Prabodha Samarasekera gets NDB thinking about convergence

Eventually many banking products will converge with capital markets. But by implementing the idea now, Samarasekera plans to disrupt Sri Lankan banking.

By Shamindra Kulamannage.

Published on January 19, 2015 with No Comments

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It shouldn’t come as a surprise that banks have gone unchallenged in their role as financial intermediaries in Sri Lanka. Too many families are too poor for a bank account, where some savings can be squirrelled away. Rural families that do have some money saved are often considered a relatively cheap and unfussy source of finance for banks that lend that money to large businesses in cities.

However, more affluent bank customers have smartened up to the fallacy of bank deposits as a store, preservation and enhancement of wealth. In the past decades, inflation has often eaten up the purchasing power in bank deposits. The only real hedge against the corrosive quality of inflation on savings is to own real assets or financial assets with inflation-beating yields. Bank savings haven’t provided either of those inflation hedges consistently.

Prabodha Samarasekera is Chief Executive of NDB Wealth Management, a fully owned fund management unit of NDB, a commercial bank. Bankers typically consider fund managers a nuisance but not really a threat to their low-cost core deposit base. The mutual fund industry’s attempts to grab a piece of the banking pie have floundered in the past. Rarely does an asset manager, who is cautious and wiser due to the campaigns that have misfired in the past, go it alone now.

Bankers have also pushed back against allowing fund management units they own to use the bank’s infrastructure and sharing resources to offer services.

Prabodha Samarasekera believes he has cracked this long apprehension commercial banks have had of asset managers cornering their low-cost deposit bases. Bankers fear that money managers will tempt away their deposits with promises of capital preservation and superlative returns.

His argument to NDB, which controls about four and half percent of banking deposits, is that the financial sector is converging with capital markets and, in Sri Lanka, NDB is best placed to disrupt both these segments by leading this trend. “The most crucial thing is for the bank to recognise that convergence is going to be important going forward,” says Samarasekera, who has commercial banking, investment banking and asset management experience. Working on both sides of the divide has given him a unique perspective.

“If you are a relatively small bank, but have a good investment banking operation, one strategy is to converge some retail banking products with capital market products,” he says, “You converge to create
a competitive advantage.”

Bank deposits in Sri Lanka top Rs3.3 trillion, about 33 times greater than total assets under unit trust industry management.

Samarasekera says they are ready with people, products and processes to start converging the capital market-related offerings of NDB Wealth Management with those of the commercial bank.

Both banking and capital markets fund businesses and individuals. However, the risk associated with the two are different. Bank depositors are not risk capital providers and hence receive a somewhat low, predictable return.

Capital markets on the other hand are a place for raising risk capital, both equity and debt. If a business fails and is short of cash to settle all its liabilities, the shareholders are the first to lose money, followed most often by debt stockholders. Bank loans are usually secured against assets the bank can foreclose on, should the borrower be overdue on loan installments.

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Samarasekera joined the pioneers of the mutual fund industry (also called unit trusts here) one and a half decades ago. However, he regrets the enthusiasm with which the industry promoted the riskiest types of mutual funds, ones with high exposure to listed equity and to retail investors. Soon the stock market tanked and many investors lost their money. Rates of government debt were around 18% then. “If we sold money market accounts (mutual funds investing in government debt and short-term instruments), this industry would’ve been a success, people would’ve made money continuously,” he says. “The whole industry is to blame.”

It’s the money market funds that have redeemed the mutual fund industry, where assets under management have nearly quadrupled to over Rs100 billion over the past couple of years from Rs30 billion levels. NDB’s own money market fund, offering returns in the range of 5-6%, now tops Rs27 billion. Total mutual fund assets under NDB Wealth’s management tops Rs35 billion. Prabodha Samarasekera’s optimism convergence at NDB is based on three developments.

Firstly, the NDB leadership now backs the idea. He says NDB’s wealth management unit is far more likely to attract the 96% of banking deposits it does not hold, rather than cannibalise its own deposits.

Secondly, he believes the industry now understands that investors need to be eased in to risker asset classes, than be encouraged to dive in. He would now encourage bank savers switching to NDB’s private wealth management products to first invest in money market products, the safest type of mutual fund investment available. “From there, you can graduate them to corporate debt, to balanced funds which are both equity and debt and then to a equity fund.”

NDB Wealth is Sri Lanka’s largest fund manager. In addition to the mutual funds in which it invests private wealth portfolios, it also manages the portfolios of AIA – an insurance firm – and over Rs20 billion in so-called discretionary portfolios, which are provident funds and pension pools of private firms. Total assets under management top Rs86 billion.

In the past two years, the firm has also invested in IT systems and upgraded processes to be able to serve, at a personal level, thousands of customers. This is the third development Samarasekera counts on to make convergence happen. He says a competitor deciding to adopt a similar strategy will need a couple of years to upgrade IT and develop processes that NDB now has. Soon the NDB group will introduce one customer statement for all its major units: commercial banking, wealth management and stockbroking.

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Samarasekera is cagey about revealing a target for NDB Wealth’s 2015 growth. In 2014, NDB Wealth profits topped Rs170 million. A one percent average fee for assets under management would have earned it revenue of Rs850 million. Discretionary portfolios attract the lowest fees, while unit trust fees can reach 2.55% for funds in which equity exposure is high.

A retail and mass-affluent segment focus will drive growth in 2015, according to Samarasekera. He says some bank deposits, like those offered to elite customers, offer interest rates as low as 1.5%. “They rip you off,” he says about the low rates. “There is no value addition in terms of research and no advice on structuring a portfolio. It’s just a plain vanilla banking product.” Savers banking on these services are his first target.

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