SAMPATH BANK MD CREDITS STELLAR PERFORMANCE IN 2017 TO NEW STRATEGIC PLAN
Having played a pivotal role at Sampath Bank since the year of its inception, Nanda Fernando took over as the bank’s Managing Director in October 2016. Armed with a 35-year illustrious career in the banking industry, Fernando hopes to take Sampath Bank, w
BY INDIKA SAKALASOORIYA
You took over as MD in 2016. Since then, what are the key changes that you have done within the bank?
As you know, Sampath Bank has been in existence for almost 29 years when I took over in September 2016. In 1987, when we set up, Sampath Bank created a revolutionary change—in the sense, it introduced five key changes to the market. The first one was, we introduced the uni-banking concept; second, we introduced the extended banking hours; third, we introduced an ATM network; fourth, we introduced paying of interest on the daily balances on savings accounts and fifth, we were a bank for executives.
These five changes were a huge quantum leap and changed the banking infrastructure and the model, which was in existence in 1987. Since then, we have been going on a very progressive path and at the point of 22 years, we had 100 branches. Then, we took a strategic decision to increase the branch network by further 100 branches over a period of three years. By 2017, we had 229 branches.
When I took over, my immediate thinking was where the bank would head in the next five to 10 years to come. If we were to position the bank to have a competitive edge in the next five years, we needed certain changes, moving from where we were, over the last 29 years. Going by that, we did plan a transformational change by the end of 2016 and implemented it starting from January 2017. This was a major transformational programme, which had 30 key changes. These 30 changes were covering all areas of the bank, mainly focusing on our retail and corporate banking.
Basically, what we did was, the volumes that were building up in the retail banking segment over the last 29 years, which were of corporate nature—the large advances—were shifted over to the corporate banking. Then the small facilities, which were there, we shifted them to the retail banking. Apart from that, we had 21 regional offices throughout the country, out of which we reduced seven and restricted the regional offices to 14. Subsequently, we set up some zonal offices.
Also, we did a whole lot of centralization. This helped us to expedite the processing of facilities, which were taking a long time. So, with the centralization, the duration to process a facility and disburse it was made very much shorter. We also did outsource a lot of functions, keeping the core banking functions to us. This process also helped us to create new teams for marketing of our products and services.
The programme also included nearly 150 staff transfers to accommodate these changes, which we did to the satisfaction of all the staff. These processes also helped us to relieve some of the brick and mortar buildings we had, which helped us a lot to reduce costs. The improved processes helped us to generate more revenue, which was extremely beneficial to our bottom line.
This was a real transformational period, during which our team underwent a lot of difficulties—they had to work many late nights and weekends. But when we started this, there was a lot of explaining and education on what we were going to do. So, we explained to the staff that unless we proceed with these changes, we would not be able to maintain a competitive edge in the next five to 10 years.
They very well understood the position and came along with me absolutely without any hesitation. So, this short-term pain has been translated into a long-term gain and the project was aimed at bringing results over a period of three years. But, immediately during the first year itself we saw massive progress in terms of all the areas through which this change was done.
Did the results of Sampath Bank for FY17 reflect this paradigm shift?
Of course they did. Our profit after tax, which was Rs.9.1 billion during the year 2016, improved to Rs.12.1 billion by the end of 2017. In fact, this was doubling the profit of 2015. In 2015, our profit was Rs.6 billion, which went up to Rs.12 billion in 2017. Now, for us to double the profit prior to 2015, it took a very long time. So, looking at that, this was a major achievement for us. It was a 32 percent year-on-year (YOY) growth compared to the Rs.9.1 billion achieved during 2016.
Our profit before tax too grew by 31.8 percent YOY to reach Rs.16.6 billion in 2017, against Rs.12.6 billion reported for the previous year. In fact, our aim was not only to grow in one particular area. Our target was to grow at least in three major areas. They are deposits, advances and fee-based incomes.
In terms of deposits, we achieved a growth of 22.1 percent, against the industry growth of 17.5 percent. This was possible due to the fact that we removed some of the functions, which throughout were carried out by the branches. Removing all these from the branches enabled us to make use of the branch staff to do more real business rather than engaging them in non-productive things.
Similarly, the deposit base grew up to Rs.630 billion during the year and our market share also grew by one percent over a period of two years. In 2015, our market share was 7.5 percent, which increased up to 8.25 percent in 2017. But to achieve that one percent increase prior to 2015, it took as much as nearly five years.
In terms of credit, credit growth picked up due to the changes we have done, which resulted in the credit processing to be much faster. In fact, in 2017, our advances grew up to Rs.572 billion, which was a 22.5 percent growth compared to the industry growth of 16.1 percent. The market share of advances also grew by 8.9 percent compared to 8.3 percent the year before.
Though our credit grew, that was not at the expense of non-performing advances. Our non-performing ratio of 1.64 percent in the year 2017 was the industry best ratio and compared to the industry average of 2.5 percent.
Our fee-based income also grew and accordingly, the net fee and commission income, consisting of mainly credit cards and electronic channels, grew by 23.9 percent, improving from Rs.6.6 billion in 2016 to Rs.8.2 billion 2017. This again was due to the convenience factor extended and the expansion of credit. The net gains from financial investments also grew by 12.1 percent, helped by the dividend income earned from financial assets.
The continuation of advances growth and the deposits growth, which we have increased, helped us to improve our net interest income, the main source of income of the bank, which accounts for more than 70 percent of the total operating income and this recorded a growth of Rs.5.6 billion.
You mentioned about the 22 percent credit growth. What were the sectors in the economy this credit went into?
Well, in terms of advances, the trading areas improved a lot, compared to five years before; trading, which was 16 percent of our portfolio, increased up to 21 percent. Agriculture, which was in the region of six percent, remained approximately the same due to the inclement weather the country experienced in 2017.
But the financial and business services increased from 15 percent five years ago, to 16 percent in 2014 and during the four years from 2014 to 2017, it increased by 6 percent, touching 22 percent of our portfolio.
Basically, in 2017, the bank’s exposure to the construction, transportation, commercial buildings and mixed development projects increased a lot. So, mainly it’s construction, trading, tourism and health sector.
What about SME lending? How is Sampath Bank responding to the govt.’s recent call to even lend to select SMES sans collateral?
Through our branch network we do a lot of projects focusing on the SME sector. And our main focus last year was to increase our portfolios of our retail banking targeting the SME sector. One thing we did was we arranged a lot of seminars, specially out of Colombo and encouraged a lot of SME entrepreneurs to start their businesses through project financing.
Secondly we organised meetings to help them to strengthen their supply chains. Apart from that, we did a lot of educational programmes to teach them how to do their accounts, marketing and do their taxes. We also had a large exhibition at the BMICH, where we, at our cost, let them exhibit their products so they could reach new markets, specially overseas clients.
So, in this three-year strategic plan you earlier mentioned, the SMES are a major focus area?
Exactly! SME is at the centre of it. One of our biggest achievements was the reduction of costs in certain areas. This helped us a lot to improve our cost to income ratio, which is a key ratio of any bank, which helps the bottom line. In our case, we were able to reduce the cost to income ratio 10 percent over the last two years. Coming down from 52 percent to 42 percent in the end of 2017, which was a major achievement.
Another key important thing we did in 2017 was the strengthening of our digital banking unit, which will be the future. So, basically, through that we were able to improve our process, which also helped us to grow our volumes.
What are Sampath Bank’s plans to explore overseas markets? We see a number of local banks and even finance companies venturing out seeking opportunities?
We’ve also identified other markets, which have big potential, such as Myanmar. We have our representative office based in Myanmar for over the last two and half years. We have been studying their culture, the products they have currently in their system, their accounting system, taxation, legal systems, etc.
Now we have a very good understanding about the conditions in Myanmar and we are also happy to say that we extend our facilities through our offshore banking unit to the customers who are there and also to Sri Lankan companies who have moved to Myanmar and set up businesses there. We believe Myanmar has a massive potential for us in terms of business in the future.
We also have advanced ourselves to the Maldives, Bangladesh and some of the East African countries. Very recently we moved to do certain setting up activities in Australia as well. So, we feel that our technical knowhow and managerial skills help us to move on to other international markets as well and become a vibrant player in financial markets, which are partially developed and also in certain developed markets where we could deliver much cheaper than the competitors over there.
Currently we are a bank with 229 branches and 391 ATMS. We have a market cap of US $ 447 million, a deposit base of US $ 4.2 billion and advances base of US $ 3.9 billion. We are positioned as the third largest private sector commercial bank in the country.
Going forward, we feel that the current level of the brick and mortar branches is reasonably sufficient for us to serve the Sri Lankan community. We do understand that there is a certain amount of unbanked or under-banked community in Sri Lank and we have selected two different channels to serve them.
While we may go into brick and mortar branches in potential areas, where there is always opportunity, we would go more aggressively into digital banking and to agent banking, which we set up last year. Through the agent banking, all basic banking transactions can be done. The agent has the POS machine, through which he can open accounts, accept deposits of customers, withdraw or pay cash, check balances, pay bills and carry out other types of transactions generally carried out through a branch.
So, currently we have about 500 such agents established in various parts of Sri Lanka and we intend continue this network. Parallel to this, the digital banking operations will also be strengthened so that this will be the way forward to reach the masses of Sri Lanka at a lower cost. So, our primary objective is to serve the masses of Sri Lanka as a national bank providing the maximum convenience at the lowest possible cost.
How do you view fintech – an opportunity or threat?
We are the bank, which revolutionized the banking industry and over the last 30 years we have developed certain capabilities as a bank, which could develop products cheaper, better and faster. So, we would apply the same CBF formula going forward. For example, the Mybank facility we have developed has all the features of a similar products developed by fintechs. We are not trying to match the facilities in the market but our effort is to have products and services, which are not available Our profit after tax, which was Rs.9.1 billion during the year 2016, improved to Rs.12.1 billion by the end of 2017. In fact, this was doubling the profit of 2015. In 2015, our profit was Rs.6 billion, which went up to Rs.12 billion in 2017. Now, for us to double the profit prior to 2015, it took a very long time. So, looking at that, this was a major achievement for us. It was a 32 percent year-on-year (YOY) growth compared to the Rs.9.1 billion achieved during 2016 in the local market and which are far ahead from the existing products, basically game changers!
That is the type of development we are doing through our digital banking unit. Specially over the last year, we have shown that we are capable of doing the changes and the achievements we have had over last year and beyond is proof that we are a dynamic force. In fact, I must say our biggest strength is our team. The degree of commitment, their eagerness to learn and innovate, how they groom themselves to take higher responsibilities, to be the trend-setters, is commendable.
In the latter part of 2017 and the first quarter of 2018, Sampath Bank was seen tapping shareholders and the market to beef up its capital with back-to-back rights and debenture issues…
Yes. Whenever we meet with the rating agencies, one of the biggest issues they always raise is that our capital adequacy is not comparable to our peers. So, last year we got a capital plan approved from our board of directors and not only but also we initiated to implement this during the last quarter of 2017, where we had a debenture issue and rights issue.
Immediately after that, we announced another debenture and a rights issue, which added Rs.20 billion to our base. This will help us to be much comfortable and be above the BASEL and regulatory requirement. And also, it will help us to fund the aggressive growth that we have planned for the next three years.
What is your opinion of the current Sri Lankan banking landscape? Does the industry need consolidation?
Well, we saw the post-war period where the then government initiated a consolidation programme. But with the new good governance regime coming in, the interest and focus have diluted in this regard; may be the thinking of the current policymakers is different. Right now we are not seeing much interest towards consolidation. In developed economies, consolidation is something practiced and there are advantages and disadvantages of it. We do believe that the existing set up and focus is more towards developing the technology, digitalization, delivery of banking products, etc.
We do have 32 banks providing services for a 20.9 million population. We have 25 commercial banks and seven specialized banks. Among the commercial banks we have 13 local banks and 12 foreign banks. Going forward, consolidation may help to take some global shocks and definitely help the margins.
What would be the direction of interest rates in the short and mid terms?
The increase or decrease of interest rates largely depends on strategy. At times our liquidity is tied to the medium to long-term opportunities, the liquidity in the market is lesser; there is appetite for higher borrowings at higher rates.
The indications currently are that the rates globally may rise at least towards the third and fourth quarters. Rate hikes are expected in the US and signs are such that the rates may increase globally. We are an economy highly dependent on global conditions. So, global patterns might apply to us.
There is some concern among the banking fraternity of the new reporting standards, which came into effect on January 1, 2018. What’s your opinion?
The new standards are complicated and to comply with them the banks will have to change their IT systems and make higher provisions in order to comply with the required levels. In a way, a bank being an institution whose funding is mostly based on public funds, it is prudent to have the banks strengthened to meet any possible shocks globally as we locally.
At the same time, we should think at what rate we should be complying with these standards and look at how other developed and developing countries are applying these standards. We may have to look at how the Indian baking sector is embracing these standards and how the banks in Europe and the US cope with them.
In Sri Lanka, banking is a highly regulated industry and we are compelled to proceed with the regulated ratios. Though these are tough for the banks, they will to some extent help to strengthen the industry. So, my view is that while it would help, it should not be done much differently to other countries and be spread over at the appropriate time, so that an undue burden is not brought on the banks.
We did plan a transformational change by the end of 2016 and implemented it starting from January 2017. This was a major transformational programme, which had 30 key changes. These 30 changes were covering all areas of the bank, mainly focusing on our retail and corporate banking We also have advanced ourselves to the Maldives, Bangladesh and some of the East African countries. Very recently we moved to do certain setting up activities in Australia as well