The bank will focus on supporting exporters, helping enterprises expand overseas and transforming banking with digital technology.
Hemantha Gunetilleke, Director/Chief Executive Officer at Nations Trust Bank, shares insights into the unfolding economic crisis and how the bank reinforces its commitment to support customers to sail through the storm and unlock growth opportunities.
As the Chief Executive of a leading bank in Sri Lanka, what is your outlook for the economy?
As we know Sri Lanka is currently facing its most challenging economic environment in recent history. The overall debt overhang, now deemed to be unsustainable, shortages in foreign exchange inflows, the balance of payments crisis, the devaluation of the LKR, rising inflation and interest rates, challenges around fiscal policy and monetary policy along with several other factors built up over the years have culminated in the current economic crisis. We hope there will be adequate political stability and willingness to address all these structural weaknesses and that it won’t delay the decisive action urgently required to set the economy on a path to recovery.
Having said that, our economy has several fundamental strengths that give us a strong sense of optimism and expectation of a relatively quick recovery. The last two years of the pandemic and the last few months since the onset of the economic crisis have shown us that the private sector, which is the backbone of our economy is extremely resilient. During this period, despite severe difficulties, private enterprises of our country from Micro SMEs to Large Corporates have all fought the good fight to stay in business and many have grown and become even stronger. The export sector in particular has proved to be extremely resilient while the tech sector has also grown from strength to strength.
Therefore the road ahead will be a tough one, but collectively, as a country, if the right decisions are made and we stay the course in the medium to long term, there is reason to be optimistic.
How do you see the unfolding economic crisis impacting the banking sector?
Given the severity of the current economic crisis and the central role the banking sector plays in the workings of the national economy, the banking sector is facing the brunt of the crisis. The key variables that have adversely impacted the banking sector could be identified so far, as the exposure to Sovereign Debt instruments (ISBs and SLDBs), the rapid loss of foreign currency liquidity, the drop in foreign exchange flows within the banking sector, the devaluation of the LKR and the sharp rise in interest rates. These factors along with acute fuel shortages have led to elevated credit risk across the banking sector, resulting in rising credit impairments and pressure on Capital Adequacy.
While individual banks may have been exposed to some of these risks from time to time in the past, this is the first time the entire banking sector in Sri Lanka has been exposed to the full force of macro-economic risks, market risks, interest rate risks, credit risk and counter-party risk at the same time. As the banking sector is highly connected in terms of inter-bank exposure, this raises the risk of a contagion effect or systemic risk setting in. Individual banks are now required to be largely self-reliant in terms of their stability.
To successfully navigate this storm, banks must be fundamentally stable with adequate capital buffers that can absorb significant losses, a strong deposit franchise that supports liquidity, a conservative lending culture that ensures a stable loan book and a strong integrated risk management framework that anticipates emerging risks and mitigates them quickly. Overall, banks that have followed conservative and prudent banking practices, will successfully navigate this crisis and will emerge stronger than before.
Having said that, it must be noted that despite the severe challenges faced by the banking sector in recent months, the entire sector has proved to be extremely resilient. With the effect of decisive policy measures now beginning to show results, the banking sector will remain stable and lead the national economy along a path to recovery.
How is Nations Trust positioned to confront the challenges and generate growth?
NTB is built on innovation, service excellence, teamwork and conservative banking practices backed by strong institutional shareholders. The bank has recorded strong growth with a PAT CAGR of 18.5% during the last 5 years.
Ironically, it now seems that the Pandemic that spanned the last two years prepared the Bank to face the current economic crisis. With the onset of the Pandemic, we focused on redefining our business models, de-risking certain asset portfolios and expanding into lower-risk asset classes. We also strengthened our deposit franchise to ensure that the bank was highly liquid in terms of both LKR and Foreign Currency. We challenged our operating models and undertook some deep work to drive cost efficiency. During the last three years, our Cost/ Income dropped from 48% to 39%. We also redefined how our teams work and moved into a hybrid Work from Office/Work from Home model, which has now proved to be extremely useful.
Several years of strong growth in profitability had resulted in a build-up of the bank’s capital reserves. These reserves along with the support of our shareholders, helped the bank end FY2021 with a Total Capital Adequacy Ratio of 18.01% against the minimum requirement of 12%
Therefore NTB has gone into this crisis as a Bank with conservative banking practices, a stable credit portfolio, high liquidity ratios and capital ratios well above the minimum requirement. Importantly the Bank is also managed by a highly professional and motivated team of bankers. Our customers across our business lines, undoubtedly represent the best in the market and this too gives us tremendous strength and optimism for the future. Considering all this, we are very confident that NTB is well positioned to successfully navigate the current crisis and emerge even stronger.
How will Nations Trust Bank support enterprises and unlock growth opportunities for export companies and others seeking to expand overseas?
Driving export revenue and corporate earnings from overseas operations will be a key to the path to recovery for our economy. While the export industry has been performing well, it is also encouraging to see several Sri Lankan corporates expanding business overseas.
At NTB we have a rapidly growing portfolio of export customers and we provide them with a full suite of working capital, term finance and digital banking services to drive business growth. The export sector will continue to be a key area of focus for us.
In terms of overseas expansion, we have supported several large Sri Lankan corporates with their overseas expansion and currently have credit lines to them in over 5 countries, mainly in South and South East Asia.
What is your advice to businesses fighting for survival?
The present economic climate is unprecedented and we have been encouraging our Commercial and Corporate clients to critically review their business models and financing models to plan for the future.
Most businesses, whether SMEs or Large Corporates, will face challenges due to business disruption, a drop in turnover, a rise in operating costs, rising debtors and an overall drop in cash flows and profitability. Talent attrition could be another challenge in certain sectors.
In this environment, some will struggle while others will prosper. One defining factor from a financial perspective would be the level of leverage carried by an entity. The reality is that many enterprises are leveraged and in some instances over leveraged. They have now been forced to move rapidly from a low interest environment to a high interest environment. AWPLR for example has moved from 9.85% on 31 March 2022 to 24.94% by end July 2022. Couple this with business disruption and a drop in cash flows, there could be serious stress.
Entrepreneurs and businesses will need to urgently formulate strong strategies to navigate these volatile times, and to this end, NTB is extending our fullest support.
With the high cost of borrowing, businesses falling into the above criteria will do well to slow down growth plans, especially if such growth plans require more debt. Businesses should also look to deleverage and reduce their debt burden and build up cash reserves. In most instances, this will require the infusion of fresh capital, either from existing shareholders or through new strategic investors.
However, volatile times like these also provide opportunities for prudent investors. Some asset classes are at considerable discounts. Entities that have strong cash reserves and capital buffers backed by robust cash flows to support debt repayment, will certainly have opportunities for acquisitions and expansion.
We also strongly feel that business success in the future will depend on innovation, sustainability and Corporate Governance. Increasingly, banks will look to support customers based on these criteria and financial transparency, tax compliance, and adherence to sustainable and ethical business practices will become important points of consideration when providing credit to businesses. Therefore this economic crisis presents an opportunity to learn from the mistakes of the past and to reset and build a sustainable future.
What is your strategy to deploy technology to reimagine the bank and secure the future for its clients?
NTB has been at the forefront of digital banking and innovation for well over 15 years and today it forms the core of our service proposition to our customers with the introduction of multiple market-leading digital banking platforms.
5 years ago we introduced FriMi, Sri Lanka’s first digital banking experience. Today, FriMi serves a large customer base, offering an entirely digital banking experience, fast and easy-to-use payment modules and several unique lifestyle services.
Our digital banking proposition focuses on providing all customers, including commercial and corporate clients a world-class digital banking experience. We have multi-platform cash management solutions for businesses coupled with many features such as trade services, automated payables and receivables with host-to-host (ERP) integration and API solutions that drive efficiency and cost savings for our clients.
Our digital journey targets an end-to-end digital transformation of customer experience from customer onboarding, fulfilment and internal digital enablement to increase efficiency throughout our value chain. As a result of this end-to-end digital transformation, today, over 80% of customer transactions are fulfilled digitally with a majority of our back-end processes being straight-through with no manual intervention. Therefore our transformative digital capabilities now form the backbone of our promise of service excellence to our customers.
Looking into the future, we are pleased to announce that we are poised to introduce “Nations Direct” our latest multi-channel digital banking experience that will connect our customers, merchants, partners, and the overall digital banking ecosystem seamlessly. It will bundle mobile banking, E-banking, merchant business portals, FriMi as well as all our assisted and unassisted digital onboarding platforms using the latest technology. This will be an exciting new phase in our digital banking offering and we promise our customers a fresh and unique user experience. Watch this space!