SEYLAN’S RAMESH JAYASEKARA ON LIQUIDITY, COST OF CAPITAL AND TREND DEFYING PROFIT GROWTH

Banks have been at the heart of economic activity. Sri Lanka’s economic crisis however has undermined the financial intermediation role of banks by the triple challenges of liquidity constraints as a result of sovereign debt restructuring, capital becoming costly and rising credit risk in their lending portfolios.

It’s in this backdrop that Seylan Bank’s Ramesh Jayasekara takes over the office of Chief Executive. Jayasekara has been with the bank, which has the fifth largest asset base among private sector Banks in Sri Lanka, for over 12 years. Seylan Bank’s clients are largely small and medium sized businesses, normally a profitable segment for financial institutions, but ones that have been impacted by the economic crisis, falling consumer demand and high interest rates

Jayasekara says the bank will swim upstream growing profitability by focusing on recoveries, deepening digital service delivery and improving back-end processes. Since capital has become costly, he suggests higher earnings must fund balance sheet growth over the next couple of years. Excerpts of an interview ….

This is a challenging time to take over leadership of a commercial bank in Sri Lanka. How are you approaching it?

The transition to the role commenced in September 2022 when I was appointed Deputy CEO, and was informed that I would take over in May 2023.

The crucial thing is to remain positive; like the analogy of a ‘glass that is half full’. Of course, it’s easier to take a few steps back because it’s challenging, shrink the loan book and not do anything. Instead, if we look for opportunities, we might outgrow the competition during this time.

It goes without saying that we have to tread carefully. Accelerating digital customer penetration numbers and process improvement through digital transformation are areas for significant cost reduction, greater efficiency, and will also help in rapidly expanding our reach. In these areas, we are trying to do in one year, what we would have normally taken 2-3 years.

Besides this, the focus on recoveries will have a significant P&L impact. We expanded our recoveries structure, essentially doubling our team size. We expect Recoveries to play a key role during 2023.

In the short term, besides these, we are also focusing on our human capital. There is brain drain across the country and to counter this we need to be much closer to employees. The traditional approach here is no longer relevant. We need a far closer understanding to connect, develop and retain talent. These strategies will optimise opportunities for the bank, in the short term.

How about strategies for the medium to long term, you have to balance the economic crisis impacts versus long term growth. How are you approaching this?

Accelerated loan recoveries are a short-term objective, perhaps for the next two years. For sustained profit growth, we need to grow our loan book. There are several sectors we’ve identified, including healthcare, pharmaceuticals, education and even agriculture where we see opportunities for growing credit.

We were bullish about the export sector, but now have turned somewhat cautious, since the rate of orders has slowed, for selected sectors. For us it’s a matter of selecting potential areas of growth, which we will support to revive the economy.

You highlighted several opportunities, including digital initiatives to connect better with customers. What do you think are Seylan’s strengths?

We have a relatively large SME loan book compared to other banks. Our SME loan book has been our strength, and as a bank, we feel quite connected to small businesses. Currently, we are trying to support and nurse SME customers through these difficult times. At the same time, we are expanding our corporate and retail segments.

In retail lending, we’ve defined a high-end salary segment to lend to. This segment has weathered the current economic stresses better. When we analyse this portfolio, it becomes obvious that this segment is fairly robust and can repay as opposed to lower-income segments. Similarly, our corporate lending too will be expanded.

However, we will always be an SMEs focused bank; that’s our niche. But for us to grow with SMEs, we need the economy to grow; the two are correlated. We are anticipating GDP growth from the fourth quarter of 2023. So, Seylan will be well positioned to take advantage of this growth.

You will be monitoring how much capital you are deploying to support your lending. Lending to some areas requires more capital than others. Capital is also expensive right now. Can you tell us how capital relates to the strategy you are outlining? 

One of our priorities has been to maintain the bank in a fairly liquid and well capitalized state. Our liquid asset ratio is currently 32%, which is 12% above the regulatory requirement. On capital, too we sought a strong position. After our recent debenture issue, total capital will reach 15% of risk weighted assets by June, 2.5% above the regulatory requirement. Hence, the Bank has adequate buffers in terms of liquidity and capital for future growth.

We aren’t looking at aggressive loan growth presently. Demand for credit is fairly low. We just completed our strategic plan 2023/24, and we are targeting ambitious profit growth even this year. It’s easy to be complacent because 2022 and 2023 have been difficult years and suggest we repeat the bottom-line performance of the past. However, we think there is an opportunity, for focused strategies to expand the banks’ profits.

How will the restructuring of Sri Lanka’s external debt and domestic debt impact your capital and liquidity?

On ISBs (international sovereign bonds), we booked a provision of 35% in 2022 and increased it to approximately 40% this year. The 40% provision might be far above the anticipated haircut.

On the rupee debt side, the bank is well positioned considering the recent announcement that Bank held Treasury Bills and Bonds would be excluded from domestic debt restructure. So, we don’t expect an adverse impact on local debt based on recent announcements.

You mentioned several areas of focus for growth in the future. One of those is becoming leaner and efficient. What about the cost of funds?

We are going down the path of focused digital transformation because those are lasting, sustainable cost savings. On the cost of funds side, a high CASA (current account/ savings account) ratio is a huge advantage because funds become cheap. However, at present due to high interest rates the portion of CASA is declining across the industry.

Growing CASA is tough in today’s climate due to lower disposable income as a result of high inflation and taxation. But there are customer segments that, if we target, we can attract and grow to boost CASA.

Banks in Sri Lanka have been pushing to grow their SME portfolios, because the segment is profitable for fee and fund-based growth. Seylan Bank has always had high SME exposure in its portfolio. What is your long-term view and strategy about lending to SMEs?

If you take the view that GDP will grow at 4% or more annually over the next few years, then Seylan’s portfolio mix is well positioned. Therefore, if we take a long-term view that the country will rebound, then the Bank is fairly well set to take advantage of this growth.

A lot of your time as CEO must be occupied with the lending portfolio, your liquidity and also the capital position. Is that a fair analysis? What of these occupies the most time?

Liquidity would be a key focus area because of the impending DDO (domestic debt optimization).

Capital is the basis on which we can grow. Also new capital is costly in this economic environment. So, for me, on a short-term basis, I would say liquidity is a main focus. Beyond liquidity its capital. Over the last couple of months, the bank has been buffering up liquidity and capital well beyond regulatory requirements.

If the economy is doing well, you will see portfolio quality improving. If the economy is in poor shape, the loan portfolio quality will come under pressure across industries. So, managing portfolio quality is another area of focus.

Once the domestic and foreign debt restructuring is finalized, I expect interest rates will fall and that will drive credit appetite. I think the next three to four months are important; if everything goes well, we should expect to see economic growth from Q4 2023 onwards.

You’ve been with Seylan Bank for a decade and a half. It’s a significant tenure. You will know the bank’s culture well and now you’re in a position to influence its culture. What is Seylan culture like and how would you like to see it transformed?

I’ve worked in three other organizations, and I feel the culture here is extremely friendly, warm, and caring. Overall the culture at Seylan is our strength and that’s something I don’t want to change. Our average length of service is 15 years. So, a typical team member spends half their working life at Seylan. It’s credit to the people who started this culture and how, over the last 35 years, it’s been nurtured.

However, I would also like to see us living the promise of being the ‘bank with a heart’ where the heart depicts courage, bravery in the face of challenges and tough times. I want the team to inspire and mentor our customers to unlock their true potential, and be able to relate stories of achievements beyond these challenging times.

If you look at your portfolio of products, what do you think are your strengths and what do you want to change?

All banks have a similar range of products. But I think it’s understanding the customer’s needs and satisfying them that has to be central.

For me, the end game is you aim and shoot at something you want to hit. I prefer the ‘shotgun approach’ to a ‘machine gun approach’, by identifying a target segment of customers and clearly going after those customers. However, we sometimes get caught up in just doing everything, and lose focus on the target itself. Achieving focused targets is something I want to drive at the Bank

We are a very small economy, and our economy needs to grow at 4 to 5 percent annually for people and businesses to flourish. I’m optimistic about the future. I think Sri Lanka can reclaim its place in the world in the next few years.