Seeking a bigger pool

During its short history, Nations Trust Bank has seen many strategic shifts. Now its new chief executive and her team has to pull off another transformation; capturing a broader market

By Dilshani Samaraweera.

Published on October 28, 2012 with No Comments

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In the face of immoderate challenges it’s easier to capitulate than confront. For small banks, especially ones that have targeted the elite, the last couple of years have posed unexpected challenges because of regulatory curbs on their most profitable lines of business. They have had to strategise afresh and choose between confrontation or capitulation for each of their business lines. John Keells Group and Central Finance promoted, Nations Trust Bank, had set itself up for another record year of growth and market share gains when the goal posts were moved by the regulator.

As a response to a worsening balance of payments crisis, the Central Bank imposed an 18% ceiling on credit growth. NTB, budgeting to grow its lending by more than double that, had already invested in branches and new products to capture the most profitable lending opportunities. Credit ceilings impact banks in two ways. Firstly they will have to quickly refocus their lending to the most profitable of their products to make the best of a bad situation while keeping in mind not to upset too many of their customers dependent on the institution to support growth. Secondly they have to deal with the idled infrastructure capacity. If not loan officers may end up twiddling their thumbs.

Of course all banks were impacted by regulatory rule changes, the credit ceiling and caps on interest rates changed on credit cards. However the impacts were amplified on smaller banks because they plan to grow faster than the bigger ones and in some cases depended more on revenue from a fewer business lines, for instance, from credit cards. Nearly 10% of NTB loan book is committed to outstanding credit card balances and overall credit was budgeted to grow at more than 40%.

With just Rs66 billion in deposits and Rs102 billion in assets, NTB is a relatively small fish in Sri Lanka’s Rs4 trillion plus banking pond. NTB, for much of its past has also focused on just the rich and the elite, but the regulatory rule changes came at a time it was trying to move in to a bigger pond.

Nations Trust Bank’s new Chief Executive Renuka Fernando had her work cut out even before she moved in to the corner office in mid September. Its shift from being a bank for the elite to include the upper middle market is a planned one which NTB estimates will leave it ideally ready to serve the top 20% of income earners.  But now she has to manage the transition while manoeuvring around the growth sapping regulatory strictures.

NTB Chief Executive Renuka Fernando, says the bank through, scale, efficiency, new markets or doing things differently has to achieve higher revenue

“Either through, scale, efficiency, new markets or doing things differently we have to achieve higher revenue,” explains Renuka Fernando who took over as the bank’s Chief Executive in mid September. “There may be room for some more efficiency but really it’s about revenue. We have to get the hockey stick impact of revenue in the bank,” she says referring to a long growth phase that comes after a period of investment. Because of its smaller size, NTB’s strategies were focused around achieving a deposit franchise and building balance sheet strength before taking on very open risks like the other banks.

However in 2010, urged on by government policy and the obvious logic that small business will not always stay small, NTB decided to take the plunge into SME banking. This was part of a grander plan of shifting its strategy deciding to reach beyond the relatively affluent and urban base that used to be the sole focus. “We consciously stayed in the Western Province, because that is where the money flow was,  around 60 to 70% of it,” Fernando explained of the strategy. However the potential to raise low cost deposits were greater in the provinces because people had access to few other investment options.

The provincial shift involved opening branches outside the Western Province, seeking out low cost deposits, higher margin lending opportunities to SME’s and broad basing its credit cards business. In 2011 it attracted 35,000 new customers and Rs11 billion in mostly low cost deposits.

“This year, savings balances have grown when in the industry they haven’t. So we have aggressively focused on that” points out Fernando, referring to the 22% deposit growth in the six months to June 2012. Total deposits now top Rs81 billion. “This is something we are putting our minds to and there is a lot of debate and discussion, that is one of the key things we have to get right,” adds the seasoned retail banker who set up and built NTB’s retail business after she joined the institution over a decade ago.

NTB’s current and savings deposits- which make up the low cost base – account for around 28% of total deposits whereas peers have almost double the ratio at 50%. “When you have that kind of advantage your revenue just flows in. This is one of the biggest challenges and that’s why we are putting our heads together on this,” confides Fernando who started her banking career in Sri Lanka at the local unit of Banque Indosuez before joining the local ABN Amro unit. Among ideas being debated to boost the ratio of low cost deposits is the introduction of a gift scheme.

For NTB the lending ceiling came at a time when it had significantly invested in capacity to grow. The impact was immediate. “The full impact of this regulatory intervention in the form of dwindling interest income was felt in 2011 as profitability of the cards business declined,” according to its annual report. NTB has invested in systems, personnel and last year alone, eight new branches were opened in potential SME hot spots across the country. Meanwhile, NTB’s loan book grew by 39% to Rs62 billion, from Rs 42 billion in 2010, a clear sign the rural and SME sector was willing to come on board, despite NTB’s image as a bank for the elite. Within the year, retail and SME loans (including leasing and factoring) jumped from 61% to 66% of total disbursements, squeezing corporate lending to 31% from the previous 36% of the total loan book.

“To capture market share we have to grow faster than our peers. But now we can all only grow at 18% on rupee lending,” agrees Ramanika  Unamboowe, the Deputy General Manager of NTB’s corporate banking unit.  Another sticking point, for the bank that didn’t have a strong rural presence, is the requirement that, 10% of loans have to be granted to the agriculture sector. As NTB’s credit card and corporate lending portfolios doesn’t exactly fit this bill, so the retail and leasing units have absorbed the agriculture lending requirement.

But the credit ceiling has forced the bank to trade off corporate lending against retail, to sustain its expansion drive. “In terms of resource allocation, we have had to take the stance that out of 18% growth, maybe the allocation for corporate will have lower,” admits Unamboowe.  The hope of quick returns on the expansion drive is now less certain.

Ramanika Unamboowe, the Deputy General Manager of NTB’s corporate banking unit

By end 2011, NTB’s transition was well underway and it had 48 branches across the island, very different from the single branch operation of the Overseas Trust Bank in 1999 with which John Keells Holdings and Central Finance created NTB.

The high cost physical expansion, with only limited space for credit growth, can crimp any bank’s style according to its Chief Executive. Renuka Fernando took over the reins from veteran banker, Saliya Rajakaruna. Rajakaruna himself, was hired to stabilize the bank in 2009 after it was discovered that rogue traders had hidden over Rs800 million in trading losses from the management. NTB’s then Chief Executive Zulfiqar Zavahir and Deputy CEO, Iftikar Ahamed resigned following the discovery, leaving a significant management vacuum, which Rajakaruna, a former Chief Financial Officer of the Bank of Ceylon, filled.

Fernando, who was then heading NTB’s retail banking unit, recalls the drama. “It was shocking that we missed it. These transactions could have been done without being noticed, despite all our control systems.” As the head of retail, Fernando was also directly involved in damage control. “If people lost confidence in the bank, we would not have survived that, no bank could survive a loss of confidence,” she points out. But fortunately for NTB the aftershock, perhaps due to the much smaller public presence and mindshare of the bank at that time, was minimal. “We lost a few deposits and many of them came back to us a few months later, because we have very strong relationships with our customers,” recalls Fernando who says the greater impact was internal.

The unsavoury news, due to NTB’s smaller, closer knit organisation structure, upset the staff more. The new Chief Executive is quick to go on record that since “’that time’ the bank’s control systems have come a long way. “We are an aggressive bank and what we learned was the control part was important,” Fernando confides, adding that virtually the whole industry went back and checked their positions thoroughly after the NTB crisis became public.

Apart from reputational recovery and the latest Central Bank credit ceiling shocker, Fernando says NTB is firmly in its next stage of transition. NTB has a centralised management structure organised around the five main business units of corporate, retail, leasing, credit cards and treasury services. The head of corporate banking, Unamboowe tries to put NTB into perspective. “We have kind of created an international bank structure in the local environment. It allows us to be more focussed. We have different risk profiles, capital allocations, margins and different service propositions, for each of the businesses.”

NTB branches are mere service points for customers while all fund allocation, credit approvals, operations and risk management are centrally managed. In contrast local banks here have decentralised operations, where branch managers or regional managers evaluate credit and also allocate funds.

NTB, with its comparatively smaller balance sheet, limited deposit franchise and limited to the affluent brand, could not compete with bigger, better known brands, using the same operating model.   NTB’s centralised business model was evolved in 2003. “We actually turned the organisation on its head,” says Fernando.

Its limitations of size and reach, also forced NTB to be creative and skim the market. The bank’s track record shows it has been good at spotting opportunities and market gaps, and meeting these.

One example is NTB’s strategy to grow its deposit base. Today, NTB has a Rs81 billion deposit base, and last year over 35,000 new customers signed up with NTB, mainly on the back of what it calls the “mass affluent segment,” targeted through its service proposition Inner Circle. “We felt the upper-middle income category in the country was not serviced properly.  Other banks treated them like everyone else,” says Fernando. Inner Circle helped the NTB brand establish itself in private banking.  Now, bigger banks like HNB and Sampath are coming out with premier propositions for the same previously unacknowledged “mass affluent” group in Sri Lanka.

Another case in point is NTB’s credit card business that started with the acquisition of the exclusive franchise for American express Credit cards in Sri Lanka in 2003. By end 2011 NTB had announced that it had pushed aside Standard Chartered, to claim the number two slot only behind multinational HSBC. This put NTB far ahead of much bigger state and private banks in the card business and last year the number of Amex Cards in issue here topped 100,000. This was despite the central bank credit card interest ceiling which overnight slashed, one of NTB’s most lucrative revenue lines.

Priyantha Talwatte

“The interest rates went from about 36% to 24% and our revenue lines just disappeared,” says Priyantha Talwatte, the Deputy General Manager of NTB’s American Express Card and Strategic Marketing division. The cap shaved off 12% of the net interest margin (NII). NTB closed the year 2011 with an NII of Rs4 billion down from Rs4.3 billion in 2010. Talwatte, who joined NTB as head of marketing on a 2-days- a -week assignment while running a consultancy company, and decided to ‘hang around because the first week was great,’ says the bank had to “reconfigure” its credit card business, to absorb the interest rate shock. Given a choice of scaling back or scaling up, NTB’s management and board had to decide fast.

“Even in Singapore with such low cost of funds they charge 2.5% a month, whereas in Sri Lanka when you put a cap, the card model really does not work. But we have now changed our model to a spend model rather than a NII model and recovered very well,” Fernando said.

“It was critical. The options were exit, or expand.” So 2010- 11 NTB forayed into new consumer segments. “We did a 15 point recovery plan and went ahead, because by that time we had a track record dealing with one of the world’s top 20 brands. To throw that away would have been foolish,” says Talwatte. As a result, a whole new category of “responsible professionals” in Sri Lankan society, “that are highly likely to honour their debts,” like teachers, doctors and nurses, were introduced to Amex as the new medium of exchange. NTB also used its network outside Colombo to make inroads for Amex in territory that previously didn’t have much to do with the plastic cash concept. By the end of 2011 credit cards accounted for 9% of the year’s Rs 62 billion loans and advances. Credit card interest rate ceilings have now been increased to 28%, but the reconfiguration forced the bank to streamline and broad base to acquire scale. Credit card related non-fund based incomes too, grew by 29% during 2011, while income from card fees and merchant discount commissions increased by 24% and 29%. Talwatte says it wasn’t, “a bad year considering everything that happened.”

For the Amex business in Sri Lanka, NTB is the only acquiring bank, so far, and collects both the margin on spend from the merchant and the margin for providing the connectivity to the network.

Priyantha Wijesekera, NTB’s head of leasing

But policy shocks didn’t end there. NTB’s fifth pillar – leasing, that has been piggy-backing on the bank’s branch expansion, was hit earlier this year, by higher vehicle taxes and rupee depreciation that put up costs of vehicles. The impact of the walloping tax increase on the leasing landscape, says Priyantha Wijesekera, NTB’s head of leasing, “was like a mini tsunami.”   So it certainly helped that NTB had, at the start of the year, decided to shift focus from private vehicle leasing towards commercial vehicles, and machinery and equipment leasing. “When the news broke everyone in the industry was complaining, but we just changed our game plan and fast tracked our plans for the commercial, and machinery and equipment sectors,” he says.

NTB Leasing went on an aggressive communication campaign to complement its change of business model. “We targeted the Sinhala speaking, rural people. Now, people who didn’t know us before, are aware we are in the market,” says Wijesekera. In 2011, out of the leasing portfolio, 5% was machinery and equipment, 70% was private vehicles and 25% was commercial leasing. By end August this year, the mix of loans granted in the year showed signs of changing, with the share of private vehicles reducing to 41%, commercial leasing rising to 52% and machinery and equipment leasing also increasing to 8%.

Overall, revenues have also held ground, despite the reduced share of private vehicle leases. “We were doing a billion per month before the market crashed and we are still doing a billion now. This is with just 60 staff, compared to the 2 billion my competition in the leasing industry is bringing in, with over 200 staff,” says Wijesekera, who plans to keep up his billion-a-month on track for the rest of the year. NTB’s leasing book, which is about a quarter of loans was worth 18 billion by end August this year.

Wijesekera says the success of the NTB leasing model is due to being able to offer efficiencies of the leasing industry with advantages of a bank. As Wijesekera puts it, “it’s a marriage made in heaven.”

“We offer one-day leasing services, which other banks cannot do and we don’t have funding difficulties like leasing companies do. So we can offer one day services at bank rates,” says Wijesekera. The downside is the lack of reach compared to competition.  Wijesekera says leasing looks bright because of the growing demand from the SME sector.  Next to corporate loans, leasing accounts for the second largest portion of the loan book. “Leasing is a big business, we are not going to cut them, but we feel other businesses have to take on some of the proportion of the revenue generation,” explains Fernando. She says the lack of medium term funding; to match the duration of leases – usually five years – is a challenge. “So you can’t just have it at 25% or 35%, we won’t do that.”

Keshini Jayawardena, NTB’s Deputy General Manager, Retail and SME Banking

More loans to small and medium sized businesses is the most immediate business diversification at NTB. “SME is where the highest growth is expected in the coming years,” says Keshini Jayawardena, NTB’s Deputy General Manager, Retail and SME Banking. So NTB hasn’t lost any time armed with a full service package, and its trademark relationship banking.  “We want to be recognised, especially in the rural segment as a SME bank,” says Jayawardena, who is targeting a 10%-20 % year on year growth, over the next 5 years.

Apart from SME hunting, NTB started pawning services last year, mainly to get a foothold in the North and East, where gold is sill the currency of choice. The bank also “soft launched” mobile banking services earlier this year.

NTB also focused on making the best of a bad situation where the credit ceiling is concerned. It introduced US dollar fixed deposits for US$ 50,000 or more, at 5% interest, mainly to pull in dollar deposits from abroad. The bank has also been busy signing up with money transfer agents to channel remittances in its direction. The foreign currency will be used primarily for rupee lending, says Jayawardena.

NTB’s corporate banking division is also aligning itself with the dollar trend. By end-August NTB was already close to its 18% credit growth limit, but relief troops were on the way in the form of US$ 35 million in foreign funding. “We have to overcome resource constrains on rupee lending and there are no restrictions on dollar lending. So we changed course to dollar lending,” says NTB’s corporate head, Unamboowe. In 2011, corporate lending grew by 25% and the bank targeted 29% growth in 2012, but was forced to realign its targets. “We re-forecast by reducing on corporate lending but this year about 20% of corporate lending would be dollar lending.”

So NTB’s corporate banking arm is now romancing exporters. Part of the plan is to rebalance the importer dominated portfolio that saw trade volumes crash with vehicle tax increases. With the credit ceiling expected to hang over its head, NTB will continue to chase dollars. “We want to build our exporter base, because we can use the foreign currency to give better rates for importers as well. This is better in a volatile exchange rate scenario,” says Unamboowe. In the slightly longer term, NTB is looking at project finance that will take the bank into another new landscape.

This year NTB opened four branches and is planning another seven. “We think Sri Lanka’s per capita will double by 2016. Out of our 20 million population, about 20% have an acceptable quality of life. We think this 20% will double over the next 10 years. So we will be ready with the services they will be looking for, at each stage of their growth,” explains Talwatte, who feels demand for credit cards will also keep pace with the changes in quality of life, for the better.

NTB is also trying to put the brakes on its rising costs. Despite expanding in almost all activities, the group managed to limit operating expenses growth to 6% last year but it still pushed up the cost income ratio to 63%, from 59% in the previous year.  The Bank has laid down strategies to squeeze cost to income ratio to below 50% in the medium term.

Banks with larger consumer portfolio’s have higher operating costs because expenses on sales, acquisition costs, collection costs, are higher than in corporate banking for instance. “We need to get a return back for that model. So every business is focused on getting a real return in terms of the effort and the cost we put in to that business,” explains Fernando.

“Everybody is like an entrepreneur here,” says Fernando about the heads of the key business units. “Everybody is focused on Return on Equity. So it might not mean that we go after market share always. But within our market share, we might get a better return on some products than we do on others.”

The rising cost of deposits has been cushioned by the growth and shift in the deposits towards low cost funds. Over 65% of the deposits are from personal banking customers, making this a very stable source of funding and also generating opportunities to cross-sell other products. Corporate and Institutional deposits account for 25% of the deposit base.

But the costs are piling up. “Banking has a fairly long gestation period. In our centralised model, in terms of investing in technical infrastructure to take the volume, there is a fixed cost before adding scale,” acknowledges chief executive Fernando, who was part of the team that guided NTB through a number of crucial transitions. She reiterates that in response NTB needs to urgently grow its revenues. “This is priority number one.”

The target is to double the CASA to 50% of total deposits in 5 years, or better still, 3 years. “We should try to achieve that in 3 years. I am fairly confident we can do this,” says Fernando. Part of CASA growth is anticipated from SME business growth and through operational accounts of SMEs. As it is, NTB has more current accounts than the industry average, due to the bank’s cash management model for small businesses. “Everyone thought I was a bit mad when I first suggested this because they said who will put money in a bank if we are not going to lend to them?” The general idea, she says, was, to tap cash-rich small businesses who were not interested in loans, and it has worked.

Some banks offer as much as 10% interest on savings accounts because those deposits are an important tool in liquidity management. But high yield seeking depositors are also fleeting, and not the type NTB seeks out. “As much as 50% of CASA funds tend to be fixed over long terms. For instance children’s accounts stay put in banks for years,” points out Fernando.  To feed its appetite for low cost funding NTB says it is now looking at such products, especially for liquidity reasons.

Fernando says her next priority, in addition to boosting revenue, is ROE. “We are very focused towards achieving ROE in short and mid-term,” she says. “We will be one of the best banks for ROE.”

NTB believes that Sri Lanka’s growth trajectory is on the upswing and is readying to hop on board. The credit ceiling, although expected to remain at least for another year, is seen as a short term detraction and should not be allowed to distract the bank from its long term vision. But a lot is riding on how well NTB can handle its change of focus. The rural SME customer is a far cry from the urban mass affluent but perhaps the feeling of exclusivity dished out by Inner Circle is what they were missing all this time?

Few banks have responded to credit growth and credit ceiling challenges as aggressively as has NTB. Of course it faced a stark choice because the bank had already invested and committed itself to a plan of growth. To unwind the revenue drive would have adversely impacted its cost to income ratio and driven it towards anaemic shareholder returns. Smaller businesses are also relatively easier to manoeuvre exactly like NTB is doing with its own. For its leadership capitulation isn’t certainly an option.

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