Upbeat and ready to capitalise on the opportunities that lie ahead is the country’s largest specialised savings bank, the National Savings Bank (NSB). Prudent management, combined with an ambitious growth plan, has seen the bank’s profitability and assets record healthy growth, with its profit after tax (PAT) moving up from Rs6.8 billion at end-2014 to an impressive Rs9.5 billion at end-2016. The bank also recorded Rs1 trillion in assets, up from Rs779 billion at end-2014, and is the first bank to achieve this within just 45 years.
Bullish about the future, NSB Chairman Aswin De Silva, a Chartered Accountant and senior banker, talks to Echelon about the big wins and the bank’s strategy for an exciting few years ahead..
Although the much-talked-of global economic crisis did not impact Sri Lanka as it did many parts of the world, the last two years have been challenging for us as a nation, with the economy slowing down notably. What are your views on this and how do you think the financial sector can stay competitive in the face of such challenges?
De Silva: Let me restrict myself to a few specifics. In the last year, as a country, we have been challenged primarily by adverse weather patterns. Many areas have been affected by severe drought or heavy rainfall, and flooding caused massive destruction in other parts of the country, impeding our progress as a nation. When natural disaster occurs, its impact can be detrimental to any economy. For Sri Lanka, from the GDP point of view, the impact can be as high as 1 percent, given the fact that we are an agriculture-dependent nation.
Another challenge has been our worker remittances flowing into the country. In 2017, we experienced 0.5% to 0.7% lower volumes compared to the previous year. Traditionally, these remittances account for 10% of the GDP. These lower remittances could be mainly due to the instability we are experiencing in a few Middle Eastern countries. If this trend continues, the annual impact could be around $600 million of lower remittances. Oil prices averaged around $55 per barrel, and expected to increase to around $60 per barrel this year. Thus exerting somewhat pressure on our current account. On the commodities front, tea experienced difficulties in the first half of 2017, having done well since of late with prices picking up.
That said, there have been several wins as well. Sri Lanka’s GDP grew from 4.5% to 4.7% last year, and GSP+ has been a huge win for us. Several of our exports to the EU, including garments and a few other commidities, were granted concessions in the form of entry-level duties. FDI has performed well and is likely to be somewhere in the range of Rs1.7 billion. Employment numbers have seen an upward trend, driven by investments.
[pullquote]Prudent management, combined with the execution of ambitious growth plans, has seen the bank’s profitability and assets record healthy growth[/pullquote]
We’ve seen significant growth in the real estate sector, and in the short term, this momentum will continue. This sector is expected to record the fastest growth over the short term. This is already evident with the increasing number of projects, both in the condominium and commercial spaces in the city and its suburbs. Many of these condominium projects are at premium pricing, yet the apartments are getting snatched up. We just signed an FTA with the Singapore government, and are looking at bilateral agreements with India and some other Asian nations, which will hopefully further boost FDI. In addition, several infrastructure projects have also commenced, with benefits expected to accrue over the next few years.
Looking at it from a financial perspective, I think one of the greatest wins has been the interest rate management. Despite difficult conditions in the last quarter of 2017, interest rates have been well managed, either remaining stable or coming down. This has made it possible for financial institutions to pass on the benefit to its customers. Currency fluctuations and volatility of currency markets do impact an economy. However, with the financial sector prudently managing foreign exchange risks, the Sri Lankan rupee, which is pegged against the US dollar, has seen a 2018 devaluation of 2.5-2.7%, which is good. Some of the recent action plans put in place by the Central Bank, such as the likely introduction of the Liability Management Act and the new Foreign Exchange Act, will pave the way for investment and better management of our currency, positively impacting our economy.
Sri Lanka is likely to be a business hub if current large-scale development projects like the port city, for example, stay on track. Do you think that NSB, as a state-owned bank, would be geared to leverage this potential and grow its business?
De Silva: Indeed, with these projects kicking off, the country’s infrastructure development will take center stage. So, take NSB for instance; we are one of the biggest lenders to the government, be it in housing, roads, water or power generation. It will open up more opportunities for us to partner the State in its development activity. We may have been challenged in raising funds, but we have now put in place some impressive action plans to meet demand for growth.
From a retail point of view, we are the biggest lender in the housing market in Sri Lanka, with the largest market share. This gives us an opportunity to grow our balance sheet prudently, while offering very good rates to our customers, probably the best rates in the industry. We believe that, if you can mobilise labour and wealth creation, then comes the opportunity for increased savings, which is channeled again towards investment that will help take our country forward.
Also, the Port City development work is done against challenges with regard to multifaceted participation of investors, thus creating opportunities to boost direct and indirect employment, and wealth creation.
The financial sector is competitive. What is NSB’s business strategy?
De Silva: Competition will always bring pressure margins down. In developed countries, the net interest rate differential is lower than in Sri Lanka. So, if we bring this down, our people will benefit as a whole. This means, we need to compensate it with volume growth.
To grow volume, we need to ensure the economy stays robust and dynamic. We need to think big and outside the paradigm. Well-managed diversification is absolutely necessary. So, prudent management of our assets and volume has been NSB’s strategy for growth. In addition, our savings mobilization needs to maintain a momentum. Another aspect is productivity enhancement of our existing resources. We also need to diversify our business, taking into consideration NSB’s strengths.
[pullquote]“…our biggest win is when a majority of our clients say NSB is their preferred bank…”[/pullquote]
PAT and assets have seen significant growth over the last two years. What’s the strategy behind this and what does it look like in 2017?
De Silva: At end-2014, our total assets was about Rs780 billion, and today, it’s over Rs1 trillion. Growth over the last three years has been terrific. It’s been extremely satisfactory, to say the least. Moreover, our non-performing assets ratio is just 1.3 percent, which is the lowest the bank has ever seen in its 46-year history. I believe this is also the lowest in the banking industry. This impressive NPL ratio has been possible to achieve due to the prudent management of our growth in credit facilities.
Most financial institutions can grow its asset base, but that’s not the biggest achievement. We don’t want to go in that route because we feel it’s an injustice to the borrower, and we are doing injustice to our depositors. It’s their money that we are lending, and we wont be in a position to pay the returns. In such a situation, the stability of the bank is also undermined. We want to grow our balance sheet and asset base prudently so that sustainability could be ensured.
What about PAT?
De Silva: Unaudited financials say we have recorded highest-ever profits in 2017. However, this will be revealed only at the end of the first quarter of this year. If we look back at the financial performance of the bank in the years ending 2015, 2016 and 2017, our profitability in these three years has exceeded the previous five years’. I am quite confident that this growth momentum will continue in to 2018 as well.
What has been the major contributor to the bank’s growth?
De Silva: Traditional business together with multifaceted improvements in non-core areas. We took several steps of action to fortify the traditional business. We have also entered the digital world. While many talk of digitalization, we decided to enter the digital landscape with a meaningful proposition. It is easy to provide customer convenience through technology, like launching various apps. But, to provide that real digital convenience, we need to launch apps and go beyond. For me, our digital offering has to be meaningful to our customers. We need to understand what our customers want. Yes, they do want convenience, and other benefits. So, if we can bring down costs and still provide a better service, I think that’s imperative. I must say that we do a lot of research before we introduce anything new from a technology perspective.
We don’t look at things from a narrow lens; we look at it from a broader perspective and a flexibility point of view. One classic example is the I-saver product we introduced in partnership with Sri Lanka Telecom and Mobitel, wherein approximately 15,000 direct or indirect franchisees can help us grow savings. We have set ourselves an ambitious target of Rs10 million in incremental savings per day. We won’t relax until we reach this target, and once we do so, we will take it to Rs20 million a day. This will not only assist the bank in its growth, but also the country. From a treasury point of view, increased trading volumes and resultant profitability have been most encouraging.
Do you think Sri Lanka has a “saving” culture, given the fact that we have more debt-driven instruments, like credit cards?
De Silva: As a country,our savings rate needs improvement. We are behind some countries in Asia. Our domestic savings rate is around 24% . That is the vacuum we want to fill as a savings bank. We have a financial and social responsibility to do that. That doesn’t mean we will not diversify; we have and we will continue to do so. We have an excellent tie up with Sri Lanka Postal Network, resulting in a broadbasing reach across the country. We want to be more bullish in the housing market, in terms of turn around time for credit disbursement, and improving the documentation processes. You will see a lot of new things happening under the NSB flag soon. We are introducing some model branches and we want to focus on the reduction of the carbon footprint of our country, as well.
What’s the next two years looking like for the bank?
De Silva: The next two to three years is going to be very exciting for us. We are investing in a new core banking solution, which will not only help customers, but also help our 4,400 plus employees to operate more effectively and efficiently. The process is ongoing at the moment.
In terms of digital, we plan to introduce several new mechanisms that will help increase efficiency and grow the business. In China, for example, web chat rooms are quite popular, but today, they have turned into mini banks. They have identified customers from their behavioural patterns on social media, a facility that meets that lifestyle. In Kenya, you can buy government bonds through your smart phones.
So how can we apply those strategies here? How do we facilitate a person in Teldeniya, Pasikudha, Puttalam or Jaffna to invest in government securities if he is interested? We all have access to smart phones today, so what’s stopping us? Let us take ‘baby steps’, but most importantly move forward.
We will continue to strengthen our core business, whether it’s housing, or infrastructure facilities, or savings. We already have several savings products. Our children’s savings account, ‘Hapan’ is quite popular; we re-launched Sthree, a savings product for women. We are in the process of launching two other products shortly. We also have concessionary interest rates for our senior citizens.
NSB is not a commercial bank; it’s a licensed specialised bank, and the first to reach Rs1 trillion in assets as a specialised bank. Our goal is to make NSB the preferred bank for the people of our nation.
The soundness of a financial institution is measured by its ability to meet the CBSL-stipulated CAR. With Basel 3 also kicking in, where does NSB rate on this requirement?
De Silva: Indeed, financial institutions need to comply with BASEL III as per CBSL guidelines. This requires prudent management of capital. To maintain our credit approval, we also can’t be lending at a very high interest rate to be only commercially viable. We need to have a variety of products and borrowers, as profitability is important. But profitability at the expense of capital being eroded is obviously non-negotiable for us. The banking business is competitive, and for smaller banks, meeting CBSL -stipulated capital requirements could be challenging. It could constrain expansion and growth. From a depositor’s perspective, they would want to invest in banks on security and return. So this is a challenge for the banking industry, which can possibly be addressed through consolidation and mergers.
NSB, however, has met all BASEL III requirements.
[pullquote]At end-2014, our total assets were about Rs780 billion, and today, it’s over Rs1 trillion[/pullquote]
The bank has received many accolades over the years. Does it matter?
De Silva: Yes, we have won quite a few of them in the recent past. We have been AAA rated for our long-term debt for the 16th consecutive year. We were also recognised and awarded as the safest bank by Global Finance, which is the Oscar’s of the banking industry. However, for us, our biggest win is when clients say NSB is their preferred bank, and come to us for all their financial requirements. Our ability to delight them is the biggest reward we can get.
Banking is personal. It’s a service. So no matter how many accolades we may get, above all is the fundamentally strong pillars we have that make it count, and we want to make use of it to grow the bank.
Does being a state-owned bank have an impact on the bank’s growth?
De Silva: Indeed it does. But that does not mean that the bank should not have its strategy for growth. It also does not mean that growth is going to come only because it’s state owned. At NSB, we are ambitious, focused and determined to be a driver of change, leveraging every opportunity for growth.