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- Sampath Bank PLC Managing Director Aravinda Perera
Sampath Bank PLC Managing Director Aravinda Perera believes that the paucity of low cost deposits in the current high interest scenario is a major challenge for 2013. "Banks are increasingly compelled to raise high cost deposits to finance their rising credit demand and this would naturally push the lending rates up," he told The Island Financial Review.
The interest rate and exchange rate volatility in the market is another challenge for the banking industry as these will put additional pressure on banks to manage the associated risks prudently.
He also noted that lending to the agriculture was stipulated to be at a minimum of 10%, many years back. "Presently, our portfolio towards agriculture is little over 11%. However, we have noted that other sectors of the economy are growing faster and demand more loan facilities from the banks than for agriculture," he remarked.
Here, he is in conversation with The Island Financial Review:
Q: You trimmed your ownership in the LankaBangla Finance operation in Bangladesh from 30% to 9% during the past few years, Why was this done, given that it is still the biggest stockbroking operation in Bangladesh?
At the beginning, we had approximately 22% which is now down to about 9%.
What we have done is in fact to sell the additional shares that we got as scrip dividends. When we made this investment, the regulators stipulated that all dividends should be brought back to the country. Also, we sold these shares when the market was at its peak. The share price is now much lower which indicates that we have done the sale at the right time.
The subsidiary of LankaBangla Finance Ltd is still the biggest stock broker in operation in Bangladesh. With the sale proceeds, we have strengthened our balance sheet with substantial capital gains. These gains were necessary to offset the impact of rapid branch expansion drive we initiated in the last 3 years.
Q: When it comes to your fund based operation, what are the expected growth rates for 2013 and 2014 for deposits and Loans if the credit cap is taken out or eased by the Central Bank?
The expected growth for 2013 and 2014 are still being worked out. We believe that there will be a credit cap next year as well. The expected growth rates will be finalized once we are aware of what the credit ceiling is going to be for 2013.
If there is no credit cap, we plan to be aggressive in lending. With an exceptionally good NPL ratio we have a higher appetite for lending. When there is demand for lending, obviously we need to be aggressive in deposit taking as well. But with a view point to be involved in development of economy, specific attention will be given for manufacturing, services, exports and agriculture.
Q: Do you expect to grow your pawning book further (as at 31 Dec 2011 , pawning accounted for an approximate 1/4th of your loan book), if yes, how do you see your bank contributing to the national growth plan by been largely a working capital provider?
We expect the pawning book to grow at the same rate as other components of the loan book. We are aware that pawning is not only for consumption but also provides working capital requirements for the bottom of the pyramid borrowers, especially in the areas of agriculture and fisheries.
The bulk of our pawning customers comes from the lower income groups. We are aware that informal pawning activities happen at village level at extremely high interest rates. What we intend doing is to allow these customers to be serviced by us at much lower interest rates easing their debt service problems.
As a strategy, the bank not only provides working capital but we do have a strong Development Banking Division. The Development Banking Division of Sampath Bank during the last few years has concentrated strongly on renewable energy, health and education.
As a commercial bank, we agree that providing working capital to manufacturing and services sectors is the best way for us to contribute to nation building.
Q: You successfully completed a debt issue recently, however despite it being oversubscribed, what made the management not increase the size of the debt amount as initially announced?
The debentures were issued mainly to improve the Tier II capital of the bank. We are aware that the Tier II capital is little expensive than deposit taking. So, on one hand we need to increase our capital and on the other hand to maintain our cost low. Concluding the issue at Rs 1.5 bn was mainly to balance these two aspects.
With the successful completion of the debenture issue, we have a reasonable capital ratio. This allows us to lend more in the market. The success of the issue also indicated that Sampath debentures are heavily in demand. If the interest rates stay low, probably within a year’s time, we may raise more Tier II capital. At the same time, we have not given up attempting Tier II capital raising through Dollar denominated long term Tier II instruments.
Q: Where do you see interest rates heading in 2013 given the expanding budget deficit (on latest annualized numbers it is above the initially budgeted 6.2%)?
The interest rate trends will become more apparent when we see the Central Bank’s road map in early January 2013 and the new credit ceiling. How the budget is going to be bridged will be seen in early November. It is perhaps too early to speculate on interest rates at the moment.
Q: You have increased your bond trading and bond portfolio significantly in your latest published in 2Q 2012 interims, What is the thinking behind this?
Actually, our bond portfolio relates to Treasury Bonds only, which is very insignificant. A significant Treasury Bill portfolio is kept for liquidity purposes. What we have done is increasing our repo operations on Treasury Bill Portfolio.
Q: What is your market share in the credit card operation? What are Sampath’s Non Performing Loans in this segment?
We believe our market share of credit cards is about 12%. Sampath Bank’s NPLs in this segment is lower than our competitors. This is a highly competitive market segment and we are aggressively pursuing for a higher market share. However, we are very mindful of the possible high NPLs in this segment. Therefore, card approvals and follow up of NPLS have to be in line with the bank’s other credit operations.
Q: How do you see Sampath electronic mobile phone cash transfer system benefiting the bank? What is the expected fee contribution (as a percentage for your non- interest income in the medium term from this operation?
Mobile cash is a product which was brought to add value to current and savings accounts. It is true that there will be a contribution by way of fees but that will be negligible as compared to other non interest income in the medium term. What we expect from this product is to attract more savings and current accounts which helps to be the lowest cost deposits that we can generate. However, very high utilization of Mobile Cash would in the long term result in a significant contribution to our non-interest income.
We believe that Sampath has been the leader in banking innovations. This product is independent of mobile telecom operator and user friendly. This is one of many new products our customers can expect Sampath to introduce in future.
Q: You maintain your Foreign Currency Banking Unit ( FCBU) operation profits in FCBU itself, i.e. without converting it to local Rupees (LKR), What was the book gain reflected through this operation in your First Half of 2012 forex exchange gains?
We agree that FCBU profits are kept in foreign currency without converting to LKR. We presently have a substantial gain reflected due to this reason. This gain fluctuates depending on the movement in the exchange rate.
Q: From the 2012 budget the Government proposed Banks to increase their lending to 10% for agriculture related investments, what is the composition of agriculture related lending in Sampath’s books?
Lending to Agriculture was stipulated to be at a minimum of 10%, many years back. Presently, our portfolio towards agriculture is little over 11%. However, we have noted that other sectors of the economy are growing faster and demand more loan facilities from the banks than for agriculture. Lending to agriculture includes mainly paddy and other cash crops and also export oriented crops such as tea, rubber and coconuts. In fact fisheries and livelihood are also included in this sector.
Q: Despite maintaining a relatively higher provision cover ratio (PCR: of above 60%), we saw a gradual decline in Sampath’s provision cover ratio (i.e. Specific provisions / Non performing loans*100) over the past two quarters? What is you comfortable PCR? (note industry average is around 40 - 45%)
The bank decided to be very conservative and hence wanted to maintain a high provision cover. However with aggressive actions taken for recovery of NPLS, the provision cover naturally has to decline. Furthermore, we have managed to keep the new entrants to non-performing at a minimum level. In fact, we have one of the best non-performing ratios in the industry.
The level at which, the bank will be comfortable in provision cover depends on the individual bank’s strategy and for us, what we have at present is very comfortable.
With the introduction of IFRS, the concept of provisions will change completely. The banks who have provided adequately for non performing loans will find them in a better position than the others after introducing IFRS.
Q: You opened more that 100 bank branches during the period 2008 to-date, how many of these branches have passed the breakeven level (given the fact that some rural branches will take around 1.5 years to break even)?
More than half of the new branches are now making profits. Of the others, except a few all are improving monthly. We have noted that some branches break even in 7-8 months whereas for some it will be more than 2 years. The composition of the deposit mix in the new branches is more towards high cost fixed deposits. Hence, the longer period to break even. The location also matter when it comes to attracting business to new branches. Competition is also a factor to reckon with.
With the present network of 209 branches, we believe that our coverage is in line with our competitors. Our advice to the new branch managers is to bring both loans and deposits adequately to ensure profitability. Hence, though we are consolidating our present net work, business volumes will continue to grow adequately, and this would reduce our cost/income ratio in the medium term.
Q: One of the broader objectives of your expansion drive was to increase Sampath bank’s operation to a bank with a market share of more than 12% (i.e. like the Commercial Bank of Ceylon which has a market share of 13%), whilst your current market share remains at around 7%, when do you expect this to happen?
Being a bank of only 25 years of age, attaining a 12% market share would be extremely difficult. We believe that when we are aggressive all our competitors react with more vigour. However, we have gone on record that we wish to become the best private commercial bank in the country. To achieve that we need to grow faster than our competitors. However, with the credit ceiling imposed, there is no possibility of obtaining market share from others. Once the credit ceiling is lifted, we may once again accelerate our growth whilst managing the credit quality and profitability, as we have done in the recent past.
Q: You received a license to carry out a merchant banking operation recently. What is the status of that?
We have the regulatory approval to carry out the merchant banking operations but this is not a license. Our Board is at present evaluating different proposals on how to carrying out the merchant banking activities.
Q: How you see bankassurance contributing to your medium term growth ?
Bankassuance is a product we will consider to improve our fee based income.
Q: You recently sold your one Employee Share Ownership Plan (ESOP) stock quantities to a foreign party. What are the expected synergies from these foreign-investors?
Sampath Bank shares belonging to the privately held Provident Fund of the bank was sold in the market. The bulk was bought by local parties and others by foreign buyers. We do not expect any synergy from these investors at present.
Q: Can you explain about the rationale underpinning your relatively lower delinquency rate (i.e. about the centralized credit model)?
As mentioned earlier, we enjoy a better than industry NPL ratio. In the first place, better credit screening and approval process has reduced the new entrants to the NPL. The new credit approval process is centered around the offices of our regional managers. This centralized process has improved quality of lending tremendously. On the other hand, we are very aggressive in pursuing non performing customers. In addition, actions for recovery are speeded up and we also enter into negotiations with them for mutually beneficial settlement agreements. I must add that country’s economic growth in the last few years also has helped us to improve the quality of our lending.
Q: What is the reason for your stock to trade at a discount to market heavyweights Hatton National Bank and Commercial Bank? (is it only the size?)
If you look at the market, you will agree that this discount has narrowed now. I believe that the reasons can be better explained by the investing community and stock brokers.
Q: Do you expect financial Value Added Tax (of 12% for the banking sector) to be taken off in the upcoming budget/s as this was imposed initially to finance the war ?
It is true that the Financial VAT was introduced only on the financial sector during the period of war. As the war has now ended, we do not see any strong justification to continue with same, applicable only on one particular sector of the economy. Whilst appreciating the fact that the tax rate has already been reduced from 20% to 12%, it is our wish that the remaining tax too will be withdrawn as soon as possible.
Q: Finally, what are the main macroeconomic challenges you see for the upcoming year?
There are many macroeconomic challenges in the upcoming years. Paucity of low cost deposits in the current high interest scenario is a major challenge. Banks are increasingly compelled to raise high cost deposits to finance their rising credit demand and this would naturally push the lending rates up. The high borrowing cost for the customers is not good for their businesses and to the price competitiveness of their products in the international markets. Further, the high borrowing cost may result in high NPLs in the industry.
The interest rate and exchange rate volatility in the market is another challenge for the banking industry as these will put additional pressure on banks to manage the associated risks prudently.
The extremely slow recovery process currently experienced by our overseas export markets which are already down by the world recession is another major challenge, as this will affect our export financing volumes.
Any re-imposition of the credit ceiling would be an issue, as this would curtail our income growth from the main activity of lending, when the operating expenses continue to rise in the market.
The interest rate and exchange rate volatility in the market is another challenge for the banking industry as these will put additional pressure on banks to manage the associated risks prudently. The extremely slow recovery process currently experienced by our overseas export markets which are already down by the world recession is another major challenge, as this will affect our export financing volumes. Any re-imposition of the credit ceiling would be an issue, as this would curtail our income growth from the main activity of lending, when the operating expenses continue to rise in the market.
http://www.island.lk/index.php?page_cat=article-details&page=article-details&code_title=64259
Sampath Bank PLC Managing Director Aravinda Perera believes that the paucity of low cost deposits in the current high interest scenario is a major challenge for 2013. "Banks are increasingly compelled to raise high cost deposits to finance their rising credit demand and this would naturally push the lending rates up," he told The Island Financial Review.
The interest rate and exchange rate volatility in the market is another challenge for the banking industry as these will put additional pressure on banks to manage the associated risks prudently.
He also noted that lending to the agriculture was stipulated to be at a minimum of 10%, many years back. "Presently, our portfolio towards agriculture is little over 11%. However, we have noted that other sectors of the economy are growing faster and demand more loan facilities from the banks than for agriculture," he remarked.
Here, he is in conversation with The Island Financial Review:
Q: You trimmed your ownership in the LankaBangla Finance operation in Bangladesh from 30% to 9% during the past few years, Why was this done, given that it is still the biggest stockbroking operation in Bangladesh?
At the beginning, we had approximately 22% which is now down to about 9%.
What we have done is in fact to sell the additional shares that we got as scrip dividends. When we made this investment, the regulators stipulated that all dividends should be brought back to the country. Also, we sold these shares when the market was at its peak. The share price is now much lower which indicates that we have done the sale at the right time.
The subsidiary of LankaBangla Finance Ltd is still the biggest stock broker in operation in Bangladesh. With the sale proceeds, we have strengthened our balance sheet with substantial capital gains. These gains were necessary to offset the impact of rapid branch expansion drive we initiated in the last 3 years.
Q: When it comes to your fund based operation, what are the expected growth rates for 2013 and 2014 for deposits and Loans if the credit cap is taken out or eased by the Central Bank?
The expected growth for 2013 and 2014 are still being worked out. We believe that there will be a credit cap next year as well. The expected growth rates will be finalized once we are aware of what the credit ceiling is going to be for 2013.
If there is no credit cap, we plan to be aggressive in lending. With an exceptionally good NPL ratio we have a higher appetite for lending. When there is demand for lending, obviously we need to be aggressive in deposit taking as well. But with a view point to be involved in development of economy, specific attention will be given for manufacturing, services, exports and agriculture.
Q: Do you expect to grow your pawning book further (as at 31 Dec 2011 , pawning accounted for an approximate 1/4th of your loan book), if yes, how do you see your bank contributing to the national growth plan by been largely a working capital provider?
We expect the pawning book to grow at the same rate as other components of the loan book. We are aware that pawning is not only for consumption but also provides working capital requirements for the bottom of the pyramid borrowers, especially in the areas of agriculture and fisheries.
The bulk of our pawning customers comes from the lower income groups. We are aware that informal pawning activities happen at village level at extremely high interest rates. What we intend doing is to allow these customers to be serviced by us at much lower interest rates easing their debt service problems.
As a strategy, the bank not only provides working capital but we do have a strong Development Banking Division. The Development Banking Division of Sampath Bank during the last few years has concentrated strongly on renewable energy, health and education.
As a commercial bank, we agree that providing working capital to manufacturing and services sectors is the best way for us to contribute to nation building.
Q: You successfully completed a debt issue recently, however despite it being oversubscribed, what made the management not increase the size of the debt amount as initially announced?
The debentures were issued mainly to improve the Tier II capital of the bank. We are aware that the Tier II capital is little expensive than deposit taking. So, on one hand we need to increase our capital and on the other hand to maintain our cost low. Concluding the issue at Rs 1.5 bn was mainly to balance these two aspects.
With the successful completion of the debenture issue, we have a reasonable capital ratio. This allows us to lend more in the market. The success of the issue also indicated that Sampath debentures are heavily in demand. If the interest rates stay low, probably within a year’s time, we may raise more Tier II capital. At the same time, we have not given up attempting Tier II capital raising through Dollar denominated long term Tier II instruments.
Q: Where do you see interest rates heading in 2013 given the expanding budget deficit (on latest annualized numbers it is above the initially budgeted 6.2%)?
The interest rate trends will become more apparent when we see the Central Bank’s road map in early January 2013 and the new credit ceiling. How the budget is going to be bridged will be seen in early November. It is perhaps too early to speculate on interest rates at the moment.
Q: You have increased your bond trading and bond portfolio significantly in your latest published in 2Q 2012 interims, What is the thinking behind this?
Actually, our bond portfolio relates to Treasury Bonds only, which is very insignificant. A significant Treasury Bill portfolio is kept for liquidity purposes. What we have done is increasing our repo operations on Treasury Bill Portfolio.
Q: What is your market share in the credit card operation? What are Sampath’s Non Performing Loans in this segment?
We believe our market share of credit cards is about 12%. Sampath Bank’s NPLs in this segment is lower than our competitors. This is a highly competitive market segment and we are aggressively pursuing for a higher market share. However, we are very mindful of the possible high NPLs in this segment. Therefore, card approvals and follow up of NPLS have to be in line with the bank’s other credit operations.
Q: How do you see Sampath electronic mobile phone cash transfer system benefiting the bank? What is the expected fee contribution (as a percentage for your non- interest income in the medium term from this operation?
Mobile cash is a product which was brought to add value to current and savings accounts. It is true that there will be a contribution by way of fees but that will be negligible as compared to other non interest income in the medium term. What we expect from this product is to attract more savings and current accounts which helps to be the lowest cost deposits that we can generate. However, very high utilization of Mobile Cash would in the long term result in a significant contribution to our non-interest income.
We believe that Sampath has been the leader in banking innovations. This product is independent of mobile telecom operator and user friendly. This is one of many new products our customers can expect Sampath to introduce in future.
Q: You maintain your Foreign Currency Banking Unit ( FCBU) operation profits in FCBU itself, i.e. without converting it to local Rupees (LKR), What was the book gain reflected through this operation in your First Half of 2012 forex exchange gains?
We agree that FCBU profits are kept in foreign currency without converting to LKR. We presently have a substantial gain reflected due to this reason. This gain fluctuates depending on the movement in the exchange rate.
Q: From the 2012 budget the Government proposed Banks to increase their lending to 10% for agriculture related investments, what is the composition of agriculture related lending in Sampath’s books?
Lending to Agriculture was stipulated to be at a minimum of 10%, many years back. Presently, our portfolio towards agriculture is little over 11%. However, we have noted that other sectors of the economy are growing faster and demand more loan facilities from the banks than for agriculture. Lending to agriculture includes mainly paddy and other cash crops and also export oriented crops such as tea, rubber and coconuts. In fact fisheries and livelihood are also included in this sector.
Q: Despite maintaining a relatively higher provision cover ratio (PCR: of above 60%), we saw a gradual decline in Sampath’s provision cover ratio (i.e. Specific provisions / Non performing loans*100) over the past two quarters? What is you comfortable PCR? (note industry average is around 40 - 45%)
The bank decided to be very conservative and hence wanted to maintain a high provision cover. However with aggressive actions taken for recovery of NPLS, the provision cover naturally has to decline. Furthermore, we have managed to keep the new entrants to non-performing at a minimum level. In fact, we have one of the best non-performing ratios in the industry.
The level at which, the bank will be comfortable in provision cover depends on the individual bank’s strategy and for us, what we have at present is very comfortable.
With the introduction of IFRS, the concept of provisions will change completely. The banks who have provided adequately for non performing loans will find them in a better position than the others after introducing IFRS.
Q: You opened more that 100 bank branches during the period 2008 to-date, how many of these branches have passed the breakeven level (given the fact that some rural branches will take around 1.5 years to break even)?
More than half of the new branches are now making profits. Of the others, except a few all are improving monthly. We have noted that some branches break even in 7-8 months whereas for some it will be more than 2 years. The composition of the deposit mix in the new branches is more towards high cost fixed deposits. Hence, the longer period to break even. The location also matter when it comes to attracting business to new branches. Competition is also a factor to reckon with.
With the present network of 209 branches, we believe that our coverage is in line with our competitors. Our advice to the new branch managers is to bring both loans and deposits adequately to ensure profitability. Hence, though we are consolidating our present net work, business volumes will continue to grow adequately, and this would reduce our cost/income ratio in the medium term.
Q: One of the broader objectives of your expansion drive was to increase Sampath bank’s operation to a bank with a market share of more than 12% (i.e. like the Commercial Bank of Ceylon which has a market share of 13%), whilst your current market share remains at around 7%, when do you expect this to happen?
Being a bank of only 25 years of age, attaining a 12% market share would be extremely difficult. We believe that when we are aggressive all our competitors react with more vigour. However, we have gone on record that we wish to become the best private commercial bank in the country. To achieve that we need to grow faster than our competitors. However, with the credit ceiling imposed, there is no possibility of obtaining market share from others. Once the credit ceiling is lifted, we may once again accelerate our growth whilst managing the credit quality and profitability, as we have done in the recent past.
Q: You received a license to carry out a merchant banking operation recently. What is the status of that?
We have the regulatory approval to carry out the merchant banking operations but this is not a license. Our Board is at present evaluating different proposals on how to carrying out the merchant banking activities.
Q: How you see bankassurance contributing to your medium term growth ?
Bankassuance is a product we will consider to improve our fee based income.
Q: You recently sold your one Employee Share Ownership Plan (ESOP) stock quantities to a foreign party. What are the expected synergies from these foreign-investors?
Sampath Bank shares belonging to the privately held Provident Fund of the bank was sold in the market. The bulk was bought by local parties and others by foreign buyers. We do not expect any synergy from these investors at present.
Q: Can you explain about the rationale underpinning your relatively lower delinquency rate (i.e. about the centralized credit model)?
As mentioned earlier, we enjoy a better than industry NPL ratio. In the first place, better credit screening and approval process has reduced the new entrants to the NPL. The new credit approval process is centered around the offices of our regional managers. This centralized process has improved quality of lending tremendously. On the other hand, we are very aggressive in pursuing non performing customers. In addition, actions for recovery are speeded up and we also enter into negotiations with them for mutually beneficial settlement agreements. I must add that country’s economic growth in the last few years also has helped us to improve the quality of our lending.
Q: What is the reason for your stock to trade at a discount to market heavyweights Hatton National Bank and Commercial Bank? (is it only the size?)
If you look at the market, you will agree that this discount has narrowed now. I believe that the reasons can be better explained by the investing community and stock brokers.
Q: Do you expect financial Value Added Tax (of 12% for the banking sector) to be taken off in the upcoming budget/s as this was imposed initially to finance the war ?
It is true that the Financial VAT was introduced only on the financial sector during the period of war. As the war has now ended, we do not see any strong justification to continue with same, applicable only on one particular sector of the economy. Whilst appreciating the fact that the tax rate has already been reduced from 20% to 12%, it is our wish that the remaining tax too will be withdrawn as soon as possible.
Q: Finally, what are the main macroeconomic challenges you see for the upcoming year?
There are many macroeconomic challenges in the upcoming years. Paucity of low cost deposits in the current high interest scenario is a major challenge. Banks are increasingly compelled to raise high cost deposits to finance their rising credit demand and this would naturally push the lending rates up. The high borrowing cost for the customers is not good for their businesses and to the price competitiveness of their products in the international markets. Further, the high borrowing cost may result in high NPLs in the industry.
The interest rate and exchange rate volatility in the market is another challenge for the banking industry as these will put additional pressure on banks to manage the associated risks prudently.
The extremely slow recovery process currently experienced by our overseas export markets which are already down by the world recession is another major challenge, as this will affect our export financing volumes.
Any re-imposition of the credit ceiling would be an issue, as this would curtail our income growth from the main activity of lending, when the operating expenses continue to rise in the market.
The interest rate and exchange rate volatility in the market is another challenge for the banking industry as these will put additional pressure on banks to manage the associated risks prudently. The extremely slow recovery process currently experienced by our overseas export markets which are already down by the world recession is another major challenge, as this will affect our export financing volumes. Any re-imposition of the credit ceiling would be an issue, as this would curtail our income growth from the main activity of lending, when the operating expenses continue to rise in the market.
http://www.island.lk/index.php?page_cat=article-details&page=article-details&code_title=64259
