Banking Sector Performance – Interview transcripts

Topic: Performance of the Sri Lankan banking sector

Speaker: Nimesha Jayakody – Senior Product Lead

Video length – 11:47 mins

00:18: How have the interest being fluctuating over the past couple of months?

  • From around 2013 interest rates in Sri Lanka were falling almost until the end of 2015.
  • In response to the growing worry of excessive credit growth, the Central Bank started taking some policy measures from last year.
  • Stemming from that we are now operating in an environment with relatively higher interest rates

01:00: How did loans perform last quarter? Any specific loan categories you want to talk about?

  • As a result of the measures taken by CBSL there are signs that private sector credit is slowing down. In line with that, the loan growth in local private banks during 2nd quarter of 2017 also slowed down compared to the previous 3 quarters.
  • Another reason for this slowdown is that Banks have become more selective with regard to their lending
  • With regard to specific loan categories, A recent Fitch Ratings report mentioned that construction is the single largest sector that the Sri Lankan banks are exposed to and by the end of 2016, the segment accounted for around 17.5% of their total lending
  • However by analysing the quarterly financial statements it’s not very easy to give a view as to whether this trend has continued in 2017 as the loan values to this segment could be included in broader loan categories.
  • Another category to look at is the leasing category. In the 2016 budget last November, the Central Bank tightened the maximum loan to value ratios so the lending institutions couldn’t lend as much for vehicle leasing compared to earlier periods.
  • However in 1st half of 2017, we are still seeing some growth in the loan volumes under this category but at a much slower rate.

04:26: How have the loan repayments been last quarter?

  • One key metric that we look at to understand how healthy a bank’s loans is the non-performing loans (NPL) ratio. NPL is a loan on which a borrower is not making any interest payments or repaying principal amount they had borrowed for a certain period of time. The NPL ratio is simply the value of these loans as a percentage of the total loans. Lower the ratio, better it is for a bank.
  • For some time in the past few years we saw the NPL ratios improving.
  • A key reason for this was the gradual reduction in pawning facilities starting from around 2014 which back then used to be a source of high NPLs. Now the effects of that is slowly going away.
  • However, during the most recent quarters pawning activity had picked up and many banks reported a higher NPL ratio
  • Another reason for higher NPLs in 2nd quarter of 2017 were the floods and droughts that affected a lot of people’s ability to repay what they had borrowed.

06:05: How was the profitability of the sector in the 2nd quarter of 2017?

  • Overall, the banking sector achieved a higher level of profits compared to the previous quarter
  • A core reason was the improvement in banks’ net interest margin, where the core income source for a bank is the interest income.
  • In addition, total operating cost had only increased marginally and the staff cost had reduced during the quarter, along with the portion of taxes they paid.

07:20: Any comments  about the future strategic plans of banks?

  • One thing banks are looking at is the technology developments and automation efforts to make it more convenient for customers and to possibly reduce operating costs in the long run.

08:06: How have recent regulations affected the banking sector?

  • One key regulation that the banks need to adhere to is the BASEL III requirements; an international regulatory framework for banks where they set minimum levels of capital that banks should hold given a set of criteria.
  • BASEL III is being implemented in Sri Lanka in 3 stages and banks had to meet the requirements under the first stage by 1st of July this year. Looking at the quarterly financial statements, all banks had met these minimum requirements.
  • The next hurdle date is set for 1st of January 2018. Some banks will definitely have to raise capital through rights issues and other ways to bring their capital to the expected levels.

09:10: Were any new banking products introduced to the market recently?

  • Banks are trying to increase the level savings deposits they have since they carry a lower cost of interest to them compared to fixed deposits. So there have been several new savings deposit schemes being introduced especially for women.

09:37: How will the banks perform in the medium term?

  • When trying to understand how the banking sector will perform, the movement of interest rates becomes quite important. Frontier Research expects broader market rates to go down further within the next months before they start picking up again during the 2nd half of 2018. Usually the bank interest rates start moving in a similar direction but with a delay.
  • There is still a window in the short term for the banks to hold on to relatively healthy net interest margins. If the banks manage their deposits and lending portfolios tactically they could still perform sufficiently well for the remainder of 2017.
  • There is some uneasiness in the sector about NPLs and it’s possible that it wouldn’t improve within the year. We shouldn’t completely rule out the possibility of a real estate sector bubble either which can affect the banking sector significantly.
  • Overall in my view the banks will perform moderately well like they had done so far this year, but they need to drive performance very carefully so as not to compromise their long term stability.
  • This I believe is very important because, if banks, which are one of the most connected sectors in the economy, weaken most other sectors/industry will start feeling it too.

The 1-Hour Weekend Activity That Will Totally Change Your Week

While the weekend is a time for relaxation, it might be wise to set aside one hour during the weekend to map out the upcoming week. Here’s the four-step approach to planning your upcoming week.
 
  • Review the previous week. Think of this step as performing an audit on yourself. 
  • Get all of your ideas out of your head. Empty your brain of ideas, review those ideas and pick the most valuable.
  • Input your activities onto your calendar.
  • Decide on your daily actions. Identify and commit to the actions that lead to your desired results.
 
Visit inc.com for more on planning and beyond!

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Archives page!

We Built Time Twister to Solve Your No Time Problem. Here’s How.

We are on a mission to solve your “No time” problem and here’s how Time Twister became one of the solutions! 

 

We call it Time Twister because of its core purpose of saving time. But the name is also reflective of how we “twist” work hours, well away from the norm, to bring you Time Twister as early as possible each day.

8 Time Twister team members ensure that you get the news you require, delivered to you 7 days a week, 365 days a year.

 

For a more details on the story of Time Twister, visit the Frontier Blog!

Regaining GSP+ In Sri Lanka – Interview transcripts

Topic: Sri Lanka Regaining GSP+ – opportunities for firms

Speaker: Travis Gomez, CFA – Product Head

Video length – 9:10 mins

Starting point:

1:20:      How has the loss of GSP+ impacted local companies?

  • Between 2010 to 2017, companies that were traditionally more export oriented, were affected and the extent of this impact depended on their exposure to European Markets
  • A case in point is the HAYL’s group where some of its subsidiaries such as; Dipped Products, Haycarb and Hayley’s Fabric performance was affected due to the global slowdown
  • As a result, HAYL pivoted towards investing in the domestic sector and subsequently the contribution from these traditional export segments to the firm’s performance saw a dip
  • This shift was also facilitated by the ending of the war which opened up more opportunities in the local economy and the company invested heavily in sectors such as construction, power & Energy and Leisure.
  • Now with the regaining of GSP+, we could potentially see some turnaround in the performance of some of these s export segments of HAYL’s.

2:55: How important is GSP+ for Sri Lanka?

  • This is a somewhat controversial issue as we don’t have a lot of empirical evidence to gauge the impact
  • One reason for the difficulty is because we don’t have many listed companies that are exposed to European Markets and one of the few listed companies that have this exposure is Tee Jay Lanka (TJL)
  • Considering their revenue performance and margins over time, the loss of GSP+ seems to have had only a minimal material impact the benefit of GSP+ is in the form of allowing firms in certain sectors to get a leg up in terms of a cost advantage compared to competing countries.
  • This could explain the minimal material impact on TJL’s performance because in the case of Garments, companies like TJL, MAS, Hirdaramani do not attempt to compete in terms of cost with competitors such as Bangladesh (that also enjoys the benefits of GSP+).Instead they compete in terms of quality, use of new technologies as well as better lead times
  • Another reason in the case of large scale garment manufacturers is that they have been investing in manufacturing capacity in countries such as Bangladesh which enjoys the GSP+ benefit.

5:20 What has been the stock market’s reaction to the news of regaining GSP+?

  • Minor reaction from the market
  • The perception is that this has been talked about for a long time hence it’s been factored in
  • At the same time, it will take time for tangible benefits to materialize

6:08 What are the sectors that stand to benefit from the regaining of GSP+?

  • The obvious sector is garments, given the sector’s large exposure to the EU
  • Sri Lanka could benefit from the added cost advantage as well as the need of global garment buyers to diversify risk in terms of their geographical exposure
  • Hence, it is possible that some of the garment operations that were moved to countries like Pakistan to return to Sri Lanka
  • But the focus of garments should remain on the innovation side and competing on quality
  • An important point brought up by the EU delegation is that we need to diversify our exports to other segments. Hence other sectors that can benefit are the Agribusiness and fisheries segment.
  • Products such as Organic fruits and vegetables as well as canned fish and ornamental fish have high growth potential too.

The Global Economy in September

September marked a resurgence in the US Dollar, as reflected in the Bloomberg Dollar Spot Index, after a prolonged weakening during the year so far. This resurgence was helped by the increasing likelihood of a December rate hike by the US Federal Reserve, positive US economic data and renewed optimism on tax cuts to be introduced by the Trump administration.

In addition, the dollar was helped by sudden weakness in a number of major currencies. The Euro weakened following the controversy around the independence referendum in Spain’s Catalonian region. The British pound was affected by renewed political uncertainty in UK over Brexit. The Yen weakened as Japan’s PM announced snap parliamentary elections.

Meanwhile, President Trump is to announce his nomination for the next Federal Reserve Chairperson in October. Analysts and betting markets have speculated on who it could be with Gary Cohn and Kevin Warsh among the names being discussed. Markets are concerned about the possibility of someone as hawkish on interest rates as Kevin Warsh having a fair chance of being nominated.

With both the US Fed and the European Central Bank (ECB) talking about reducing their quantitative easing measures amidst the US Dollar strengthening; emerging markets could see some of their gains chipped away. In fact, some report of caution by investors in emerging markets (EMs), with overall inflows slowing down. The Institute of International Finance (IIF) reported that September saw $14.5bn in overall inflows to EM stocks and bonds, the least since January. But many analysts expect to see the emerging market rally continuing.

Brent crude oil prices increased in the month reaching a two year high of $59.02 a barrel on the 25th. This was caused by increased optimism over the OPEC-led oil producers extending their production limitations beyond March 2018 and optimistic demand outlooks by the International Energy Agency and OPEC. Aiding bullish sentiment was the possible shut down of the Kurdish oil pipeline via Turkey amidst controversy over its independence referendum. However, prices have moderated to the mid-$50s since then, with Kurdish supply continuing and the possibility of increased US shale oil supply amidst higher market prices. In fact, US oil exports have increased as the spread between Brent and US crude futures expanded.

The Global Economy in August

The highlight during the month of August was the growing tensions and uncertainty created by North Korea’s aggressive actions; threatening the US pacific territory of Guam, firing a missile over Japan and carrying out its sixth nuclear test – claimed to be a hydrogen bomb. Their actions were met by President Trump’s rhetoric when he threatened North Korea with “fire and fury”.

The rising tensions caused major stock markets to dip while there was increased demand for ‘Safe Haven’ assets like the Yen and Gold. However, markets as a whole have not moved dramatically. As some analysts put it, markets cannot price in an existential situation like a North Korea focused nuclear exchange.

According to the Institute of International Finance (IIF), emerging markets have seen a slowdown in capital flows during August with a $4bn drop from the previous month and the lowest since January. IIF earlier said that while EM investors continue to take on credit risk in search for yield, they appear to have turned slightly negative on EM currency risk despite recent U.S. dollar weakness. US dollar weakness has allowed most EM currencies to appreciate vis-à-vis the dollar.

The search for yield in fixed income assets has seen Tajikistan issuing its first ever international dollar bond with a yield of 7.125%, while the yield on Mongolia’s 2021 dollar bond dropped below 6%. This risk appetite continues even as certain bearish market commentators see EM trades as being crowded and due for a correction.

Markets also focused on the minutes of the US Federal Reserve meeting, which showed that there was disagreement on whether the weak inflation was transitory or not. While some officials claimed that the inflation numbers do not support further rate hikes, others, including the Chairperson, insisted on its transitory nature. September 6th saw the Fed Vice Chair, Stanley Fischer, resigning – effective from mid-October – due to ‘personal reasons’ and increasing the empty seats on the Board of Governors to four.

Brent crude oil prices stayed above the $50 a barrel mark during the month and was majorly affected by three factors. First, prices reduced early in the month as the July OPEC output reached record highs. Second, prices were helped up by supply disruptions in Libya and drops in US stockpiles. Finally, the end of the month saw Hurricane Harvey creating an interesting situation. Despite affecting US oil infrastructure in Texas, crude oil prices reduced due to the reduced demand for crude as refineries shutdown.

Your Brain Can Only Take So Much Focus

The ability to focus is an important driver of excellence. But can the opposite be true as well?

This week we look at how “unfocus” can help build creativity and better decision making (along with a few ways you can add unfocus to your day!):

 

Focused techniques such as to-do lists, timetables, and calendar reminders all help people to stay on task. The problem is that excessive focus exhausts the focus circuits in your brain. As a result, decisions are poorly thought-out, and you become less collaborative.

In keeping with recent research, both focus and unfocus are vital. The brain operates optimally when it toggles between focus and unfocus, allowing you to develop resilience, enhance creativity, and make better decisions too.

When you unfocus, you engage a brain circuit called the “default mode network.” Under the brain’s conscious radar, it activates old memories, goes back and forth between the past, present, and future, and recombines different ideas. Using this new and previously inaccessible data, you develop enhanced self-awareness and a sense of personal relevance. And you can imagine creative solutions or predict the future, thereby leading to better decision-making too.

There are many simple and effective ways to activate this circuit in the course of a day.

Using positive constructive daydreaming (PCD): PCD is a type of mind-wandering different from slipping into a daydream or guiltily rehashing worries. When you build it into your day deliberately, it can boost your creativity, strengthen your leadership ability, and also-re-energize the brain.

Taking a nap: Not all naps are the same. When your brain is in a slump, your clarity and creativity are compromised. After a 10-minute nap, studies show that you become much clearer and more alert.

Pretending to be someone else: When you’re stuck in a creative process, unfocus may also come to the rescue when you embody and live out an entirely different personality.

 

Using these techniques to build unfocus into our day, we may be able to “preserve focus for when we need it, and use it much more efficiently too”.

Visit the Harvard Business Review for more.

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The Global Economy in July

July began with a scare of a potential selloff  in emerging market (EM) assets. This was triggered by talk of developed market Central Banks starting to end the era of monetary easing. Alongside the US Federal Reserve’s interest rate hikes and balance sheet unwinding, the Canadian central bank raised rates and the European Central Bank signaled willingness to consider changes to its bond buying program. However, the switch in market sentiment was short lived thanks to Fed Chairwoman Janet Yellen’s dovish statements in her testimony to the US Congress. The outflows reversed and the Institute of International Finance (IIF) reported $20 billion in portfolio inflows to EMs in July.

To some market commentators the episode of EM weakness signaled that international investors were ready to let go of their EM debt investments as soon as global markets wobble. This has prompted fund managers to be cautious of their investments especially in terms of market liquidity giving them space to exit. However, analysts saw the episode as a short period of time in which asset prices adjusted to reflect the hawkishness of developed market central banks.

While Emerging Markets were helped by a weakening US dollar, developed markets were helped by an improving Eurozone economy. In the IMF’s July World Economic Outlook report, it highlighted that global growth in 2017 was being driven by the EU alongside Japan and China. In the meantime it also downgraded US growth outlook slightly, citing the failure of the Trump administration to deliver on its promised fiscal stimulus. The IMF also indicated that the US dollar and British pound were overvalued, relative to fundamentals, while the euro, yen and yuan are seen as being in line with fundamentals.

Brent oil prices made gains in July and increased above the $50 mark reaching $52.65 on July 31st. This was largely driven by higher US demand and reductions in crude oil stockpiles in the US. It was also helped by outcomes of a meeting among major oil producers in St. Petersburg on the 24th, where Nigeria agreed to cap its output and Saudi indicated limits to their exports. But the gains were capped by high OPEC production, primarily due to Libyan and Nigerian output.

Use a Compass Not a Map for Future Success

The future is impossible to predict with perfect accuracy. So, how do leaders forge ahead into this uncharted territory? They ditch the map and use a compass!

This week, we look at how compass leadership may be the way forward:

 

Before the Internet, life seemed simpler, easier to grasp. People in positions of power gave their employees check lists to complete. And they would do their job and wait for next tasks.

Nowadays, life is increasingly unpredictable and even the idea of leaders with all the right responses seems old-fashioned. This is the big question searching for answers now, “How do I participate responsibly in a system almost impossible to predict.”

The excitement of today is that anyone with an idea can make it come alive. You can create it, publish it, pitch it, without proposals or permission. And, without a lot of money. It’s the end of the MBA era and the beginning of the design innovation era.

The reason for a compass not a map is…

Maps are stationary, may be dated and causes frustration when inaccurate.
Maps provide a description; a compass provides vision and direction.
Maps can slow you down when the path is not clear.
Maps cannot show you how to get on that road not traveled.
Maps are poor indicators of what is unfamiliar.

The older command and control style of leading is about maps. It’s about going on a chosen course and staying there, no deviations.

Compass leadership is about a process of discovery. It’s about learning as you go along. It’s about more than one right path. It’s about hunches and taking chances.

 

“Business is complex and volatile and those who don’t read the signs of the times will be left behind”.

Visit Inc.com for more like this.

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Snapshot of the Economy – July 2017

At Frontier, we love trying out new ways to help our audience make sense of the economy.

Here’s a quick look at how key economic indicators are performing so far in the year, with an easy-to-understand snapshot.

For this update we have chosen the variables we consider to be most important in understanding the health of the Sri Lankan economy.

*Please note this does not indicate our outlook on each of these variables, but provides our understanding of how it has been performing based on the latest available data.

The key to understanding their performance:

    Improving

   Manageable

   Worsening

 

Gross Official Reserves: Stable at US$6.9bn levels in June following inflows from the sovereign issue

Trade deficit: Imports growing at a faster pace than exports in the Jan to May period

Foreign holdings: Consistent inflows slowly trickling in; Rs. 40 bn inflows from mid-Feb to end-June

Global situation: Positive for EMs and FMs

USD/LKR: Gradual depreciation

 

Credit to private sector: Rs.300 bn absolute growth during the first half of 2017, despite YOY slowdown

Inflation: Easing from record-highs despite sustained supply side pressures

 

If you want a look at the underlying numbers on each of these variables, please click here