DFCC Bank - playing their part in GOSL's development drive

DFCC Bank, the pioneer development bank in the country which is approaching its 60th year, recently released its Annual Report for 2013/14 titled 'Game on'. The report, based on the theme of cricketing, compares the Bank's successful journey of almost six decades, which very few corporates in Sri Lanka can be proud of, to the evolution of the game. It has been written in the aftermath of Sri Lanka's T-20 success.

Starting from small beginnings, DFCC Bank has grown into one of Sri Lanka's top banking groups with assets of over LKR 177,000 million, which include untapped resources from its valuable equity portfolio. The Bank has a consistent record of success by judiciously managing its business and expanding through a series of strategic acquisitions, alliances and partnerships. DFCC is one of the largest capitalised companies in the Colombo Stock Exchange valued at LKR 38,148 million. Its shares are widely sought and actively traded. Arjun Fernando, Chief Executive of DFCC Bank shares his thoughts about DFCC's journey, its performance and response to changes that are currently taking place in the country's banking sector. What prompted you to use cricketing imagery in relation to the performance of DFCC Bank? Sri Lanka's success at the T20 World Cup is what prompted us to use cricketing as a theme. If we look at the strategies during the various stages of DFCC's journey, they would be analogous to those employed in the three formats of the game. i.e. The Tests, the 50-overs and the T20s. Coincidentally, it would seem that DFCC's sixty years fit chronologically into three periods suggestive of these formats. The Test era from the mid-1950's to 2000; the 50-over from 2000 - 2013 and the T20s from 2014 onwards. In hindsight, the leadership and strategy in each era was one that was right for the time. How is DFCC's journey analogous to the changing formats of cricketing? Well, if we look at the period from mid 1955 up to 2000, it was a time for settling in and concentrating on playing the long innings. DFCC steadily consolidated its development banking business while at the same time diversified its activities into other financial services as and when the opportunity arose. It is during this time that DFCC seized the day with the acquisition of the 29.8% stake in Commercial Bank of Ceylon PLC.

Then, the new millennium saw an upward shift in tempo where game strategies and conditions called for more aggressive play and quicker reactions. Accordingly, DFCCs business model was revamped by a full scale foray into commercial banking and investment banking. This was achieved with the acquisition of Merc Bank and its re-launch as DFCC Vardhana Bank PLC (DVB) as an almost wholly-owned retail banking subsidiary, and Acuity Partners (Pvt) Limited, an equally owned joint venture with Hatton National Bank PLC that involved the amalgamation of investment banking businesses and franchises of the two banks.

Coming to the present day, T20 is the current state of play. Consolidation in the financial services sector, like the cricketing T20 cricketing format is awaited with expectation and excitement tinged with apprehension and anxiety. To succeed in a T20 game, the team has to be flexible, dynamic, agile and even unconventional to beat whatever challenge is thrown. Above all, they have to play to their strengths. Likewise, in consolidation, these same qualities are critical. Even if the prerequisites such as approvals and statutes are in place, consolidation will fail if the mindset of the players and other participants are not up to it.

You say 'development banking is our turf… we are ready to play our part'. Is this in response to the pro- posed merger of your Bank with NDB? It is important to note that despite the higher risks involved, throughout the years, there was no dilution of focus on DFCC's core business of development banking. We continued with passion to discharge our project financing mandate serving a diversified portfolio of top corporate to SMEs, whom we have supported especially during their risky start-up stages. In fact, the World Bank, in one of its publications, referred to DFCC as 'One among the successful few' in the context of the sustainability of development finance institutions around the world.

We consider the merger a timely move and a landmark event in the banking landscape with the country positioning itself as a middle income economy. Our priority in this exercise is to ensure that our stakeholders (shareholders, employees and customers) interests are well looked after and protected. I prefer to view it as the next phase of DFCC's evolution where the Bank progresses to greater heights in a new form that is stronger, more dynamic and more enduring. In fact, consolidation will materialise the full value of DFCC's constituents; i.e. its investments, customer base, project financing franchise, human capital, IT systems and so on. This process can only benefit all of DFCC's stakeholders and the country alike as the outcome will be an entity whose value is greater than the sum of all its individual parts.

DFCC is also fortunate that it has recent first hand experience in successful acquisitions and business amalgamations with regard to both DVB and Acuity Partners Group. In addition to structural re-organisation, these have required a realignment of mindsets. So, as far as consolidation goes, I would say 'Game On, Bring It On'.

As perhaps the country's only development bank, are you future ready to meet the challenges of the Government's drive towards the developmental goals set for 2016 and beyond? DFCC has never been better positioned to play our part in the drive to take Sri Lanka to a higher league. With the correct mix of funds, expertise honed over sixty years and an excellent and responsive team; we are ready to take on every challenge.

The year 2013 was excellent in terms of raising funds to fuel DFCC's future business which is a key aspect of development banking. DFCC was the only private bank to raise USD 100 million through a landmark 5-year bond issue in the international capital market in October 2013 based on the strength of the Bank's own balance sheet. This was a significant feat given the volatility in the debt markets that prevailed at the time and it is a strong testament to the international investor confidence in the Bank and the country alike. Further, the bank's cost of generating LKR through funding swaps with the proceeds of the bond issue compared very favourably against the cost of raising debt in the domestic market for the same tenure during this period. Debt issues in the local market at that time were as high as 250 basis points above the hybrid cost of the overseas debt issue of the bank. During the year, DFCC also successfully negotiated Euro 90 million of long term funding from the AAA rated European Investment Bank (EIB). These funds will be deployed to support the SME sector in Sri Lanka as well as to support Green Energy initiatives. Based on DFCC's unparalleled track record of managing multilateral credit lines, the Bank was EIB's clear choice to be the manager/administrator for the programme. We have already approved several loans and possess a strong pipeline for the utilization of the funds allocated to the Bank.

DFCC can also unlock and deploy the substantial value of its equity portfolio which includes significant holdings in strong listed financial institutions. The funds unlocked as and when required could significantly enhance the regulatory capital of the Bank and provide the foundation for leveraging and supplementing the growth of the Bank's balance sheet.

DFCC is therefore ready to meet the anticipated credit expansion especially at the long end as the private sector begins to move on in the wake of the Government's development drive. In fact the funds sourced are already shifting our project lending activity into top gear. DFCC has been a key driver in leading the development of industry sectors beneficial to the country. What are your future plans in this regard? The main thrust of DFCC's medium term strategic plan is to capitalise on financing the direct and spin off business opportunities arising from the Government's Five+1 Hub strategy. DFCC's leadership in key sectors such as Green energy and Tourism will underpin its capabilities in this respect. At the same time, supporting Small and Medium Enterprises (SME) will continue to play a major role in DFCC's portfolio and this sector will benefit greatly from the low cost funds sourced from EIB.

International consultancy would be another area of focus. DFCC was retained by two financial institutions overseas to provide consultancy and management services. This has established the Bank's credentials in international markets as a provider of fee based services and will be the launch pad to aggressively pursue future assignments. Another component of our international strategy would be to partner our customers in venturing overseas. What's your medium- term outlook for DFCC? The year ahead is challenging but promising. We have kick started by good asset growth in the last quarter of 2013/14 coupled with the robust pipeline of requests for funding for new projects and the rolling out of EIB funds to SMEs at concessionary rates will keep project lending activity at a peak throughout the year. Our success with ongoing consultancies in Fiji and the Solomon Islands are opening new doors for international business. Our foray into Bancassurance will add to our palette of services. Leveraging on the competencies of our Group of Companies and deriving optimum cross- sell opportunities will be a prime area of focus. All of these are exciting prospects. DFCC has what it takes to play a great innings and the Bank is geared to perform.