Meet the chief executive confronting banking’s toughest challenge

Consequences of NDB’s slow and incomplete transition to commercial banking have been painful so far. Its new chief executive Dimantha Seneviratne outlines how he plans to change the narrative

Key performance measure comparisons against other commercial banks on a black leather-bound notebook were sketched soon after Dimantha Seneviratne was first offered the job as NDB Bank’s chief executive. A couple of months after his arrival at NDB’s corner office on the top floor, Seneviratne turns to the same notes for industry-wide performance on fee income and net interest income. At 33%, fee income as a share of net income at NDB is higher than that of peer banks. But, in absolute terms, it can be better still, he contends.

Much of Seneviratne’s quarter-century-long banking experience has been at HSBC, where he headed risk management at its Sri Lanka, Bangladesh and Thailand offices. He returned to Sri Lanka for appointment as chief executive of PABC, a small but fast growing commercial bank in 2014. Unlike PABC, NDB is a storied financial institution established with state sponsorship. Government-controlled firms and pension funds still hold 33.5% of the voting stock.

Until NDB shed its development banking focus in 2005, there was little need for customer deposits as most loans were funded by credit lines from foreign governments and development lenders like the World Bank and ADB.

Sri Lanka rising up to middle-income rank made credit lines, subsidizing long-term loans to select industries, dearer. By acquiring a banking licence, NDB started the inevitable transition towards becoming a commercial bank. Seneviratne thinks a lingering attachment to development banking remains at NDB.

“Commercial banking has to make commercial sense,” he says of NDB’s need to nimbly respond to market changes. “We are not delivering results comparable with investments made in capital and the balance sheet size. We have to be accountable to our stakeholders and shareholders.”

In NDB’s determined push, it is also capitulating to the development banking heritage. Retail and consumer banking success demands processes, products, skills and a mindset different to those that are the focus of development bankers.

NDB’s development banking heritage has skewed its preference towards lending to businesses, even though it’s been run as a commercial bank for more than a decade. Large businesses are less risky. However, even after accounting for the fee income they generate, profitability of these relationships is often low.

“It’s not only about having the best risk system or the best controls, but seeing what the market is doing and adjusting to grow the business, while ensuring that controls are maintained.”

NDB Bank’s net non-performing loan ratio at 1.16% is one of the industry’s lowest, a reflection of its prudent lending and return-sapping conservatism. In the year to December 2016, NDB’s net interest income grew 13%, while net interest margin or NIM (the difference between income from loan interest and the cost of the deposits funding those loans) was 2.64%. While net interest margins have been narrowing across the industry, NDB’s margins are among the lowest.

Its new chief executive believes that improving margins is a key business challenge facing the bank. “Our NIM is declining. In 2016, it was below market average. We have too much low-yield lending because we have gone after assets ignoring margins, while relying too much on high-cost deposits.”

In banking, lending is an asset on the balance sheet. The fact that low-yield lending narrows margins isn’t a complex analysis, however Seneviratne’s experience uniquely positions him to gauge market risks. As PABC’s chief executive, he led a bank with a high-risk credit profile because of its sub-prime focus and succeeded in improving its credit quality by broad-basing the assets. PABC’s net interest margins are now some of the industry’s highest. In contrast, HSBC – where his career spans 15 years – is a process-driven global bank serving mostly super prime customers. He admits that re-pricing assets – or charging higher interest rates on existing lending – is a challenge—“You may need to replace them with other high-margin items.”

Given his exposure to both the sub-prime and super prime segments of the Sri Lankan market, he cautions, “Simply chasing high margins will only curtail growth.”

Capital attracts varying risk weights for different loan categories. For gold-backed loans, it’s zero up to 70%, 60% for housing loans and 100% for lending to companies that are not credit rated. “Going forward, we will measure customer level to make sure the minimum return on risk-adjusted capital (RORAC) is delivered.”

“This is the commercial banking mindset I’m pushing in a development banking institution.”

Some of NDB’s strengths are unrivaled. Its products are organised around a central structure, which makes funding and risk management efficient. The overhead of such a model – which is common among foreign banks but unavailable at local ones – is also lower. NDB Investment Bank – a fully owned unit – is a market leader in multiple capital market segments. However, dull market conditions have eroded the investment banking unit’s profitability in 2016.

Seneviratne expects changes afoot now to boost the net interest margin in three areas: One, by lowering foreign currency lending; second, by growing retail lending; and third, by growing the low-cost deposit base. Often, the challenge isn’t around planning – most strategies are well developed – it’s with execution. “To be fair, over the last few years, the bank’s concentration was shifted. We were working on a merger with DFCC, and that went on for a year before being abandoned in 2015.”

Reports suggest it also attempted to acquire another commercial bank, after the DFCC merger was abandoned, under NDB’s former Chief Executive Rajendra Theagarajah. These continued to distract the leadership team from its core banking. The advantage of scale is a critical success factor in the financial sector. However, that does not mean that a bank a tenth the size of the market leader can’t thrive. Usually, a smaller bank would succeed by focusing on leadership in niches. NDB is a mid-sized bank with a balance sheet about a third the size of the market leader and a 4.5% share of commercial banking assets. Twenty two percent of NDB’s lending is in foreign currency (comprising short to medium-term loans, trade finance and overdrafts), a high percentage for a local bank.

Also, like most commercial banks, NDB has focused on growing its retail and small business loan books. “But, is it happening at the pace we want?” asks Seneviratne. “I’m addressing this by changing mindsets and getting the team to work as a cohesive unit.”

NDB Bank had developed a suite of products focused on retail banking including mortgage and personal loans, credit cards, and banking services for the rich, in addition to small business-focused ones.

Seneviratne was most surprised by the well-thought-out products covering consumers, small businesses and wealth management the bank had processed. He surmises that the priority is to tweak these products to suit opportunity. When interest rates are rising, he says, continuing to offer fixed-rate mortgage and consumer loans won’t win business because long-term borrowers wishing to benefit from future rate declines will seek floating rate loans.

Mortgage loans are just one area where NDB has been caught flat-footed recently. “If we strengthen execution, we have won half the battle. Then, we will be at a position where the bank is delivering on potential; right now, we are performing below our potential.” Commercial banks NDB and DFCC had their origins as government-sponsored development banks. They were later privatised, but continued to offer long-term loans funding business expansion. Their need for customer deposits emerged when foreign funding for lending dried up as Sri Lanka became more affluent. Deposits had to replace foreign funding lines, and for this they needed a larger branch network, which they didn’t possess.

The development banking heritage wasn’t abandoned as they continued to lend for business expansion, now in competition with more commercial banks. A maturing capital market broadened opportunities for growth capital to which commercial banks responded with greater focus on retail and small business lending, both of which tend to be more profitable than lending to big corporations. DFCC and NDB were initially slow to build the products, capacity and branch network necessary to win more retail business.

In NDB’s determined push, it is also capitulating to the development-banking heritage. Retail and consumer banking success demands processes, products, skills and a mindset different to those that are the focus of development bankers.

Low-cost deposits in current and savings accounts – which at NDB are lower than the industry average – boost net interest margins. Only 23% of NDB’s deposits are in current or savings accounts; the rest are all higher interest-bearing fixed deposits.

NDB’s advance-to-deposit ratio has improved to 108% from 200% levels when the bank was mostly funded by credit lines, but is still some way off from the industry’s 90%. Bankers will prefer to fund most loans with deposits, but NDB is funding a greater share than the market with debt and shareholders’ money.

“For this transformation, we need a liability-focused approach that has to come from the branches,” is Seneviratne’s view. Nearly half of NDB’s 105 branches were added to the network in the last five years, and 35 in the last three. New branches take time to turn a profit and many new ones are located in the former war-torn North and Eastern areas of the island. The strong correlation between the high share of low-cost current and savings deposits (CASA) and a large branch network has buttressed NDB’s network expansion.

“While we have core development banking strengths, the opportunity is on the liability side. Without lending, we cannot get a return.”

Lending is expected to grow disproportionately in credit cards – where the portfolio now tops Rs1 billion – mortgage and personal loans, and small and medium business loans because investments have already been made and resources are already available within the bank, according to the chief executive.

“It’s not only about having the best risk system or best controls, but seeing what the market is doing and adjusting to grow the business, while ensuring that controls are maintained.”
– Seneviratne

That NDB’s risk apatite is now higher isn’t something that’s lost to industry watchers. A rating agency Fitch, in an update published in June 2016, states, “The bank is likely to face difficulty sustaining a capital buffer in line with higher-rated peers due to its higher risk appetite and operating environment-related risks.”

orces shaping the financial sector – like global competition for capital, evolving regulations and disruptive technology – make banks increasingly complex organisations to manage. It’s possible for a company to emerge through a stage with a complete suite of products or an innovative business model, but this by itself won’t guarantee enduring success. Strategy is really about trying to work out in a sensible way how to get from one stage to the next. With each stage, a new set of problems has to be negotiated before a company is able to move beyond it.

Dimantha Seneviratne estimates that it will take one and a half to two years to shift the bank to the new stage. However, he approaches it with a sense of urgency.

A palpable urgency permeates due to the uninterrupted balance sheet need. “By the second half, we need the capital. We are now working on reviewing the set strategic plan in 2014.”

Seneviratne is leading NDB’s team to revise the 2014 set strategy focusing on growth to reach the targeted ROE. “With that, there is going to be a clear vision of where we want to be. We have to approach potential investors with that strategy in place.”

Basel III capital requirements kicking in by mid-year 2017 will categorise banks based on balance sheet size. NDB’s planned growth will likely shift it to the Rs500 billion category from the Rs300 billion category that it now falls within. Adequate capital will free the bank to grow lending in areas requiring greater risk-adjusted capital, where net interest margins are higher, if it chooses to do so.

Seneviratne – at just seven weeks into his role – needs to deliver a strategy that convinces potential equity investors that the bank is capable of lifting its returns from below-industry levels. “We have to strategise for industry-level ROE and make them believe that our strategies can deliver that.” The more convincing Seneviratne is about NDB’s ability to deliver future market equaling returns, the higher the valuation at which new capital can be raised.

NDB Group’s return on equity at 9.2% in the year to December 2016 is roughly half that of the industry’s best performers, and far lower than the average. At bank level, ROE was 13.3% for the same period.

In June 2016, Fitch downgraded NDB’s long-term rating by one notch to ‘A+’, a reflection of “the decline in its capitalisation, alongside continued strong loan growth and weaker profitability”. Fitch’s expectation that the bank’s higher risk appetite could dilute the benefit of a capital infusion has been incorporated in the rating action, the agency added.

Strategy execution these days depends on using narratives, both to explain a proposed course of action and recruit support for it. “I don’t think it’s anything to do with the team; we have done well in the past, which means the ability is there. Basically, the top needs to drive that.”

Seneviratne’s strategy for the bank is not an extrapolation of the status quo. He is changing the approach at the core to be more commercial minded. He notices that the “culture has taken some time to shift”, a reference to the last vestiges of the development banking approach to the business.

A virtue for new leaders confronted with the challenge of altering a mindset is to approach it with a sense of urgency and decisiveness, a style NDB’s new chief executive is adopting. But he departs from application of superior force to tact and inclusion. Brute force can backfire in the most unpredictable ways.


Quick Bio

Dimantha Seneviratne’s commercial banking career spans a quarter century. He processed a decade’s financial sector experience at Sampath Bank, Overseas Trust Bank and Saudi British Bank prior to joining HSBC’s Sri Lankan branch in 2000.

His career highlights since…

January 2017
Chief Executive, NDB Bank

March 2014 to December 2016
Chief Executive & Director, PABC

October 2011 to February 2014
Chief Risk Officer, HSBC Thailand

July to November 2010
Chief Risk Officer, HSBC Bangladesh

February 2005 to September 2011
Chief Risk Officer, HSBC Sri Lanka & Maldives

February 2000 to March 2005
Managerial positions in corporate banking and risk, HSBC Sri Lanka