The Comeback from the Brink

Seylan’s Chief Executive is looking to steer the bank to a growth phase while trying to decisively erase the last remnants of a crisis that almost led to its collapse

By Dilshani Samaraweera.

Published on November 07, 2012 with No Comments

Seylan Bank’s new Chief Executive, Kapila Ariyaratne

From the vantage point of Seylan Towers, Seylan Bank will look like any other financial institution buzzing  in mid day activity – if not for Celestial Towers. Rising above the skyline in plain view of Seylan Bank, Celestial Towers is a towering reminder of Seylan’s past and its connections to the Ceylinco group. Today, nearly  four years after Seylan’s near death experience, the bank has been virtually reborn, but Celestial is a piece of the past that is yet to be reconciled, acknowledges Seylan’s new Chief Executive, Kapila Ariyaratne.

Seated in his 17th floor office in Seylan Towers, Ariyaratne admits Celestial Towers or Celestial Residencies as it was formally known, is still a towering headache for Seylan’s decision makers, despite the passage of time and change. For Seylan, Celestial represents the tallest unrecovered debt in its books. The one-time pride of the Ceylinco group, earmarked to become Sri Lanka’s tallest building and housing a 180 room hotel and 198 luxury apartments, Celestial has, like many other assets of Ceylinco, passed on to new owners. The transition was again typical of the Ceylinco legacy – a complex web of unfinished business. When the government took over the incomplete building earlier this year, under its Revival of Underperforming Enterprises and Underutilized Assets Act, work had been abandoned since 2009. Now, under a new owner, Sino Lanka Hotels & Spa, Celestial’s construction has recommenced and the new buzz of activity is visible from Seylan Towers, the bank’s headquarters.

While Celestial has changed hands, Seylan’s debt of Rs 2.5 billion in capital and an additional Rs800 million of unpaid interest remains outstanding. Recovery has been slow, not for the want of trying by Seylan’s management, but also, according to industry sources, due to Celestial’s complex ownership structure. Celestial Residencies original owner was Ceylinco Homes International Lotus Tower, whose main shareholders were Ceylinco Homes International, Ceylinco Capital Investment (a subsidiary of Shriram Capital Management), and Ceylinco Insurance. Embarrassingly the government, in attempting to takeover Celestial, had acquired Ceylinco Leisure Properties Ltd – which had nothing to do with Ceylinco Homes International Lotus Tower. Eventually the government adjusted a schedule of the act acquiring the incomplete building, leaving Celestial’s creditors, including contractors and those who had made advanced payments for apartments, in limbo. But Ariyaratne says there is a ray of hope. “Our claim has been recognised and there is a compensation tribunal set up to determine a settlement. We have lodged our claim with them and we are hopeful of a solution,” says Ariyaratne. “We haven’t seen what they are offering or negotiated on that. But I think a good settlement can be expected,” he says. , adding that the entire settlement may not be in cash. “We will look at a combination, could be a bond, we could get involved in the project which is not a bad thing, there are several options. There will be cash involved as well.”

Seylan’s legacy dud loan challenge at Rs20.7 billion at end 2011 out of Rs118 billion in total lending by end 2012 extends well beyond Celestial. Legacy Ceylinco related bad loans top Rs4.6 billion including Celestial.

There is better news on two other big ticket bad loans, one, Rs 1.5 billion lent for the construction of a shopping mall and the other a Rs 1 billion facility where the borrower has now secured a joint venture partner to move the project forward. . “In a technical sense until the performance reaches one year you cannot reclassify it,” points out Ariyaratne, who has wide-ranging financial sector experience at NTB, state controlled People’s Bank, ANZ Grindlays and ABN Amro. “It’s nonperforming in the books, but the interest is being collected,” Ariyaratne says about both loans, now that borrowers have agreed to reschedule. The second loan is now backed by a bank guarantee which makes recovery certain.

One of the outstanding examples of Seylan’s re-emergence is the transformation of its non performing loan book. Seylan’s reputation for generous credit to Kotelawala’s favoured firms where he was Chairman were exposed when the Central Bank appointed board started digging into the bank’s finances. It found the dud loan pile was larger than reported because the bank had been rescheduling loans to keep them out of NPL status. A third of Seylan’s loans were actually nonperforming compared to the official rate of around 14%. The NPL status was not the only discrepancy. Central Bank directives had not been flouted or ignored – but instead of fixing the issues, Seylan took the banking regulator, the Central Bank and the bank employees union, to court. Central Bank regulations, for instance, required banks to maintain a 20% liquid asset ratio and a 10% capital adequacy. In 2009 Seylan Bank’s capital adequacy was 7.5% and the liquid asset ratio was 12.5%.

Since prioritising debt recovery in 2009, dud loans have halved to mid 2012. Fitch Ratings in a report, noted that Seylan’s asset quality had improved significantly since 2009, and that NPLs are down 44% between June 2009 and June 2012. Fitch also highlighted Seylan’s profitability rise and improved return on assets (ROA) of an annualised 1.2% at June 2012.

Two factors have contributed to reducing Seylan’s dud loans as a % of lending from catastrophic 30% levels to 17% at December 2011. Firstly the bank has been, shifting its treasury bond investment in to loans aggressively since Ariyaratne took over the mantle. “In 2010 60% of total revenue was coming from treasury activity and the balance from regular activity and we felt that was not a very healthy situation to have,” he points out. Increasing the loan book size reduced, in relative terms, the outstanding bad debt as a % of total lending. “As a percentage, the growth of the denominator also helps,” agrees Ariyaratne. “But it (bad debt) has also come down as an absolute number through recoveries, write downs and rescheduling,” he points out the second and perhaps the most crucial reason for the decline.  From Rs25 billion in January 2011 outstanding bad debt declined to Rs20 billion by December 2011, most of it due to recoveries.

Ariyaratne, says the bank is simultaneously inculcating a professional credit culture, to ensure there is no relapse in quality of future loans. Its governance structures are now in place and the Chief Executive now steers the bank. “With these debts turning into performing assets again, our NPL will definitely see a sharp reduction, because these are a small number of very large debts,” points out Ariyaratne.

Other factors that have assisted minimise the impact of dud loans on the bank’s books include a special Monetary Board granted exemption for ‘Seylan Bank PLC from the requirement to apply progressive discount on the forced sale value of immovable property in terms of a Banking Act Direction on “Classification of Loans and Advances, Income Recognition and Provisioning” when computing the provisioning to be made as at 30th June 2012, for non performing facilities of Ceylinco Homes International and Golden Key Credit Card Company” according to a note in the banks June 2012 results.

Despite whispers and rumours in the market and about the un-viability of some Ceylinco related firms, the collapse was triggered only in 2008 when Golden Key, which had been run like a ponzi scheme, finally ran out of money. The complex web of interrelations, related transactions and loss of confidence saw the ground give way beneath them. The run on Golden Key in rapidly widening circles, sucking in most of Lalith Kotelawala controlled and Ceylinco related entities. In the thick of the vortex was Seylan, a systemically important bank faced with an uncontrollable panic run and in the harsh glare of the negative publicity; it was expected to cave in. But this self fulfilling prophesy did not materialise –mostly due to the Central Bank’s quick stepping in to install a caretaker board of directors to stabilise the bank.  But even today, Seylan’s new management, headed by Ariyaratne, is still grappling with its legacy of an unusual corporate and management culture.

While Seylan Bank enjoyed a reputation for supporting mid-sized firms, particularly in rural areas, it also had a reputation for being a ‘one man show,’ when it came to big ticket loans; a reference to its biggest individual shareholder and figurehead of Ceylinco, Lalith Kotelawala. Seylan Bank’s near collapse, and most challenges adjusting even today, are a result of the Kotelawala regime’s somewhat eccentric management culture.

Eastman Narangoda, Executive Chairman of Seylan’s caretaker board says although the bank appeared to have all the standard operating procedures, seen from the inside, the picture was different. “The culture at Seylan was totally different. Normally banks are run by the General Manager and the Board, but here, even staff promotions and loans were given on the Chairman’s directives. Monitoring and control systems were weak. So it was overall run somewhat unprofessionally,” says Narangoda.

Seylan’s Chief Financial Officer(CFO), Ramesh Jayasekara, who joined the bank from BNP Paribas, where he was the Deputy Regional Financial Controller, handling the Middle East, says Seylan’s credit culture and credit processes have been restructured to avoid another relapse. Meanwhile, Jayasekara, like Ariyaratne, believes that recovery strategies will show results soon.  “The NPL is a priority. In about two and a half years the NPL was cut down from around 30%, to around 12% (net of interest in suspense). Given our plans, I am confident we will see this reduce to a single digit within the next 12 months,” says Jayasekara confidently.

Jayasekara, who is among the new blood injected into Seylan as part of the bank’s overall restructuring and culture change, says Seylan was a career choice with prospects. By the time he joined Seylan in August 2011, much of the clean up inside the bank was over and the bank was showing signs of recovery. “Initially, making the changes would have been tough. But by the time I joined, the fundamentals were on track and a lot of the change initiatives were already paying dividends.  So people could see and feel the turnaround in the bank. At this point there is a strong sense of motivation to drive the bank forward,” he says.

Seylan’s Chief Financial Officer(CFO), Ramesh Jayasekara, who joined the bank from BNP Paribas, where he was the Deputy Regional Financial Controller, handling the Middle East

Since its near collapse towards the end of 2008, Seylan has risen like the proverbial phoenix from its own ashes.  By June 2011 a rights issue infused Rs 4.7 billion in equity, taking to Rs7.7 billion the total equity injections since the bank faced the crisis in 2008. The equity injection also pushed Seylan’s tier 1 capital to 15% of risk weighted assets from 10.58% a year earlier. Since Seylan has little debt on its balance sheet now, its shareholders may have greater flexibility for funding future growth. Seylan’s profit numbers have kept pace with the reawakening.  The bank reported an after tax profit of Rs 1 billion by end 2011, after financing a Rs 699 million voluntary retirement scheme.

In the six months ending June 2012, Seylan reported an after tax profit of Rs 1 billion, with a Rs 614 million profit after tax for the quarter ending June 30, indicating that profitability is on an upward trajectory. The bank will probably report record earnings and record profit growth this year. In September 2012, following the massive rights issue, Fitch Ratings upgraded Seylan Bank’s rating by a notch to ‘A-‘ with a stable outlook.

Higher net interest margins (NIM), despite rising interest rates, and tighter cost controls, have driven the improvement. The NIM has improved, says Fitch, due to strong recoveries of NPLs and new lending. Fitch also expects Seylan’s ROA to improve further over the medium-term, despite slower economic activity, as recoveries of legacy NPAs are likely to outstrip new NPA formation. The analysis certainly augers well for Seylan. Bringing Seylan’s NPLs in line with the industry, is now Ariyaratne’s challenge.

Ariyaratne sums up his responsibility for Seylan’s future with “no point dwelling in the past, my job now is to take the bank forward.”  The new CEO acknowledges the bank has already made headway in changing its culture under the caretaker board appointed by the Central Bank in January 2009.  From then on, much of the rescue effort focused on candidly facing down the challenges. “I felt the management culture at that time was very much directed from the top. That’s not my style. So this is definitely one big area of change,” says Ariyaratne.

Less obvious to the outside was the transfer of leadership and authority back to the Chief Executive from the board. Seylan’s board, naturally after the crisis erupted, took executive control of the bank. Narangoda, the former executive Chairman of that board, admits that he sometimes had to act like a ‘dictator’ due to the scale of the crisis.

However Narangoda stepped aside as Chairman earlier this year and Mohan Pieris, a former attorney general, was appointed non executive Chairman in April this year. With that transition also ended executive directors input in to management, except for one director R Nadarajah who continues in an executive role. Government control in the bank continues to be high through its 32% shareholding through the EPF, Sri Lanka Insurance and Bank of Ceylon.

Ariyaratne says changing the culture is perhaps the greater of challenges versus non performing loans because ‘that includes the attitude towards NPL. NPL is just one banking aspect; it involves the culture towards credit quality, monitoring follow up and all that.”

Part of the solution involved installing a different calibre of people at the helm through new appointments at different levels of management, including professionals like Jayasekara and Ariyaratne himself. With Ariyaratne entering the picture, Seylan has continued investing in strengthening the quality of its management pool by hiring top talent from the banking industry and improving professionalism at management level, and helping consolidate the culture change by introducing international best practices. Today, things have stabilised to such as extent that Seylan Bank is now actually looking at changing gear from recovery, to growth, under its new corporate strategy for 2012-2015.

The new CFO, Jayasekera, who was actively involved in formulating the latest strategic plan, says the plan is geared towards covering lost ground on growth.  “For the past three years Seylan has been looking at strengthening structures and processes. So I think now, the time is right to get into aggressive growth mode, and show some big growth numbers,” says Jayasekara.   Under Jayasekera the bank has introduced systems of analysing individual business lines and tracking bank branches, to closely identify performance bottlenecks that can then be directly targeted with solutions. To support its growth plans, the core banking system will be upgraded and Seylan’s extensive branch network will also be refurbished.

Seylan’s CEO says for Seylan, the future is about the bottom line. “We brought in a heavy bias on the numbers. The bank had a lot of things going on but I felt the focus on the bottom line needed to improve. So now the focus of the transformation, is on the bottom line.  All the branch managers have been aligned to this and they are right now very focused. They are rationalising their operations from top to bottom, staff, facilities, revenues and enhancing revenue sources, everything,” says Ariyaratne.

While Seylan Bank’s deposit growth was not as strong as it could have been, given its grass root strength and island wide reach, under its new growth strategy, the bank will look at leveraging its advantages to boost the bottom line.  “Some of the branches were not aggressive enough in selling our products, despite the bank offering a full range of products. In fact, I don’t think any other bank has such a diverse range of products like Seylan has. So we have been working this advantage and we have brought in a culture of cross selling,” says Ariyaratne.

The bank’s strategic plan, that is driving this ambitious growth, is in itself, another paradigm shift in the management style at Seylan. While strategic planning may seem standard procedure for any business, let alone a large bank dealing in billions of rupees of public funds, at Seylan this was blind spot. Narangoda reveals that when he took over, Seylan did not have a culture of strategic planning. The bank had instead, adopted a budget based management approach that changed direction based on the steering from the top.

Under Ariyaratne, the planning process was strengthened and made more inclusive,  and under Ariyaratne’s leadership the bank embarked on a full scale strategic planning exercise that spanned its island wide network of branches and involved over 3,700 staff, for over four months of discussion. Every branch was required to contribute ideas and inputs that were assimilated through regional workshops, where each branch presented a SWOT for the area. Champions were appointed to take the suggestions forward and develop them. This collaborative effort built confidence and helped reinforce the new, more inclusive management culture. “I believe that people in the front line have to be involved, because they have the best knowledge about the expectations from the bank. We also had to sustain our bottom line. With the strategic plan in place, we set our growth targets that could be monitore, explaining that the home made strategic plan has now effectively focused Seylan’s formidable strengths of large workforce and countrywide network.

Ariyaratne has also been working on changing the management style at Seylan.  Managers can no longer recline in air conditioned offices in Colombo but are required to visit outstation branches, “and address firsthand any shortcomings. “Everybody was sent out. We made the head office more service oriented by making them more aware of the needs of the branches and consumers in these areas.” To facilitate the process, the work load and responsibilities of managers were restructured. Instead of all managers being required to dedicate large amounts of time to overlook credit management, branch operations were brought under a single head and a separate bank credit unit was created.  This released other managers to overlook operational aspects, also enabling better planning and coordination. “A centralization and a process rationalization was on the cards and I just accelerated that and we restructured the entire management structure,” Ariyaratne adds.

Prior to 2009, the inconsistent implementation of procedures and controls had resulted in wastage and corruption. “The culture seemed to be driven by personal gain but not properly controlled. Staff salaries were below industry standard and employees were set low targets, but they were given various incentives for deposit mobilisation and pawning. This caused unnecessary costs and irregularities based on the desire for personal gain,” explains Narangoda who is now retired. “They were also overstaffed. For instance, they had about 21 deputy general managers when even Bank of Ceylon at that time had only six,” says Narangoda shedding some light on the internal workings of the bank prior to the 2008 crisis.

Eastman Narangoda, former Executive Chairman of Seylan’s caretaker board

These systems established the culture at the bank and formed employee attitudes but not always for the better. As one employee explained “From the beginning, Seylan Bank had a very good customer care culture. So some people misused this for personal gains. Because the management was weak, some executives could manipulate the management for benefits. Some executives were directors in other Ceylinco companies and they even started pumping money out of the bank and into their companies. So other employees felt it was useless working hard and being honest, because these people were being rewarded. These things were happening at the bank way before 2008.”

Today, Seylan is still in the middle of an ongoing culture change. The bank has streamlined its performance management to bring genuine productivity into the equation, by rewarding employees with promotions and by establishing a corporate succession plan. In 2011, the bank promoted 755 employees and also rationalised its staff with a voluntary retirement scheme that reduced its staff from 3,622 at end 2010 to 3,150 by end of 2011. To deal with the problem of over staffing, since 2009, the bank had been encouraging employees to go abroad on no-pay leave, where a majority settled into new jobs.  These measures helped lift the salary increment freeze the bank’s employees had been facing since 2008, and in 2011 the bank announced a salary increase to employees, bringing pay closer to industry standards.

Given these sweeping, and in many cases in depth changes, Seylan’s Chief Executive feels it is only a matter of time before Seylan regains its premier position among Sri Lanka’s financial institutions. Certainly depositors are returning to the bank in numbers, indicating that for many, the past is only a memory.  For the local banking industry, Seylan, if it does succeed in turning its balance sheet around, will become a landmark of learning.

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