Sampath Bank sets industry standards for sustainable growth in Sri Lanka

Statistics show that the Sri Lankan banking sector has come on leaps and bounds in recent years, but banks must still determine the right strategy and navigate challenges to sustain growth

Sampath Bank's head office
Sampath Bank's head office at night. Sri Lanka is seeing very positive economic trends but the banking sector will need to embrace a new vision in order to sustain them 
Author: Ranjith Samaranayake, Group Chief Financial Officer, Sampath Bank
November 14, 2014

To assess the current economic performance of Sri Lanka, one must first look to the past. Indeed, the peace dividend and political stability achieved by Sri Lanka since ending its internal conflict in May 2009, paved the way for accelerated GDP growth in excess of six percent per annum during the last four years, which rose to 7.3 percent in 2013. Faster growth in sectors including the wholesale and retail trade, hotels and restaurants, transport, banking, insurance, real estate, and service sectors provided the momentum for such economic growth.

The country’s inflation rate showed a declining trend in 2013 as a result of relaxed monetary policies during the year. This process started in mid-December 2012 by cutting policy rates by 0.25 percent, which continued in May and October 2013, with further rate cuts of 0.50 percent. Lending rates of commercial banks also declined, noticeably in 2013, but the year-on-year credit growth decreased to 8.8 percent in 2013 from 17.4 percent in December 2012.

After the sharp depreciation of the Sri Lankan rupee in the early months of 2012, when the exchange rate was allowed to float, the currency fought back to become broadly stable against the US dollar in 2013. Foreign investors exiting from emerging markets in mid-2013 had only a modest and temporary effect on the exchange rate. In 2013, the rupee depreciated against the dollar by only 1.9 percent.

Overall, 2013 proved a very positive year for the Sri Lankan economy. Exports and imports both posted positive growth in the second half of the year, following declines a year earlier. Export earnings increased by 6.3 percent to $10.4bn, reflecting a gradual recovery of demand in partner countries, with garment exports increasing by 13 percent and agricultural exports, mostly tea, increasing by 10.7 percent.

The banking sector will require a renewed vision in the run-up to 2016, to sustain the positive economic outlook

Imports, on the other hand, declined by 6.2 percent during 2013 to $18bn. This was a result of less demand for oil, policy measures adopted in 2012 to rationalise imports and subdued commodity prices in international markets. The bulk of the drop was due to the reduced imports of transport equipment by 32.7 percent and fuel by 14.7 percent. The trade deficit fell to 11.4 percent of the GDP, a marked decline of 4.4 percent from 2012.

The tourism boom continued in 2013 with the number of visitors growing by 27 percent to reach 1.2 million and earnings expanding by 35 percent to $1.4bn.In addition, tourist arrivals from China and Russia increased significantly, while western Europe continued to be a large source of visitors.

Workers’ remittances expanded by 13 percent to $6.8bn. The main factors that boosted remittance inflows were the increased labour migration in professional and skilled categories, the expansion of formal channels for remitting money and the introduction of swift web-based money transfer systems.

A renewed vision
Road Map 2014 – which introduced the Central Bank of Sri Lanka’s (CBSL) monetary and financial sector policies for 2014 and beyond – highlighted that the banking sector will require a renewed vision in the run-up to 2016, to sustain the positive economic outlook and ensure greater financial system stability.

As part of this vision, the CBSL expects that at least five Sri Lankan banks will have assets in excess of LKR1trn ($7.68bn) by 2016, with a strong regional presence. It also envisages that there will be fewer banks as a result of mergers and acquisitions and anticipates that there will be a large development bank to provide a significant impetus to the nation’s development activities. The CBSL assures that its policies “will be forward looking, designed to balance potential worldwide policies and adjust to sudden volatilities”.

In keeping with the CBSL’s vision, banks with assets of less than LKR100bn ($768m) are expected to grow beyond this limit, either through organic growth, consolidation or mergers with other banks or non-banking financial companies over a reasonable time frame. The island’s two main development banks, the NDB and DFCC, have been in preliminary discussions to merge their operations, in the light of creating a robust entity that could provide a broader impetus to development banking activities.

Recently, the banking industry has been showing remarkable growth. As a result several banks were successful in 2013 in raising dollar funds from international capital markets at very attractive interest rates, reflecting growing investor confidence in the industry. With these funds, the banking sector was able to diversify the sources of funding and to channel more credit to the needy sectors of the economy.

Sampath Bank has been focusing on both traditional branch banking and technology driven banking for customers. Though 2013 posed many challenges, the bank was successful in overcoming them strategically. The bank’s consistent focus on customer-convenient banking has been the key competitive advantage.

Credit growth
The industry’s loan growth moderated in 2013, after recording high growth rates since 2009. A drop in gold loans due to falling gold prices further aggravated the situation. Nevertheless, Sampath Bank managed to successfully penetrate the market and record high credit growth (see Fig. 1). The bank was successful because it was able to re-channel funds released from gold loans to other products such as overdrafts, credit cards and leasing, while also introducing structured financial solutions tailor-made to address customer needs at competitive pricing.

Growth among Sri Lankan Banks graph
Source: Sampath Bank

A popular product among the low-income groups, gold loans accounted for 24 percent of Sampath Bank’s lending portfolio-mix. When hit by the falling gold prices, the bank was able to adopt new strategies such as reducing the loan to value ratio from 80 percent to 65 percent, discontinuing the practice of granting extensions to customers on part payment of capital/interest and expediting the auctioning process on defaulted articles. An impairment provision of LKR3.2bn ($24m), which was the highest among peer banks, was made to cover the entire gold loans portfolio and exposure to the product was reduced from 24 percent to 19 percent by the end of 2013.

The bank also had the highest net interest income growth among its peers in 2013 (see Fig. 1). This success was due to the several factors, including high credit growth and safeguarding net interest margins, despite downward market pressure. In addition, low non-performing assets in all lending products other than in gold loans, timely re-pricing of products, conversion of the bulk of off-shore banking foreign currency reserves to local LKR to reap the benefit of higher interest rates also helped to achieve the NII growth referred to above.

New branch model
Sampath opened 101 new branches between 2009 and 2013, in order to expand the customer reach. This was done by adopting a low cost branch model, in that the branches operated only as deposit collecting and credit marketing centres, with an initial staff of six to seven. All credit decisions were centralised in the hands of well-trained officers at regional offices. This model ensured superior credit quality as well as low cost operations at branches, expediting the break-even process of new branches. Consequently, the number of loss making branches reduced from 37 to nine during 2013.

Overall, 2013 proved a very positive year for the Sri Lankan economy. Exports and imports both posted positive growth in the second half of the year

The bank launched the Sampath mobile app in 2013, enabling the customers to do transactions through their smart phones and tablets using unique and versatile features free of charge. This software, which can be downloaded from the Apple and Google Play stores, has been downloaded more than 10,000 times to date.

The bank has also enhanced its internet banking products – by linking card system and treasury systems to Sampath Vishwa and further implemented a process improvement. Consequently, it was possible to increase the internet business volume and value by 40 percent and 50 percent respectively.

Sampath introduced the first ever cardless ATM in the country in 2013, which, as the name suggests, allows customer to use the ATM without a card. Customers are authenticated through the national identity card number and unique pin. The bank also installed its foreign currency ATMs at several key tourist locations in Sri Lanka. This ATM allows the users, including non-customers, to convert foreign currency to LKR. Further, the interbank ATM network was expanded to reach 1,420 ATMs, the largest network in the country.

The bank raised $100 from a syndicated loan through HSBC. Initially, HSBC was engaged to raise $45m, but due to growing confidence of the foreign investors in the performance of Sampath Bank, the syndicated loan was increased to $100m. Furthermore, the bank was able to raise another $20m to finance its renewable energy projects from Proparco, the private sector arm of the French Development Agency (AFD).

The bank also raised LKR5bn ($38.4m) medium-term debt capital funds in the local market by way of issuing, unsecured, subordinated, redeemable, five-year debentures, also strengthening its Tier II capital.

As a systemically important bank in the country, Sampath looks forward to continuing its tradition of setting industry standards through technological innovations and customer service.