Bank of Ceylon, which commands a peerless position as Sri Lanka’s largest bank, saw its deposit base expand 15% from a year ago to Rs2.3 trillion in the first nine months of Covid-hit 2020 despite of low interest prevailing in the market. Its loan book grew by 25% despite a debt moratorium imposed by the Central Bank and private sector credit inching just 2% from January to September with most banks reluctant to lend during a recession. The official forecast is that the economy is expected to have contracted by around 3.9% in 2020. For R M N Jeewantha, Deputy General Manager (International, Treasury & Investment) of Bank of Ceylon, 2021 will be a year of consolidation.
Bank of Ceylon is well-positioned to generate considerable foreign currency inflows. With its reputation with global banks intact despite the sovereign rating downgrade, Jeewantha says the bank will see growth in remittances and foreign investments. The bank is renewing its focus on the export sector and will launch a venture capital fund to boost the country’s startup ecosystem.
What is the Outlook for 2021 in an investment context in a post-Covid, low interest rate environment?
2020 was a dismal year for the global economy. Sri Lanka’s economy contracted by 1.7% in the first quarter, 16.3% in the second and bounced back in the third quarter. The Central Bank estimated a 3.9% decline for the full year. The pandemic devastated economies worldwide. All countries reported economic contractions, but Sri Lanka’s economy did relatively better than most countries contracting just 3.9%.
Exports fell by 17%, but imports declined more steeply 20%, and this was a relief. Earnings from tourism and FDIs were disappointingly low, but this was an expected outcome of the global pandemic. Thankfully, remittances performed above expectations. In 2019, workers’ remittances amounted to $6.7 billion which grew to $7.1 billion in 2020, a 6% increase which very encouraging.
In 2021, tourists are returning to the island after the government opened the airport. Businesses are rebounding after benefitting from debt moratoriums in 2020 and the prevailing low interest rates regime. The Central Bank is taking measures to maintain a stable exchange rate. All these together place the country on the path to economic recovery. We took all the pain in 2020, and now we are on the cusp of an economic recovery. FDIs and remittances growth will be a priority this year. I believe things are looking up, especially with the vaccination program going on, and there is every reason to be optimistic about growth. In 2019, lending rates were around 12%.
Since the pandemic hit, the government has brought rates down to single-digit levels with the average weighted prime lending rate at 5.76% in January 2021. The Central Bank cut policy rates by 2.5% during the year, significantly bringing down market lending rates. It also reduced the statutory reserve ratio of the banking sector by 3%, and this created excess market liquidity worth Rs150 billion. Now businesses can borrow at a lower interest rate which is a huge benefit. I believe this low interest rate regime will prevail for at least two years.
The Central Bank’s intension is clear. In its Road Map 2021, the Central Bank expects credit to the private sector will expand by around 14% during the year so interest rates will have to remain relatively range-bound at these low levels. Almost all banks in Sri Lanka have reduced their lending rates. While it is true that depositor returns will fall, bank deposits remain a safe investment, and those looking for higher yields can invest in listed equities. Deposits are popular because most people are risk-averse.
Trust remains a premium in any market and as the country’s largest and most profitable bank, Bank of Ceylon commands trust because we guarantee the safety of people’s hard-earned monies. This is why our deposit base increased by 15% year-onyear during the first nine-months of 2020, despite falling interest rates.
What investment opportunities is Bank of Ceylon creating in this challenging period?
Not everyone knows how to manage their assets effectively, or do not have the resources to analyse markets and discover investment opportunities. Thus, we introduced diversified portfolio management a few years ago, investing in a mix of fixed income instruments, equities and other high yielding instruments on behalf of our clients. What is unique about our portfolio management strategy is that we will invest various asset classes such as fixed deposits of other financial institutions to ensure optimal returns for our clients.
We have the most sophisticated Treasury operation in the country with a 50% share of the market and our dealers are extensively trained in BOC (UK) Ltd, which is a fully owned subsidiary of Bank of Ceylon and BOC Chennai Branch, and this expertise feeds our portfolio management function. The portfolio management unit averaged 10-15% growth in fund size annually since 2017, but in 2020 the fund grew by 20% to Rs1.6 billion in assets under management. This is a testament to the level of trust investors have in the bank. Even with low interest rates, people continue to place deposits with us.
Institutional investors continue to place their trust in Bank of Ceylon too. In June 2020 we raised Rs5 billion to bolster the bank’s capital via a debt instrument called Additional Tier One, or AT1, and again in December, we raised another Rs10 billion the same way. Both AT1 issues oversubscribed because investors trust the bank and believe in its potential for growth.
The Asian Infrastructure Investment Bank (AIIB) has allocated a $180 million credit line to Sri Lankan banks to on-lend to businesses recovering from the pandemic. Of this, Bank of Ceylon has secured $90 million owing to its size and impact it can have in the business sector.
For instance, Bank of Ceylon disbursed Rs40 billion out of Rs150 billion Saubagya concessionary loan scheme for struggling businesses during the height of Covid-19, this was by far the largest contribution by any single bank. Besides this, we launched our own concessionary credit scheme for SMEs namely Divi Udana and disbursed more than Rs10 billion within a space of less than five months since it was introduced. While banking sector credit growth contracted in 2020, Bank of Ceylon’s lending book expanded by 25% demonstrating our commitment to uplifting the economy.
How is Bank of Ceylon contributing to improving foreign reserves?
I believe we are in a good position to influence the economic recovery of this country. As the number one bank in the country, we have the highest market share of inward remittances in the country, which is a more than 40% share amounting to nearly $3 billion. In 2021, we expect a significant increase in remittances, which will bolster the bank’s foreign currency holdings. While the bank remains focused on profits, we also have a national duty as the largest bank in the country, so we release excess foreign currency we hold to stabilize the exchange rate whenever required. The currency is relatively stable now mainly because of the import restrictions, but we contribute whenever needed to sharp volatility which can have a disruptive impact on the economy.
We have the highest market share of inward Remittances in the country at more than 40%
Bank of Ceylon provides incentives, convenience and security to Sri Lankans living or working abroad to remit funds to the country. The bank has the reach. We have four branches: two in Maldives, Male and Hulhumale one in India – Chennai and Seychelles. We have a fully-owned subsidiary in the UK. We cover the entire Eurozone from our office in London which was set up way back in 1949. The bank has 25 representative offices in 10 countries to facilitate fund transfers through Bank of Ceylon.
We developed a special mobile application for Sri Lankans working in South Korea for this same purpose. We have special agreements with over a hundred exchange houses across the Middle East where most of our workers are in, and other parts of the world. We also have a large network of correspondent bank numbering more than 600 across the world so anyone working anywhere in the world can send money to Bank of Ceylon. Their families can access the funds from any one of our excess of two thousand touchpoints across the country including 646 branches.
During the lockdown period, when most banks were not fully operational, Bank of Ceylon launched a service to deliver remittances to families and relatives right to their doorsteps and also pioneered banking on wheels, a mobile banking concept. We also provide an additional Rs2 on the conversion rate, proposed by the government budget, to encourage expat Sri Lankans to transfer their funds to the bank, long before any other bank.
Bank of Ceylon provides the highest interest rates on balances in Special Deposit Accounts (SDA). The Bank processes a state of the art foreign remittance system called Smart Remit and whoever sends money from abroad to the bank, we will credit funds immediately, which is why people continue to remit their earnings to the country through us, and by doing so, they are contributing to the economic growth of this country.
We recently started a new unit called “BOC Export Circle” to provide financial and non financial services such as funding guidance, advises etc., for any business in exports from startups to large corporations. Parallelly, the bank will soon launch a venture capital fund which will boost the startup ecosystem and foster the entrepreneurial spirit of young Sri Lankans. This is a project close to the hearts of the Chairman of Bank of Ceylon, Kanchana Ratwatte and General Manager, D. P. K. Gunasekera.
For foreign currency remitters who wish to maintain their earnings in foreign currency, we provide unmatched interest rates on those accounts. No other bank in Sri Lanka can match our rates, and we also provide the best conversion rates in the market if they need rupees. We have the largest foreign currency reserves of all banks, we dominate currency markets and have the largest dealing room in the country, which allows us to offer the best interest and conversion rates to our customers.
Foreign investors mostly deal with Bank of Ceylon because of our international presence and an extensive network of correspondent banks. I must say here that despite the sovereign rating downgrade none of our correspondent banks curtailed our credit lines. In fact, we have deferred credit that was already agreed upon because foreign currency inflows into Bank of Ceylon have improved despite the global pandemic. Sri Lanka has never defaulted on its ISB commitments no matter how difficult the situation, and investors and correspondent banks are confident about Bank of Ceylon’s strength and the size of our balance sheet.
To facilitate foreign investments, we open special-vehicle accounts called Inward Investment Account (IIA) with minimum documentation and red tape, hassle-free. Repatriation of funds is likewise easy. Most investors have and continue to channel their investments via Bank of Ceylon, but we have now further simplified processes under the newly introduced Inward Investments SWAPs scheme which is to hedge the foreign exchange risk pertaining to foreign currency inflows that are channelled through the IIAs, bank has already put in the necessary processes in place.