Summary of performance in 2018
HNB, Manager Strategic Planning, Rajive Dissanayake
Overall HNB is not just a bank but a well-established financial conglomerate and in 2018, we saw good contributions from all sectors. We achieved healthy growth in terms of Net Interest Income, Net Fee Income, across all businesses.
Insurance premiums under our subsidiary, HNB Assurance also recorded impressive growth while Other Income also benefitted from exchange re-valuation. The biggest negative aspect to performance was in terms of impairment which increased by almost 150% to Rs. 9.8 billion.
Operating expenses were managed well, expanding by just 12% Year-on-Year (YoY) in 2018 despite the year in review seeing collective agreements renegotiated at the end of its three year period of operation to provide increased salaries to eligible categories of employees.
The largest contributions to HNB’s bottom line were NII, and Other income with a significant part of that from exchange gains. Profits After Tax were however eroded by drastic increases in taxes.
On increasing impairment provisions
Non-performing Assets (NPA) have been on the rise across the industry and while HNB’s NPAs have remained below the industry average, we too saw an increase as a result of increasing impairment provisions. The introduction of IFRS 9 also mandated increased impairment provisioning.
In order to address this challenge, HNB appointed a Chief Credit Officer for all SME, and retail loan approvals. We have instituted a strict segregation between business targets and loan approvals while our centralized collection unit introduced in 2017 is also having a positive impact on these costs.
Despite this the bank remains soundly capitalized and we are quite confident of our Tier 1 capital base. When HNB conducted its rights issue, we did so based on a projection of our requirements for the five years up to 2021. We had therefore raised quite a large amount of capital to sustain our Tier 1 capital base for that period.
With Tier 2 capital, like other banks, we may look to supplement this requirement with debentures and so we might need to look to the market for this.
On HNB’s exposure in the real-estate sector
HNB Managing Director/CEO, Jonathan Alles
We have been dealing with only our most respected customers in property development, and we have tended to avoid newer, less-established players. So overall I would say that we have exercised a great deal of caution in this sector and at this moment, we are comfortable with that exposure. However, we have not taken on any significant new exposure at this stage and at present, we do not have any property development transactions that have moved into NPA.
Similarly, where we have signed tri-partite agreements for housing loans for some of these apartments, there too we have no instances where they have gone into NPA, because we tend to have reasonable LTVs on housing loans.
On whether real estate is a good investment
If the necessary national development does takes place – and if foreign investment and new projects take off and GDP grows to the expected levels, I think we will be able to fill up some of these apartments very easily.
What is key is for economic development to take place and why you are seeing a slight slow-down in sales in apartments, is probably due to relatively lesser cash flows being available for these investments. In general there has been a slight reduction in the pace of Sri Lanka’s growth and by no means do we think that 3% GDP growth is adequate. There are of course those who are concerned that new buildings are coming up in this current growth enviorenment, but I believe that over the long term, if Sri Lanka’s growth can truly recover, then there is a clear benefit to having all of this infrastructure in place over the long term.
On lending to the tea industry
We are of course a bank that has a special connection to the tea industry. That is where our roots are and we still have lasting relationships in this industry. We are of course aware that the industry has seen signs of stress and some companies are not doing as well as they should. While we are cognizant of these dynamics we remain comfortable with our exposure to the sector at this time. But we will not be complacent and we are keeping a close watch on the industry because it is one that is of national importance.
At the lower-end of the business, we also see a lot of Plantation SMEs that require support and in those instances we have sought to give them some time to pay in order to ease the pressure on such businesses. This is an industry that is vital to the country so we are being paitent with those companies that have slowed down and are struggling to pay. Being a bank of systemic importance, HNB is aware of its responsibility to support the industry, and not ‘pull the plug’ so to speak even though we are also facing our own challenges through IFRS pressures and capital requirements, we are still committed to supporting the industry to the best of our ability.
On heavy taxation of banks (JA)
SL has one of the highest taxed banking sectors in the world. This is not sustainable for an industry that is needed to support other industries to keep the economy going. What we hope is that sooner rather than later, there is realization among those that form these policies that when money is kept within the banking industry as capital, it enables not just the banking industry, but all industry and the national economy as a whole country to grow 10 times over. When those funds are instead taken as tax and put into some expense item, that is the end of it. That is the reality – we need to have strong banks that are able to support the rest of the economy. We make money certainly, but the way we go about making that money is through caution. We tighten our belts, and a great deal of our profits this year were driven by reductions in our cost-income ratios. When we consider those who run at a deficit, perhaps there is something to be learned from how we in the banking sector approach financial management. Rather than taxing, they should look at the good things that we have done in reducing our costs and improving efficiency and then learn and adopt those strategies.
HNB Chief Operating Officer, Dilshan Rodrigo
On the significance of HNB’s digital strategy
I would confidently state that our digital strategy is fundamental to the future success of the bank. Customer lifestyles are changing and it is vital that we adapt to these changes. Therefore HNB has been relentless over the years in our efforts to prepare the bank to go digital. The entire outlook and strategy of our branch network has been accordingly revised to position them closer to the customer, and infuse customer centricity in every aspect of the business.
We have invested significantly in technology and at present, HNB has established a total of 5 centralized units that leverage these investments in tech to drive cost optimization and process efficiency. We have also invested in mobile and internet banking and many other initiatives are already in the pipeline to enable customers to transact more effectively access our banking products and services via mobile phones – whether it is applying for a loan, credit card . Where in the past it used to take days or weeks and time at a branch these services can be accessed in a matter of minutes or seconds. This innovations are all a result of evolving HNB’s digital strategy.
On the potential of digital banking to increase financial inclusion
One of the main reasons that digital banking is emphasized across the Asian region is due to its potential to reduce the informal economy and integrate those aspects into the formal economy. As a nation, the volume of digital transactions in Sri Lanka is very small, especially when compared with India where there has been tremendous success in this field, and approximately 15% of payments are integrated into the formal economy through digital payment channels.
For Sri Lanka too we see great potential in terms of reducing poverty and expanding the formal economy. This is a very important trend and we expect a lot more work from the Government as well – such as in driving forward digital National Identity Cards which can serve as a lynchpin for certifying customer identity on digital channels.
Moreover, digital strategies in general promote greater efficiency. It reduces transaction times and there are just a great deal of benefits in terms of time and convenience for the customer and it is therefore vital that more attention is focused on this area.
On disbursements to construction sector post-Budget
We have been informed that maybe around one third of dues to the construction sector would be settled by the Government in month of March following which work can resume. This will drastically ease pressure on the sector.
On the impact of October’s political crisis
HNB Chief Financial Officer, Anusha Gallage
Overall the banking industry and the wider economy as a whole was strongly impacted by those developments which resulted in a downgrade in the country’s sovereign rating, and subsequently rippled across the ratings of the entire banking sector. With risk ratings being revised downward, there was an impact on borrowing costs for the banks while investments were impaired, resulting in an overall higher impairment that was carried over into 2019. This also inhibited corporates in terms of their discussions with investors and in terms of planning. In terms of the actual impact, we would estimate an impact of approximately Rs. 500 million directly from the impact of the ratings downgrade on sovereign bonds and Sri Lanka Development Bonds. Combined with the requirements of IFRS 9 – the total impact was approximately Rs. 1.2 billion.