not apply for an award although we were doing it because we thought that having won once, we should step aside. For 2012 we are discussing it.

Our basic thrust this year has been entrepreneur development. We are lenders. What we are trying to do is take unbankable customers. When someone walks into our branch, our branch managers have a chat. We have certain industry norms, banking principles; we take only the customers whom we can take.

What we have done for our CSR in the past is to take the people whom we would have said no to for various reasons but for people who have capability and potential and take a risk on that. That is something that we have done in the past. We will probably continue in 2012 as well.

I will not want to divulge details for 2012 because we obviously want to apply for the award in 2012. Social activities, education and health are three things that we are really looking at. There is a separate team headed by me, we have met a couple of times and we are formulating and we will get the board blessings for that. We usually spend a certain per of our profits for CSR. That will continue in 2012. I am sorry I cannot be specific although we have formulated a few plans.

Q: Sampath is an indigenous bank formed in 1986. Do you see room for mergers with other banks in the future? Do you think the necessity may arise?

A: There is absolutely no reason why we should not be merging with somebody. Or why we can’t acquire another bank. Having said that, the legal and regulatory regime that we have probably favours an acquisition rather than a merger. I will not rule out a merger or an acquisition. We probably want to be the acquirer and in this respect it is not the management but the bank that will be making proposals, it’s the Board of Directors. I will not want to say anything further than that because it is a matter for the Board to discuss.

We have quite a large number of players in this market. But we have not seen a single consolidation so far except a few cases where the Central Bank has requested some banks to take over certain banks which are pulling out. It’s an interesting scenario; we are watching what is happening in the market. We will not hesitate to engage in such activities if the proposal is exciting.

Q: Shareholders and staff virulently staved off a takeover by Hatton National Bank in the 1990s. Can you say why and whether you are committed to remaining independent or are particular to overtures from select groups?

A:I would not like to discuss the HNB saga, or rather the Stassens Group, HNB, the whole team. What really happened was that some of our staff members went to courts and took the stand point that certain regulations and laws had been violated and some of the shareholders supported that as well. Since then we have not been approached by a particular party for a merger or an acquisition.

However, it’s a matter not for the management but for the shareholders and the Board of Directors to decide. Finally, at the end of day, they will be the deciding factors. But management will always look at what opportunities there are and if there are exciting opportunities, management will discuss them with our shareholders.

Q: Banks are thought to mirror economic activity in the country. What are your views on the economic climate at present?

A: Let me put it in this way. I believe we are a privileged generation. For 30 long years we have had this war. All of a sudden we find there is no war. We have a responsibility; we have to catch up with 30 years that we have lost. Other countries in the region have gone far away. We will have to catch up.

Right now we are decision makers. We have a responsibility to make sure things work. The Government can only support. It is the private sector that is going to drive growth. We as a bank are ready to take up the challenge. We have taken up the challenge.

For example, in the north and east, we have over 30 branches now. Before the war ended, we had only one in Vavuniya and one in Trincomalee. We can say that we are ready to take up the challenge and we have already taken up the challenge.

Q: Can you speak on the markets in which you operate; your competition, strengths and product markets?

A: We believe that we are a retail bank and we have reached almost all segments of the market so far. We probably will not want to concentrate on one segment as such. It’s a retail bank for the whole country, covering the whole market.

We believe Sampath is a technically-innovative bank. As such we will want to bring out products which are technically superior to the products that are in the market. A few examples are Sampath Sanhida, which is a senior citizens account. We are the only bank which can provide interest every two weeks. Other products like Kids Saver, we came out with first. Kalin cash is another product with which we said we will pay interest up front for a fixed deposit. All that came through innovation and technical superiority.

Our internet payment gateway became the Sri Lankan payment gateway when the tsunami struck us. We were the first to bring out a credit card to this country and the first local bank to come out with an ATM network. Not just a single machine but real time online integrated system. Whatever the products that will come out from our bank will obviously go hand-in-hand with technology.

However, on the other hand, we also pride ourselves on providing a customer service; we try to exceed expectations. We were obviously doing that when we were small in size and as we become larger and larger, it becomes very difficult for us to keep the same standards but we believe that we are good in that as well.