SDB bank is in a rapid growth phase and its proposed Secondary Public Offer of up to 88 million shares will help the bank maintain the momentum.
SDB bank, has had a phenomenal run despite the economic slowdown caused by the Covid-19 pandemic in 2020 and the devastating Easter bombings and political uncertainties over the previous two years. SDB bank’s loan book has grown 18% annually since 2011 to Rs103 billion in 2020. The bank’s deposit base expanded 19% annually during this period to Rs94 billion and retained earnings have grown 13% to nearly Rs2 billion.
Starting as a development bank, SDB bank today focuses on small and medium enterprises and rural businesses because they can have a transformational impact on the entire economy, uplift livelihoods and elevate the living standards of Sri Lankans across the country.
The bank believes this approach – improving financial accessibility and inclusivity – will drive sustainable business growth and generate attractive shareholder returns. And investors share this vision. In November 2020, the pandemic-ravaged year, SDB bank made capital market history in Sri Lanka. It became the first listed entity to float a digital rights issue which was also oversubscribed!
Now, the bank is on the cusp of a secondary public offer (SPO) of up to 88 million shares to build enough capital reserves and part finance loan book expansion so it can continue to maintain business growth at 20% over the next few years. As it is, the bank is already comfortably capitalised: As of March 31, 2021, SDB bank has fulfilled regulatory capital requirement. Common Equity Tier 1 Capital Ratio was at 9.44% against the regulatory minimum of 6.5%; Tier 1 Capital Ratio was also at 9.44% compared to the regulatory minimum of 8% while its Total Capital Ratio at 12.71%, compared to the 12% minimum requirement. For SDB bank, the proposed SPO is the springboard for rapid growth. It will generate new business and enough retained earnings so SDB bank can continue to grow and have a positive impact on the economy without having to raise fresh capital.
Thilak Piyadigama, SDB bank’s Chief Executive Officer with a passion for innovation and technology, has been breaking traditional mindsets and leading a digital transformation. He started his career at John Keells Holdings and has over three decades of banking experience in senior management roles in Singapore, UAE, UK, and Sri Lanka with Standard Chartered Bank and Nations Trust Bank. In this interview, Piyadigama discusses SDB bank’s SPO and growth strategy.
What do you envision for SDB bank, and what about the bank’s future excites you the most?
The SME sector will be the engine that drives the economy, and SDB bank is strategically placed to influence that growth. We started out as a development bank and today, SMEs account for 40% of our loan book demonstrating our commitment to our founding principles. But we are going beyond that.
We have the necessary infrastructure, financial services, capabilities, and skills already in place to be a growth enabler to small and medium-scale businesses. By strategically aligning ourselves with the SME sector, we are ensuring both considerable and sustainable growth for SDB bank, our clients, staff, and investors.
Our digital banking services are also faster and better, designed to cater to the needs of the rapidly evolving SME sector and also meet the aspirations of our personal banking customers. We leveraged the power of tech to create unique experiences for our customers with a product that is appealing and userfriendly.
Today, we have over 100,000 digital transactions a month with Lanka QR being a core driver. We have also seen a growth in registrations for the use of digital transactions including UPay, internet banking, and debit card transactions, with an impressive 300,000 plus customer base to date.
By investing in digital technology, we are also contributing to the development of the rural economy where 80% of the country’s population lives: another important priority for us. The rural economy has exciting growth potential, and we want to be the enablers of that growth.
We are transforming SDB bank into a technology platform that delivers growth to SMEs and the rural economy. In the future, the concept of measuring a bank’s importance, or relevance in terms of balance sheet size, will no longer hold. A bank’s relevance, and success, will depend on its services and accessibility, and banking per se will evolve to become only a segment within a larger techbased services platform. That is the future we envision for ourselves at SDB bank.
Of course, how fast that change happens depends on many factors: but banking regulations here are also evolving, and there will be room for consolidation as well. There is more than enough opportunity to drive organic and inorganic growth going forward.
SME is a broad definition, but there are sectors within that we would like to specialise in. Take the agriculture sector, for instance, particularly rice farming, which not only provides a staple food source but is part of our national heritage. As a bank, we can add value and drive growth in this sector because we understand agriculture from crop cycles to climate change impacts.
We can provide other services like crop insurance and introduce new farming concepts and technologies from successful commercial farming companies and countries to improve yields and farmer earnings here. We do not just provide loans. In 2020, for instance, despite the Covid-19 disruptions and lockdowns, we provided 10% of the country’s demand for harvesting equipment in partnership with leading agricultural equipment suppliers, and in a single year!
Agriculture employs 27% of the country’s labour force but contributes 8% to GDP, which is not good enough at all. Every five years, around 80% of SMEs go out of business, which is a morbid state of affairs.
Providing loans alone is not enough to uplift people’s livelihoods across agricultural communities or elevate SMEs to the next level of development. Banks need to provide them with commercial and technical expertise so that they can grow and thrive. This is why we rolled out a financial management training programme in partnership with CA Sri Lanka, the country’s professional accounting body.
Imagine what will happen if agriculture productivity doubles, the ripple effect on related SMEs and the rural economy will be tremendous, which is why SDB bank is focusing on these niche segments. The bank has been recognised for its values and endeavours to make an impact. Recently, the United States International Development Finance Corporation (DFC) approved an Rs7.5 billion term loan facility to SDB bank to promote financial inclusion among women entrepreneurs in the SME segment.
We are transforming SDB bank into a technology platform that delivers growth to SMEs and the rural economy.
Can you tell us about the SPO, and how this fits into your overall strategy?
We intend to offer 68 million shares via a secondary public offering with an option to offer another 20 million if oversubscribed. The SPO will help us grow the business significantly by becoming an enabler of SMEs and the rural economy, and do this without raising additional capital buffers for at least three years.
Based on the current share capital of Rs10 billion, the bank’s loan book at Rs107 billion could potentially grow to over Rs150 billion with the SPO and generate retained profits of about Rs5-8 billion in the process. As I said, that will allow us to grow this bank up to another three years without any additional capital and we will also become large enough to generate growth without raising additional capital. So that is the plan. We will be able to maintain growth at around 20% annually, on average.
We laid the foundation for growth in 2020 with a successful Rs1.5 billion rights issue which was oversubscribed in November. We created capital market history by becoming the first Colombo Stock Exchange-listed company to successfully host and complete a rights issue digitally. It was officially recognised as the first local digital share subscription to be oversubscribed as well! The success of the issue despite the pandemic is a testament to the confidence investors have in our vision for SDB bank. The SPO is the second phase of our growth journey.
Where do you see the banking sector in the next five years, and what are some of the factors shaping the industry’s future?
The banking sector in Sri Lanka is evolving and shedding its traditional business model as it becomes more tech-savvy. As rapid upheavals in digital technology replace brick-and-mortar banking business models, we may see an expansion of the banking sector, including the advent of new entrants like what has happened in Singapore. Sri Lanka’s digital mobile payments infrastructure is already in place to drive these transformations I speak of forward.
It is inevitable because there is an emerging demographic of consumers who want to bank differently: they demand access to banking services anytime, anywhere on their mobile devices and loathe to visit branches. The world is also getting more connected. Banking regulations will change with the times, and cybersecurity protocols will strengthen to enable a digital transformation.
In terms of business growth for banks, Sri Lanka does not have a large manufacturing base, so it will be the services sector and small and medium enterprises (SMEs) that will provide growth opportunities. Today, SMEs contribute 52% to the country’s gross domestic product, and I passionately believe this share will only grow!
The potential for consumption and retail to drive economic growth is tremendous, and the outlook for investments is also very encouraging. Irrespective of how one feels about the Colombo Port City, the project will attract investments and open doors for the country to establish itself as a financial hub for the region leading to corporate-related lending growth for banks. So, these are some of the factors that will shape the banking sector over the next five years, as I see it, and SDB bank is transforming itself for this future.
Based on the current share capital of Rs10 billion, the bank’s loan book at Rs107 billion could potentially grow to over Rs150 billion with the SPO and generate retained profits of about Rs5-8 billion in the process