Why banks must reconsider their business models
It has certainly been a challenging period for Sri Lanka and the banking sector. At a macro level, GDP growth and loan growth have been sluggish. Adverse weather conditions experienced for over four seasons, delays in settlement encountered in the construction sector, high interest rates that prevailed, as well as the overall stressed market conditions have led to higher sector-wide NPAs for our industry. Heavy taxation exacerbated by the introduction of the Debt Repayment Levy has increased the total effective tax to over 55%. The introduction of higher capital requirements under the BASEL III standard and significantly higher credit costs with the introduction of IFRS 9 have all played a part in negatively impacting banking sector profits.
Although the Central Bank has directed rate cuts in order to drive credit growth and the economy, we believe that there would be a lag effect due to the uncertainties prevalent with the two upcoming elections. In that context, I would say that the performance of large banks like HNB has helped showcase our resilience – both as an organisation and a sector – and while these conditions are not expected to ease in the near future, we remain confident in our fundamentals.
For example, in terms of performance, HNB’s asset book surpassed the landmark of Rs. 1 trillion in 2018, recording a CAGR (Compound Annual Growth Rate) of 16% over the past five years. We have continued to maintain a very strong CASA (Current Account and Savings Account) base which exceeded Rs. 266 billion as at end-June 2019.
Through our concerted efforts on operational efficiency, the bank was successful in improving its cost to income ratio from 50.3% in 2013 to 39.5% as at end-June 2019.
Today, HNB is one of the best capitalised banks in Sri Lanka, a position which was enhanced in 2017 by way of the largest rights issue in the country by any company. The most recent capital raising exercise by way of a Basel III compliant Tier II debenture of Rs. 10 billion that was significantly oversubscribed.
In the current context where profitability of the banking sector is being impacted negatively in multiple ways, it’s clear that there needs be a sector-wide focus on improving the bottom line. Considering that the margins are coming under further pressure with the rate cuts announced, the banks may have to relook at their business models in order to remain profitable. Implementing sustainable solutions to improve asset quality, effectively recover overdues, and thereby manage impairment costs is of paramount importance. Further in this difficult backdrop, the banks need to focus on realising cost efficiencies. Given that the internal capital generation is being hindered constraining the capacity to grow, there would also be opportunities for industry consolidation.
Having realised our broader goals and targets in 2017, we formulated an ambitious Vision 2020 to lay the foundation for a future-ready bank. This transformational journey that we have embarked upon in 2018 is the largest ever project in the history of HNB, and encompasses sustainable growth, customer experience, technology enablement, digitalisation, and people transformation.
Over the past year, we have progressed steadily in our journey, and have made great strides in many fronts. In May 2019, with the launch of HNB SOLO – our proprietary payment app – HNB was able to advance the development of the entire domestic cashless payments ecosystem. SOLO provides users with complete freedom and flexibility in digital payments. This represents another major step forward in our ongoing digitalisation efforts and we plan to add further value to the app through more features and functionality moving forward.
The bank has also progressed well in terms of technology development, and is currently in the process of upgrading the core banking system as well as the loan origination system. Considering the importance of information security in the current context, HNB is also on the verge of launching a data loss prevention solution.
During the year, HNB launched a new business operating model creating separate verticals responsible for key areas. Consequently, sales and service and credit underwriting functions have been segregated, with the Chief Credit Officer being responsible for credit underwriting. The accountability and the specialisation created through this effort is expected to drive greater process efficiency as well as better credit quality.
With our staff being at the heart of our business, we believe in enhancing the overall employee experience and several initiatives are underway with regard to human capital. The team remains engaged and committed to drive the transformational change and are working on many more initiatives at present.
From a Sri Lankan perspective, there are many obstacles which we face in shifting to a 4.0 paradigm, but we can say with certainty that its disruptive potential is not overblown. Relative to our regional peers, Sri Lanka is still lagging behind drastically in terms of adoption of digital banking. While this places us at a natural disadvantage, it is also an opportunity to learn from the experiences of our regional peers. That knowledge combined with the very nature of new era of banking means that when the foundations for 4.0 are in place, it will only require a few strategic interventions in order to leapfrog the competition in development.
Banks that fail to take these dynamics into account run the risk of becoming redundant. In the near future, partnerships and collaborations with fintechs and the utilisation of AI, robotics, and advancements in blockchain technology will play a central role in our industry, and very quickly proliferate to impact every aspect of daily life. This will be similar to the disruptions called by smartphone technology, but on an even greater scale.
That being said, the focus on digital should not come at the expense of deviating from core banking tenets of customer service, operational efficiency, etc. HNB’s ultimate goal is to develop technology to drive best-in-class processes, digital channels, and digital solutions which offer unparalleled levels of service, convenience, and security of transactions that average Sri Lankan customers have hitherto not experienced.
Jonathan Alles is the
CEO/MD of HNB