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Clears hidden liabilities and lays platform to leverage hidden assetsBy Nisthar Cassim (Reproduced from the Daily Mirror of October 24, 2001) The 40-year old People’s Bank, currently the largest in terms of customers and reach, has opened a new chapter to become a modern customer driven financial service institution with innovative and competitive products and services. This optimistic view and confidence stems from the core achievement in 1999 when the Bank cleared its hidden and long-standing liabilities and followed up with leveraging its hidden assets in 2000, and made a continuous process to realise broader objectives. New values are being driven within the organisation and the fact that it is currently (as of October 2001) making an operating profit and yearning for true profitability is amply clear. The People’s Bank’s combined Annual Reports for 1999 and 2000 only further strengthens this case as it is full of new and strong ideas such as enhancing stake holder values, charting a new course – from red to black, moving goal posts and a new bottom line, reflecting and destructing, moving out of the morass, empowering branch network, leveraging human resources, distribution capabilities, customer base, products and services etc. Given the stature of the Board (can be confused to that of a private sector blue chip) and the strengthened senior management team along with the results so far is a testimony that the Bank is not merely reproducing these catchy phrases but truly meaning it and driving a point to its competitors and customers. Though being the second largest in terms of assets and deposits, People’s Bank, set up in 1961, commands the largest customer base of over 4 million and distribution strength with over 500 branches and savings centres. Yet as admitted in the Annual Reports, the key position the People’s Bank holds in the economy and the banking industry, regrettably is not reflected in its financial position. It has lost market share and quality of the assets has deteriorated whilst profitability has eroded as a result of a high cost base and poor returns overall. It has also been too dependent on the state - its biggest stakeholder. But that phrase too is being redefined to accommodate customers, employees, business partners and the people at large. For a change the People’s Bank is not trying to serve the government but the people, to whom it was established for. Says People’s Bank Chairman Mano Tittawella in his review: “We are a bank of the people and for the people. We are owned by the public and have more loyal customers than any other bank in Sri Lanka. A major component of our new Corporate Plan is to show how much we value our customer relationships and add value to their lives and businesses in a sustained way. We will be driven in the future by their value creating needs and be accountable to their interests.” Perhaps in different words this must have been the mandate when the Bank was set up in 1961 and some of these values were provided, including taking banking to the unbanked hence the largest network of offices. Net loans and advances amounted to Rs. 80.5 billion end 2000, while deposits were Rs. 115 billion as against Rs. 63 billion and Rs. 104 billion in 1999. The catalyst role played for over 40 years is immeasurable. But as Mr. Tittawella, who took over as Chairman in April 2000 explains in the Annual Report “Regrettably our bottom line has not reflected the tremendous role we (the Bank) have played in the economy. Over the recent past, we have been forced to carry non-performing assets, which have stymied our activities and curbed our entrepreneurial spirit. We have not had the financial autonomy to make crucial decisions and pursue new areas of income. Our policies have sometimes been shaped by external pressures which have had a negative impact on our profits.” In 1999, net loss was a hefty Rs. 8.5 billion, which was largely due to a Rs. 6.6 billion provision for loan losses and write offs. In the past there was under provisioning to show better profitability. The new Board wanted to clean the Balance Sheet, which it did and in 2000, further provisioning to the tune of Rs. 1.5 billion was made. In that context, the net loss being reduced to Rs. 1.8 billion last year is an achievement. By end 2000, total provisioning was Rs. 13.8 billion while non-performing assets (NPAs) stood at Rs. 19 billion reflecting there is room for further improvement though the non-performing ratio declined from 22.7% in 1999 to 18.9% in 2000. The mandate given to the new Board was clear - re-structure the Bank and make it more competitive, effective and financially viable given the rapid changes in the market and economic landscape of the country. After having a hard look within, the Board and senior management team embarked on a restructuring process and implemented a well-focused strategic plan. “In 2000 we commenced a review process that will transform us into an entirely new financial entity. We have greatly improved corporate governance, focused on what we do best and commenced investing in people, systems, service improvements, product development and customer acquisition to create a financial services supermarket that becomes the preferred bank of the people,” Mr. Tittawella said. “We aim to enhance profitability by growing fee based income, attracting more low cost deposits, assertively pursuing the recovery of bad debts and selling more products to each and every customer,” he added. It was also pointed out that though the Government has given an explicit written guarantee of financial support if and when necessary to meet the deficiency in net assets as at end 2000 (Rs. 6.3 billion), Mr. Tittawella said that the Government will not get involved in the running of the Bank as it did in the past. “We will assert and exercise our new found independence in a much more self-confident and transparent manner than previously so that we can convince our stakeholders that we can deliver long-term sustainable value,” Mr. Tittawella added. Profitability, prudence, productivity and focus on value-creating customers will drive the Bank and inspire new strategies. The Chairman said that the new policies adopted have already begun to show results. “Our first step was to show an operational profit, which we have already achieved. Our next step is to gradually wipe out the accumulated losses of the previous years and give the Bank true financial stability. We will prove by the success in delivering our strategic vision and stakeholder value that we are worthy of a capital injection,” he added. The People’s Bank new General Manager and CEO Derek Kelly who brings with him world-class banking experience (he had worked with HSBC for several years), says in his review in the Annual Report: “We are building a sound platform for future growth” while changes made have already begun to make a meaningful impact on the Bank’s earnings. The sound platform includes putting in place new systems, revitalising staff, devolving decision making powers to branch managers, exploring new areas of business (bancassurance will be launched shortly), and designing customer friendly products (recently introduced Jana Jaya and Jaya Shri are a success and had helped to increase low cost savings deposits by Rs. 10.2 billion in 2000) “We have already created a flatter organisational structure with clear lines of responsibility to support our operations and drive all this much needed change,” Mr. Kelly added. He said that the strategic plan finalised in early 2001 would enable the Bank to breakout from the difficult financial situation (negative net assets position) by cutting costs and adopting a very risk averse approach to grow low cost deposits and pawning whilst recovering or rescheduling non performing loans. “Fortunately, net interest margins remain satisfactory and there are good opportunities to develop non-fund income sources,” he said. While income rose from Rs. 14.2 billion in 1999 to Rs. 18.4 billion last year, net interest income swelled by 165% to Rs. 6.2 billion. The latter was possible due to growth in interest income from an expanded loan portfolio (mainly to the Government) and a parallel reduction in interest expenditure as a result of an enhanced volume of low cost deposits. The non-funds income streams had grown by 15% while total income was Rs. 8 billion as against Rs. 3.7 billion in 1999. It was explained that the 44% growth in operating expenses was partly due to the business process re-engineering program during which 100 urban branches were selected for refurbishment and restructured and made more business-friendly. A new collective agreement also led to a sharp increase in staff costs which was Rs. 4.1 billion as against Rs. 3.3 billion in 1999. “The new strategic plan learns from the Bank’s past mistakes, builds on its success and creates a new financial institution geared to meet the demands of the new economy and the new millennium,” Mr. Kelly pointed out. In this context, he is of the view that the next three years will be particularly important ones for the People’s Bank. “During this period the country’s second largest bank will go through its most important phase of restructuring. We are currently implementing a path breaking strategic plan that will transform the People’s Bank from a top heavy centralised bank into a modern customer driven financial services institution delivering state-of-the-art products to a broad range of valued clients,” Mr. Kelly said. Path breaking strategic plan Over the next three years the People’s Bank aims to achieve the following: · To obtain a 28% market share of deposits (from the current 23%) · To bring cost/income ratios towards the market norm through reallocation of resources more closely towards revenue earnings activities · To reduce the Bank’s non-performing advances ratio to 15% (19% in 2000) by introducing effective risk-management policies and disciplines and enhanced recovery targets · To grow fee income as a percentage of total income · To bring staffing (at present 10,681) and productivity levels towards those prevailing in the industry · To restrain the growth of risk assets until the capital base is rebuilt With new found independence no reason yet for state divestiture – Tittawella “We have received an explicit written guarantee from the Government. Yet the Government will not get involved in the running of the Bank as it did in the past. Previously management decisions were often influenced by political factors. There was a misconception amongst some politicians that they could “direct” the Bank and that we had social obligations far exceeding those of much more profitable banks. This is no longer the case and decision-making will be based purely on sound business criteria. Our new lending and other policies will be influenced by financial considerations alone and not by political or other external factors. We will assert and exercise our newfound independence in a much more self-confident and transparent manner than previously, so that we can convince our stakeholders that we can deliver long-term sustainable value. We see no reason to divest the ownership at this stage of the Bank’s history. The Government no longer involves itself in any aspect of the Bank’s business, thus enabling the Bank to operate independently in the best interests of its stakeholders and its financial stability. The Bank reports its success in implementing its strategies to the Government on a quarterly basis.” – People’s Bank Chairman Mano Tittawella. Highlights Figures
in Rs. Billions
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For the year
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