Profits, assets to grow phenomenally- HNB MD/CEO

Ceylon Finance Today: Hatton National Bank Managing Director/CEO, Jonathan Alles, expressed confidence that HNB's profits as well as assets would witness tremendous growth in the next three to five years, given the growth prospects of Sri Lanka and the positioning of the bank within the industry."Aggressive goals have been set and would be achieved through the implementation of the strategic initiatives outlined in our strategic plan for 2015 –17 which was completed during the third quarter of 2014 and will address the changing macroeconomic environment, client needs and competitive landscape," he said.

He also said that the vision of HNB was to align itself to the development efforts of the country and to provide leadership in product innovation, customer service and choice and convenience through alternate channels.

Q: You have aligned your development strategies with the national development goals with your approach to a sustainable business model in the long term. What does that mean and what do you hope to achieve in the long term?
The national vision outlines the development focus of the country in its journey to reach upper-middle income status by 2016. This encompasses establishing Sri Lanka as a maritime and aviation hub connecting the east and the west; commercial hub promoting tourism as well as high-end retail stores; energy hub and a knowledge hub promoting KPO, BPO operations as well as foreign affiliated universities operating in Sri Lanka.

In order to support the hubs and for overall national development, the government has undertaken projects to improve the road network and transportation systems, improving employability of youth, developing entrepreneurs, improving remittances from migrant workers and providing housing, electricity, water, and telecommunication for all. The focus of the Government in the above areas opens up opportunities for large scale corporates as well as SMEs to participate in infrastructure development, tourism projects, international trade and many other sectors targeted for development. HNB with its strong presence in these market segments and through its alignment to the national vision of Sri Lanka, will capture a portion of these opportunities in support of National Development.

Q: How would you assess the macro economic situation from now on?
The real economy is expected to grow by 7-8% during the next few years with inflation expected to remain at mid-single digit levels. Low inflation expectations will also enable the interest rates to be maintained at single digits, which would facilitate investments to achieve the high growth rates anticipated.

Export earning too has shown sizable growth over the past 9 – 12 months, remittance continues to remain strong, which has resulted in a strong external reserve position and a stable currency. We expect the currency to remain fairly stable over the medium term.

Q: With pre-tax profit of over Rs. 10 billion and after crossing the Rs. 500 billion mark in assets, how do you see the future?
Considering the expected economic growth of Sri Lanka as discussed above and HNB's positioning in the industry, we are confident that HNB's profits as well as assets would witness tremendous growth in the next 3 – 5 years. Aggressive goals have been set and would be achieved through the implementation of the strategic initiatives outlined in our strategic plan for 2015 – 17 was completed during the third quarter of 2014 and will address the changing macroeconomic environment, client needs and competitive landscape.

Q: You have changed to a multi-channel banking strategy from a brick and mortar strategy. What is the effectiveness?
The Bank has an extensive presence throughout Sri Lanka with a network of 250 customer centres spread across the country. With a view to complement this wide coverage, considering the mobile penetration level of nearly 100% and the high literacy levels in Sri Lanka, we launched a fully-fledged mobile banking solution in March 2013 while also investing heavily during the past two years to upgrade our electronic banking platform.

Launching mobile banking has resulted in an exponential growth in the usage of electronic and mobile banking channels leading to a reduction in counter traffic for routine transactions thereby enhancing service quality. Furthermore while providing more convenience to customers, these channels have enabled the Bank to improve cost efficiency.

Therefore going forward we will continue to leverage our branch network while expanding through alternate channels which offer round the clock service to our customers.

Q: How have you outperformed the industry credit growth in the backdrop of the poor demand for credit?
The industry credit growth in 2013 was impacted largely due to the reduction in pawning portfolios as a result of the low gold prices in the global markets. Despite HNB being affected, the Bank consciously increased its exposure in the corporate banking segment with a view to improve the quality of the loan book. Also through our network, we successfully increased our exposure to the SME segment thereby outperforming the industry.

Q: Have there been any changes in your business strategies since you took over as Managing Director/ CEO?
Having spent some time at HNB during 2002-2005, I re-joined HNB in September 2010 as its Chief Operating Officer and in October 2010, we developed a long-term strategy revolving around a strong sales & service culture, profitable balance sheet growth, higher fee income, operational excellence, cost optimization, building a competent, engaged and motivated team and focusing on governance, transparency compliance and social responsibility.

In line with our strategic plan, during the last 12 months, we set up a dedicated unit for business process re-engineering which is currently in the process of streamlining key processes to release resources for business development. Also, we have introduced sales incentive schemes and sales dashboards in order to drive sales and improve the sales culture within the Bank. Further we have taken several steps towards achieving service quality excellence which includes training staff, enhancing convenience to customers through multiple electronic channels and enhancing efficiency of processes thereby improving delivery times. During the period we also upgraded our technology platforms and became the first in the market to launch mobile POS technology branded as MOMO and introduced the first NFC enabled combo card to the market. We will be able to reap the benefits of these key strategic initiatives in the near future.


Q: During the past years, the industry profitability has been declining. Why? What is the impact on HNB? What are the strategic changes you have made to face this situation?
The industry profitability in 2013 and in the first half of 2014 has been affected largely due to declining interest margins as a result of reduction in interest rates, deterioration in asset quality resulting in higher provisions and due to writing off of interest and provisions made on account of pawning.

HNB which had a pawning portfolio of nearly 15% of the loan book at the beginning of 2013 was also affected by the decline in gold prices in the global market. However, due to prudent measures taken by the Bank since then, in terms of increasing the safety margin, aggressive auctioning and offering alternate repayment plans based on expected cash flows, this negative impact from pawning will be minimized in the second half of 2014. Furthermore, the Bank has focused on improving the CASA (current account and savings account) base especially in the backdrop of a decline in high yield products including pawning and leasing.

In addition, we are focussing on enhancing fee income which had recorded a notable growth driven by trade, guarantees, remittances and the card business, whist since of late E-banking is making a meaningful contribution

Impairment provision for the year 2013 increased to Rs 3.2 billion compared to Rs 1.1billion in the previous year. With pawning impact tapering, we expect the provisioning to get normalised in the next few months, enabling the Bank to post stronger results compared to the previous 12 months.

Q: Is there a concurrence between your business strategy and sustainable strategies?
The Bank's sustainability strategy is formulated with in the context of our vision, mission and values and addresses sustainable performance based on economic wealth creation, social responsibility and environmental citizenship.

Economic wealth creation involves development of a sustainable business model to meet stakeholder expectations which goes hand in hand with the business strategies of the Bank.

Social responsibility encompasses entrenching risk, governance, compliance, customer centricity, employee engagement and investing in community while environmental citizenship involves our responsibility to the environment in terms of lending, procurement and operations. As such, these sustainability strategies are in-built into the business strategies of the Bank and drive the Bank towards sustainable performance.

Q: What are the key challenges in the short and long terms?
In the current low interest rate regime interest margins have come under pressure with assets getting re-priced faster than the deposits and the margin on the CASA base narrowing.

The situation is aggravated by the low demand for credit and the price competition within the industry in terms of both advances and deposits is intense. Furthermore industry-wide asset quality has deteriorated especially due to the impact from pawning.

However, our efforts on defending margins through aggressive CASA mobilization and SME lending, focus on improving fee income, managing costs and aggressive recoveries has helped HNB to overcome these challenges and continue to post strong performance.

Q: You say that your approach is customer centric. How? Is it through your branch expansion or is it through new product(s)?
We have developed our gamut of product and service based on the customer needs and demands catering to all segments. Our product offering ranges from large corporates to the village based micro finance customer.

We launched mobile banking to serve mainly the tech savvy new generation and MOMO to serve the retail and second tier merchants.

These carefully designed products and services are served through our branch network which is strategically positioned to provide convenience to the customers.

We recently launched 'HNB You' to cater to the needs of our youth which we had identified as a big gap in the market.


Q: In a background where there is high competition in terms of deposit mobilization how would HNB source funding?
Last year, despite the drop in interest rates during the second half we were successful in recording a 14% growth in our savings base.

In addition, we raised over Rs 5.3 billion through a combination of tier II capital and senior debt during the last year with both these issues being oversubscribed by over three times on the day of opening. Furthermore in the past we have successfully secured long-term funds from foreign sources at attractive rates.

This includes USD 25Mn obtained from DEG Germany which is one of the very first subordinated debts obtained by a Sri Lankan Bank and USD 99 billion obtained from China Development Bank.
With the credit growth expected to pick up during the next 12 months, we believe that the growth in advances would outpace the growth in deposits. Nevertheless we are confident that we could bridge this funding gap through other sources.

Q: What are your plans on the recently announced acquisition of Prime Grameen Micro Finance Limited?
During the past few years, HNB was looking at carrying out microfinance operations through a subsidiary.

The acquisition of Prime Grameen Micro Finance Limited which operates through a well-tested and sustainable business model facilitates HNB to achieve the objective of serving the micro entrepreneurs at grassroot level while also supporting the national interest. We are confident that this acquisition would enable the HNB Group to post superior results in the future.

Q: What is your vision for HNB and how would you charter the bank?
Our vision for HNB is to be the best in Sri Lanka in terms of profitability, service delivery and operational excellence. We will reach our vision through the strategic focus as detailed earlier.
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Thanks for sharing

Thanks Reds for sharing. Good Insights.