National Development Bank PLC (NDBN0000) Earnings Call Transcript & Summary

Hi, everyone, from NDB Bank. Thank you, ladies and gentlemen, for connecting with NDB's investor update for the financial year 2022. Today's investor webinar will follow the same format like our prior webinars where the Bank Director and Chief Executive Officer, Mr. Dimantha Seneviratne, will take you through a prepared presentation, at the end of which he will open up the forum for questions and answers. For the Q&A session, he will be joined by the senior management of the bank. [Operator Instructions] On that note, let me now hand over to Mr. Seneviratne to take the presentation forward. Thank you.

Good morning all, and those who are joining us from Far East, good afternoon. Welcome to NDB Bank's investor update. This is the update for the full year results. And joining me today are a couple of senior leadership team members. Suvendrini, who is the Chief Financial Officer; Niran, who is the Vice President, Treasury; Indika, who is Vice President, Business Banking and SME; Ishani, who is the Vice President, Project Finance; Vinoj, who is the Vice President, Wholesale and Corporate Banking, and Zeyan who is Vice President, Retail Banking. So the agenda is basically covering about the corporate profile, the operating environment, the financial performance for last year and the way forward. And once we complete this presentation, we'll have time for the question and answers as usual. So I think all of you are aware of NDB, the profile. So I don't want to spend much time here. We have been in business for more than 42 years, fully fledged commercial bank with also subsidiaries in investment banking and the capital market cluster, wealth management, stock broking, et cetera. And the performance have been also confirmed by some of the outside accolades such as the global finance, the banker awards and also the last year for the first time, we also won Euromoney Best Bank award. Without much ado, let me move on to the operating environment. We all know the challenges that we had last year. So the priority of the banking sector, I mean the entire banking sector at large, was to basically managing the challenges. I think that last year was the worst, most turbulent time and this image also getting -- how challenging it was navigating in the turbulent time. And if you look at our annual report, again, the theme is the resilience of what -- the ability of NDB to absorb the external shocks and still manage [ like water ]. So the environment was very, very challenging. We all know the severe inflationary pressure that we had, especially after announcing the significant increase in interest rates from a low of 6.5%, this year it went up 14.5%. And the treasury bills and bonds, even much higher than that we were trading around 30% or even above that. Inflation had been peak around 80% in 2022 December, but now it has come down to around 50%. The foreign currency liquidity was the other challenge after Sri Lanka announced our debt default situation, the access to foreign currency was a bigger challenge. The entire banking sector was compelled to manage with our own cash flows. There was very little interbank activities or nothing interbank activities. So each bank were compelled to manage with their own cash flows. I think NDB has done well, thanks to some of our good exporters that we have been continuing banking that helped us to manage the situation. By September last year, we completely managed to overcome that challenge and do well thereafter in terms of even supporting essential imports. Another challenge was a sharp rise in market rates. Central Bank increased it by 950 basis points, but the market rates went further beyond that. The exchange rate was the other challenge, substantial depreciation of the rupee. From closely head LKR 202 level, suddenly without any breaks, it went up to LKR 380, almost 80% depreciation. And those exposures, which were in dollar-denominated exposure in the bank book but naturally parked in rupees, converted at high rates, leading to a severe capital pressure. The entire banking system had that capital pressure. And that's where regulator came in and offered to the banks to use the capital conservation buffers that were available to make use of in times like that. However, for NDB, there was no need for us to make use of the capital conservation buffer, but the capital ratios were impacted. So that also restricted our ability to grow our loan book, but also consciously with so many volatility, the interest rates, consciously, we also looked at not growing the balance sheet and there was certain attrition in the book. Without booking new assets, we wanted to manage the capital. We want to ensure that the loans are granted only to the deserving, more trade related, more working capital related exposure. So some of the exposures in the personal banking or the retail banking, the project finance and some of the SMEs, we curtail given the credit concerns and our inability to even take any long-term commitments in a very volatile environment. In addition to that, you all know that the power crisis, shortage of world essential consumables in medicine, all those challenges. So we had to run a bank. We had to run 14 -- 114 branches. The staff, more than 3,000 staff. Getting them to come into office, there were challenges. So many things that the banking sector was managing to provide the customer service as usual. So that's where our digital advantage actually helped us to grow our digital channels. So we saw a substantial growth in our digital reach and also the volumes substantially more than doubled, the digital transaction volumes that was processed through us. And there was a shift towards digital channels that helped us to bring our costs also down while serving the customers. So that was the background. And one good thing is IMF relief program that we now are aware that by next week, you'd have that agreement most likely signed with approval for the $2.9 billion bailout package. But last year, all those uncertainties were there. So banks were reluctant even on the -- holding on the one exposure, et cetera, because the domestic discount concerns were there. So that's the landscape that we operate. So it's important to understand the challenging environment that we all face. So in that challenging environment, how we manage -- and I must say that I -- my full thanks to the leadership team and the staff with us and also the customers who understood the position and supported in these challenging times. So we did relatively well despite all these challenges. And in terms of income and profitability, top line, we had 77% year-on-year growth, on clocking LKR 110 billion in the gross income. Total operating income, again, LKR 42 billion, that's year-on-year growth of 38%. Our biggest expenses was the impairment charges and 185% increase. The total impairments went up to LKR 29.3 billion, mainly both on loan book as well as the government investment. So as a result, though the top line was quite healthy, the impairments had a big hit, leading to a reduction in pre-tax profitability year-on-year. There's an 80% reduction to LKR 2 billion. However, there was a tax element that got released so that post-tax profitability at LKR 2.9 billion, again, a 54% year-on-year drop. But I must say that given the challenging circumstances, achieving this was -- itself is an achievement. The balance sheet, we crossed LKR 800 billion and year-on-year, there's 18% growth, LKR 832 billion, the end of the year balance sheet. Partly -- actually, I would say, mainly due to the exchange, the rupee depreciation because roughly about close to 30% of our assets are in dollars. So that was the main reason because consciously, we didn't want to grow our loan book in a volatile environment, in a high interest rate. Only the essentials, we supported only those customers who want -- I mean customers also have to decide in high interest rate scenario what to do. So are the only the critical ones we supported. The loan book, 10% growth year-on-year, again, partly due to the exchange impact. But consciously, an area that we drove was the deposit side. So to ensure that in any volatile situation, a bank keep concentration is having the liquidity situation improved. So we were consciously building up our liquidity. And as a result, our advanced deposit ratio also improved below 90%, which is a very healthy position to be in, in a volatile situation. You have to be always liquid in a volatile situation. So deposit growth was 22%, and we ended up at LKR 672 billion. In terms of group performance, with the capital market cluster also contributing, group PAS was LKR 3 billion year-on-year, again, a 56% drop, while the total group assets stood at LKR 840 billion. NIM, one of the key performance indicators, the net interest margin, that grew by quite good, 3.25% to 4%, whereas the impairment charges, impaired loans ratio or the stage 3 impaired loan ratio that increased from 4.55% in 2021 to 6.2%, mainly due to the significant credit challenges that we all face with. In terms of capital ratios, since we consciously managed the capital ratios by certain asset reductions, et cetera, the capital ratio has improved to 9.34% and Tier 2, the total capital at 13.35%, whereas the minimum was 12.5%. And the Tier 1, the minimum was 8.5%, whereas we had Tier 1 of 9.34%. So this is a very high-level performance overview. Moving on to the income side. More details about the gross income, 77% growth from LKR 62 billion last year to almost LKR 110 billion, LKR 47 billion growth there. Coming mainly from the interest income from LKR 52 billion last year to LKR 98 billion in 2022, 86% growth. And interest expenses, also a similar increase but the quantum is lower from LKR 31 billion to LKR 67 billion. So as a result, the net interest income, we had 42% growth from LKR 21 billion to LKR 30 billion. Balance sheet growth is only about 18%. However, you would note that the NIM has grown by 42%, mainly due to the very active [indiscernible] in the book at the right time that helped us to improve on the NIM. In terms of fee-based income, again, good growth there, 12% growth from LKR 5.6 billion -- net fee and commission income from LKR 5.6 billion to LKR 6.2 billion. We all know that due to the currency challenges, some of the trade businesses, there was a drop in import, import restrictions were also brought in. So the usual trade operations were not the norm. And -- but despite that, the things improved only in the last quarter. So we had to do a lot of catch-up work. But with all that, fee-based income had a LKR 656 million increase from LKR 5.6 billion to LKR 6.2 billion. Our digital base income also supported in getting that. The other non-fund based income from LKR 1 billion to LKR 6 billion basically mostly on the balance sheet management on the exchange side. And then on the non-fund based income, LKR 3.7 billion to LKR 5.7 billion. So all in all, the total operating income, we had 38% growth from LKR 31 billion to LKR 42 billion, a LKR 11 billion growth. This -- they remain because charge on us, the impairment charges. So thought of spending a little bit of time there. From a LKR 10 billion impairment charge last year, 2021, it almost tripled to almost LKR 30 billion, LKR 29.3 billion. So that's where the biggest hit came in. It came from 2 main things. One was impairment charges on the investment book for -- especially for the foreign currency denominated government securities, the SLDBs and the international sovereign bond holdings that we are having. And then the loan book, we saw the stresses coming in. Country's economy had a negative growth rate of 9%, previous year also a negative growth. So naturally, with high inflation, high interest rates, negative growth rate, what makes you expect is the impact on the credit quality. And as a result, we were compelled to take high impairment charges. Some were on a precautionary basis, some were on a need basis. And in terms of provisions made for the investment book, especially the foreign currency holdings, the impairment covers are in line with anticipating the government foreign currency debt structuring that is expected this year. Soon after the IMF announcement, government would enter into the negotiation discussion with the bilateral and the private creditors. So in anticipation of that, based on the gross financial needs, the domestic debt to GDP ratios, et cetera, as at December, we took a view, which is in line with the auditors as well, the entire industry took certain views. And our impairments are in line with those views in terms of making the impairment for the government investments. And the loan provisioning, as I mentioned, is basically due to the escalated credit risks in the current challenging operating environment. In terms of the KPIs denoting the asset quality, of course, impaired loan ratio, the stage 3 ratio increased from 4.55% to 6.2%. And the impairment cover, the impairment for the stage 3 versus the total stage 3, that we were consciously building up from 32.8%. It has improved to 37%. As of now, it has further improved. This is consciously that we are trying to ensure that the impairment cover improves. One thing here, when you look at the industry and probably when you compare to NDB, almost all our retail exposure are under the collective impairment models. However, we took [ consolation ] in individual impairment. Our thresholds are lower to ensure that a large exposure is individual assets through multifactor authentication to have a more calculated, more refined assessment. And in that, bulk of our business banking or the SME portfolio are very well secured. There are tangible security that we're sitting on. So therefore, maybe relatively the impairment cover, you would see it's lower than the industry. But it's all after critical assessment, it has been rated by the external auditors as well. But thanks to some of the strong securities that we are holding on, especially on the business banking or SME portfolio, that is why relatively it is lower than the industry. In terms of total impairment cover, it improved from 4.1% to 5.81%. Moving on to the operating expenses. This is where NDB did very well, I think the best-in-class in terms of industry. Our total operating expenses, the increase is only 9%. At a time that the inflation has gone up to 80%, at a time where the exchange rate has depreciated more than 80%, you can imagine how we are to manage our costs to reach a 9% increase only in operating expenses. So this way, I give a lot of commendation for the team, staff. And also the digitalization initiatives that we did to ensure that the work -- the increased workload was tremendous. A lot of central bank amendments, the customer queries, customer complaints in terms of loan restructuring, plus all the normal transactions that you have to manage in a closed economy. All that were handled with only a 9% operating expenses. The personnel expenses, only 1% increase from last year despite we providing about 10% increment to the staff and also having some one-off payments into the -- towards the latter part of the year, especially the senior manager and below resignations to support the staff who were really impacted by the inflation and the change of the tax regime. But despite all that, we managed the personnel expenses quite well. Depreciation and amortization remains the same. However, it can be higher this year with the core banking upgrade expenses also coming in. But mainly the other expenses from LKR 3.9 billion to LKR 4.8 billion. Though it's 22% increase, when you look at -- now these are the controllable expenses still. But when you look at the inflationary pressure and everything, still managing this is remarkable. So as a result, our total cost to income ratio was still below 30%, actually 26.6%, reflecting both cost efficiencies and also the revenue enhancement that we had. In terms of balance sheet, as I mentioned earlier, the 18% growth in total assets. Investments, you would see quite a sizable increase in investments from LKR 146 billion to LKR 199 billion, 36%. So of the total assets, actually, the composition mix more towards the investment side rather than the loan side because, consciously, one was the credit concern, the environment. There was no less appetite also for the borrowing at very high rates. So the loan book was not grown aggressively. However, with the deposits coming in, where we deploy those assets in the investment, mainly the government bills, bonds, but there again, we were consciously booking most of them in bills. So that's a relatively higher growth compared to other years in the investment side. Total deposits, 22% growth. Borrowings, that's very negligible. We settled all our foreign currency obligations during the last day itself. There are no -- despite all the challenges, we settled all that. Whatever the increase is probably the dollar appreciation. So, otherwise, there was no increased borrowings. It's only the exchange impact and the total equity improved from LKR 59 billion to LKR 64 billion. So overall, the financial performance, the investor ratios as typical to the -- our stock market behavior, the closing price of the share came down. It's LKR 32, but however, it has subsequently improved. As of now, it's around LKR 52. Hopefully, things should pick up with the IMF program also announced. Earnings per share had a big hit from LKR 19 to LKR 7.65. ROE, again, substantial reduction from 12.27% to 4.75%. Book value per share remains same, almost LKR 165, LKR 167 range. Price/earnings increased from 3.5x to 4.18x. The price-to-book value is the biggest drop, but this has slightly now improved, but as of December it was 0.19x since. In terms of capital and liquidity position, I think I touched on this. So all in all, the common Tier 1 capital ratio, 9.34%, bank level, about 70 basis point reduction from the last year, mainly due to the exchange impact and the total capital ratios from 15.4% to 13.35%. There were some debenture payments also during the year. That was the key reason for the Tier 2 level reduction. And you would have noted that we have already announced Tier 2 level capital raising, LKR 10 billion that -- where we have provided room to take the option during this year rather limiting it to a particular time frame. And we are waiting for the interest rates to come down further. There is no major pressure on the capital -- Tier 2 level capital ratio for us. So I think it is into our advantage to wait until the rates further improve and then go for that, so that will further strengthen the Tier 2 level capital. Statutory liquid asset ratio despite the minimum is 20%. As I mentioned, we were consciously building up our liquidity level. So as of the end of the year, it was 27.2%. And liquid coverage ratio very much above the regulatory requirement, minimum requirement of 100%. We are at -- actually, minimum requirement is 90%. Now we are at 297%. And liquid coverage, again, minimum, all currencies also 232% versus minimum of 90%. And net stable funding ratio, whilst the minimum requirement is 90%, again, we are at 130%. So we have been basically improving on. If you look at even the year-on-year, from 118% to 130% year-on-year liquidity has been improved. Even the liquidity coverage ratios from 170% level to 232%. So that's consciously that we have been building our liquidity position. So then it's about the way forward. So in the background, this is the achievement. But how you move? I think the most of the volatile situation, it's last year, but it's still volatile. We are still not out of the danger. There are certain questions on the IMF structuring, how the Sri Lanka would enter into the next phase of debt negotiations with the bilateral creditors, private creditors. There will be intense level of discussions there. So still there are uncertainties. But despite that, how we move forward, be a responsive and agile entity that NDB is and how we are going to move forward. So a couple of key things -- key thoughts I just want to leave with you before moving on to the question-and-answer session. One good thing is the IMF relief package that has been now announced and looking forward to the board level approval next week, that would release LKR 2.9 billion over 8 tranches. Hopefully, there will be a -- the first tranche can be something higher. But more importantly, that would also put the country into a certain framework, a long-awaited economic revival, policy level decisions as to restructuring, improving on the government revenue side, tax changes that we have seen, the utility prices that we have seen, the removal of subsidizing the fuel, et cetera, that we have seen. All those are the right directions, long-felt needs. Unfortunately, Sri Lanka, due to a lot of political pressure, never took that firm decision. So we had to have that struggle last year, people had to go through all those challenges for people to realize the need. So hopefully, that trend should continue if we are to come out from this current economy crisis and get our country back to our growth momentum that is expected. This year, still the expectation is the domestic GDP to have a contraction again, maybe around 3% or a bit less than that. Central bank expectation is at least by the first -- last quarter of this year, things to revise. So we are also hopeful of that. And in that context, the interest rate reduction that we have seen in the last 2 months, almost 500 basis point reduction in the AWPLR and similar reductions, substantial reduction in the treasury bills, bonds, all that would help to have some acceptable level of interest rates, so our customers can basically continue their operations not as paying high as close to 30%. And in that context, the recent appreciation of the Sri Lankan rupee, from a high level of LKR 365, it came down to LKR 325. But yesterday, again, it has increased up to about LKR 335 range, maybe due to smaller transactions, but based on the demand for the importers, hopefully now today that is managed at the same level. We are hopeful that the exchange rate would also come to something reasonable for country to have an overall benefit as well. We saw during the last 2 weeks where the exchange rate came down substantially, central bank also picking up dollars to build up their reserves, which is a good sign that has helped the country to get some usable reserves going up. And hopefully, with the IMF program getting announced, there will be unlocking of some other funding that is lined up for budgetary purposes, especially the World Bank fund, the ADB funds that are expected to come. Hopefully, that inflow would also help to get the exchange stabilized to an acceptable level so that we can continue. So we are looking forward to that. In the meantime, bank, how we manage is basically, looking at our customers, who were impacted due to 2, 3 years of challenges. The [indiscernible], the COVID challenges, the lockdowns plus when they came out from this moratorium, the interest rates, they had gone up, skyrocketed the inflation, all that. So they actually came out from the moratoriums in a very challenging time. So how you support them. Most of these faults are not due to them, but the economy as a whole. So how you support them. So that's one of the key priorities where we have set up our remedial unit to support them, guide them and help them because it's all to do with sustainable banking, not that we put them into difficulty. So that is one of our key priorities to help these customers, hold their hands and then support them, be more flexible to support. So -- and preserving the asset quality is yet another priority, and we will continue to be more focused on digital channels to have our cost rationalization so that we can provide recent profitability to enhance our shareholder returns. And we continue to have our liquidity level at a very strong level because still we are not the country -- I mean when I say we here, the country, the industry is still not out of the woods. Political uncertainties are there. We see a lot of pressure in terms of the tax -- high tax regime that we have. These are necessary [ decisions ], but on the other hand, people also have to understand and support these initiatives to ensure that we sail these and come out from these challenges in a much more stronger we get. There's no way that we can turn back and default another IMF bailout package, that would be the end of the story for the country. I go to see the bilateral creditors, especially China, India and the Paris Club, supporting that. But importantly, for the bank -- the banking sector, the -- in pressure, sovereign bond exposures, et cetera, how you manage it, how you negotiate, all that are still key challenges, whether there would be domestic debt reprofiling. If that is a case, how would that be -- have an impact to the entire industry. But these are the uncertainties that we had to tackle within the -- in this year. So that's why we are preserving the capital where possible. We're having our liquidity level as much as high. You can't have high liquidity, then there's another cost of -- having liquidity also is a cost. So you have to have a fine balance in managing to ensure that shareholders are also provided with good returns whilst also importantly keeping our customers also to help them to handle their transactions. Especially, in terms of foreign currency, we have seen quite a good growth, good improvement. We have been working on improving those flows, especially the export-oriented organization. We have been onboarding. We have been supporting, even growing on our remittance business. We just concluded our core banking upgrade to the latest system in January this year. So that also gives a lot of mileage, lot out of opportunities to do more on the digital side. So those are the things that we are working on whilst managing still the current challenges. So with this, I open up the session for question and answers. So please feel free to raise your questions. It will be filtered and brought to our attention, and then we will provide answers. So with me, my fellow panelists, the leadership team members that I mentioned are here to take such questions. Thank you.

So there was a question on -- at what rate are you hoping to issue the coming corporate debt securities given the volatility? Wouldn't it make sense to let an option set the rates? A couple of questions. Then another one on what's the likelihood of a domestic debt structuring? And so let me take the first 2. In terms of corporate securities, I think, as I mentioned earlier, we are waiting till the interest rates stabilize further. We see rates coming down. So -- and since we don't have that much pressure at the moment in terms of Tier 3 -- Tier 2 level, the luxury of waiting is also with us. So anyway, that's coming from our EGM on 31st March, and thereafter only we can go for the pricing checks and all. So we would wait for the right time and raise it. With regard to the other question, domestic debt structuring, I think it's all to do with the gross financial needs calculation that the government is coming up, and I think it's important to see after the IMF program, the central bank would also make certain announcement of those details. So we'd like to wait and watch that. But our take is very unlikely that overall debt structuring, may be a reprofiling, but it's too early for us to comment openly in a forum like this. So we are waiting, we are getting ready. There's another question about the net interest margin. The current environment are very high and is there any risk of sudden price on the lending deposit side on the business? Niran, you want to comment on? Niran is our Head of Treasury.

Actually, I think their -- NIMs have really improved among the industries, mainly driven by the excess funds plus funds being invested in the kind of domestic fixed income markets like the government bills and bonds because currently, if you look at it, still there is a huge difference between AWPLR and treasury bill and treasury bond rates, so which we expect to converge in time to come versus DDR and other debt restructuring uncertainties have taken off. So unless otherwise the credit appetite increases and some reductions in the interest rates, we feel that these margins may remain for a while during this year.

Niran, another question, probably you can answer. Can you comment a bit on the interbank market and how it has been operating as of recent?

Yes. Actually, we saw the interbank started to operate after quite a long time during the last 2 weeks with central bank taking the band off. Also, I think a lot of credit should go to central bank and the governor for managing it that way because they didn't take the band off immediately, but gave certain -- they've widened the band and also gave ample room for the market to adjust. And also those sites also informed to us that they will -- very soon they will take the range off. And also the timing is also -- was -- I think is quite correct because that's the time where the import demand was also much less. And even -- what we felt even within the last couple of months itself, we saw the demand side was really coming down with the interest rates at a high level and also with the credit demand also being not very high. So timing wise also, it has been quite good and also we saw a little bit of a panic from the exporter side also. And then there were certain clients who have brought in the dollars also some time well before these mandatory conversion was effective. So they also started to convert somewhat of their balances. So that also had a big impact to the exchange rate. So it was more or less lack of demand and that the exchange rate really came down. So -- and also the liquidity also has improved in the market because we have seen the worker evidences that the tourism sector in close were increasing. So -- and we feel that the sudden move -- upward move over the last 2 or 3 days be temporary. And we think in the medium term, that the exchange rate should come down a little bit more and settle at a reasonable level, I think, probably still I think there's more room for it to improve further. I mean for a rupee appreciation -- for further rupee appreciation.

Thanks, Niran. There's a question on, after nonperforming real estate loans, how much has been force sold? Is there a risk of the market value being much lower than the collateralized value? And how many months in arrears are they on average? I think the -- all the -- entire banking industry was requested to have these moratoriums in place till the end of the last year. And in terms of forced foreclosure, that again, there were certain regulated directions in terms of minimizing it. So the market opened up only in the last probably December and thereafter. So we also had quite a high number of loans that have been force sold. But in terms of the market price, I must say that we have not seen that much of reduction in the collateralized value compared to the valuation. I think in some cases, some prices have gone up because the cost of construction, especially the buildings and all, have gone up. So with the exchange impact, inflation impact, all that is reflected also. So we are not seeing a big drop. In some cases, actually, a certain appreciation as well in terms of the collateral that is offered. There's a question on what is your loan book growth assumption for '23 and from which sectors you expect the growth to come in? So as I mentioned, it's -- the economy should also grow for us to consider loan growth. So we have -- we would have a cautious loan growth, not much, but the areas that we would concentrate mainly on the corporate banking or the business banking where there is trade related, where there is working capital and export-oriented firms. We would like -- in fact, we have come up with a RORAC model as well for minimum return for us to book an asset. So we do measure before we book an asset. So it would be a cautious growth in terms of loan growth and mostly coming from the corporate and some selected upper end business banking, trying to trade them export business. There is a question on, is NDB targeting a higher loan provision cover going forward? We would consciously improve on this cover certainly. But as I mentioned, the key differentiation is that most of our SMEs are secured. So there is a value assigned to that when you apply the impairment assessment to multifactor model. However, consciously, we would also build up because still the credit concerns remain, specifically the specific ones, it would be certainly increasing. In fact, some of the old large corporates and all, the NPL or the provision cover is much higher. Some are close to 70%, 80%. But in overall context, the average is 37%. Of course, there is a question about, do you foresee a provision reversal on account of SLDBs? I think Niran?

SLDBs, definitely, yes, because we are now settlement -- we are in a settlement process, where they are the central bank on the treasuries, providing rupees instead of the U.S. dollars. So already -- so whenever that rupee settlement takes place, there is a reversal from whatever we have provided. And also, there can be -- even from the exchange rate also there can be some kind of an impact there when -- because at the exchange rate at which we have provided, but if the dollar-rupee exchange rate appreciates, it comes down further, then there can be -- technically, there can be some reversals. But overall, it's mainly because of settlement. Yes, it is settlement process right now for SLDBs, unlikely -- not like in the international sovereign bonds.

There's a question on in recent months, what is your fixed rate borrowing costs for an average borrow on 5-year facility? That has been coming down to maybe around 23%, 24%.

Again, it's like -- what's happened is like, again, the bank has an internal pricing policy on a model which is driven from the marketplace. So effectively, what we have seen is that the demand is also very much less. And we are also very concerned that even at these high rates whether pertinent to lend currently. So it's clearly driven by the internal pricing model and the risk appetite of the bank.

So just to add, we are slowing, going that consciously because as Niran mentioned, the customers who are getting into fixed rate borrowings at these high rates also are consciously coming in for that borrowing or just because the loan is that they are going to borrow. Unless the repayment capacity is really good, we are also conscious not to book much, especially on high rate regimes. There's a question on, has there been an uptick in hotel sector servicing of loans in recent months? Yes, certainly, there is. We see with the tourist arrivals picking up with the country in terms of fuel availability, the power crisis moving out and all, the hotel sector is getting back gradually to normal operations. So most of them who are holding on to their negotiations, taking the cover under the moratorium are now coming and working on the restructuring that we have been proposing. So yes, there is uptick in them servicing and also looking to service. It has not been earlier available because they also are not sure about the future, but normalcy coming gradually on the tourism side and all, there is interest for them also to come and negotiate where they all know when the tourism sector picks up, they also want to ensure that a bank debts are also really addressed. Otherwise, they can't borrow more [indiscernible] and all. So they're also keen to come and negotiate. So there is uptick there. There is a question, does the bank has anything lined up in terms of capital inclusion on the Tier 1? I mentioned about the Tier 2. Tier 1, yes, certainly. Yes, that's an area because for us to grow, we need to work on the capital side. So there are a couple of interested parties who have raised their hand, but we are also looking at the options. I think more would come in after the IMF correction is in place. So we are keeping the time lines probably towards the latter part of this year. Once the situation, all the uncertainties on the debt restructuring, all the uncertainties are cleared, I think that's the time. Otherwise, with the uncertainties, if you go, we may not be able to testify right price for us to get the new capital infused. So we are waiting for the right time to go for that capital inclusion. There is a question, Niran, how much of SLDBs are maturing in March '23? And if authority indicate that this will be paid in LKR? Of course, they have been paying SLDBs all this time in LKR, that also LKR bonds. So I think this time also it could be most likely LKR bonds. There's a question on, geographically, what regions were the most hit in the U.S. -- hit in the country during the period? And conversely, what are the best? Niran, do you want to take that? I must say that, I mean we were visiting our North and East branches last 2 months, and they are -- the area that -- I mean the economy is doing well, I would clearly rate North and East area. Only, they are not impacted by the ForEx crisis or the power crisis, all that. And even during the height of the world, they were used to that and very hard working. And I must say those are the 2 areas that they are going to come up faster in terms of regions, geographically, those 2 areas would be really -- come out much faster. Impacted regions, I think other subareas across, we cannot particularly say one, because even if we were SMEs, we see stresses in all regions. But same time, we will see some areas like Northeast and some other areas where now the cash flows are coming and the businesses are picking up. So that's a good sign. If this continues by year end, we hope that even small level SMEs are also being picked up. Okay. There is question on stage 2 and 3 increase has been around 50% year-on-year and stage 2 as a percentage of gross loans around 31%, which is one of the highest in the industry and also stage 3 is around 11%. Why have these been higher compared to other banks? Suvendrini, do you want to?

So I think -- kind of stage 3 composition that's in line with the other banks, but it would take the stage 2 and 3 together. Yes, it's high because our stage 2 composition is high. That is because we actually evaluate the potential loss. And also, we have identified certain risk elevated industries and on a consolidated basis, we have classified. At the same time, when it comes to impairment, I think we also mentioned the level of collaterals and the expectation of cash flows because we have evaluated these [indiscernible] that we have identified the business liability. So with that, the provisioning may be less. But evaluation, we cover the entire stage 2 and 3, which is a higher composition. So that's the reason for that.

There is a question on, what is the exposure to leisure and construction sector? Leisure or the tourism, I think, total book is -- I think, I have answered this question earlier as well around 4.5%. Construction, so it's about 5%. So 4.5% for leisure and 5% for construction. And there again, the construction like most of our exposures are very specific project base. So I think we are much in control of those projects because we don't have bulk OD facilities to fund, it's all project specific. So it's much more well structured. There's a question, any idea if maximum shareholding percentage in banks will be revised upward for strategic foreign investors? Asking this as it's affect all capital raising issues. I'm unable to comment on that up to the regulator also to look at. But we have seen in some cases that the bank has -- basically are flexible, especially when it comes to the foreign strategic investors. So yes, and given that need to attract more capital, all the banks would be going for capital attraction. I think it makes sense also to have some higher percentage holdings because I can't understand why it is restricted, especially for foreign investors. So -- but yes, it's difficult to give any comments on that other than sharing my opinion. There is a question on what's the breakdown in between variable and fixed loans and expectation on loan growth. So I think that's an area that fixed rates -- there is a certain exposure, which is under fixed rate, especially on the -- say, for example, housing loans or the leases, which are at fixed rates. And these are committed to facilities unless you're in OD situation and we are not supposed to make any changes on the rate. So apart from that, most of the other exposures are on floating basis, either AWPLR link or the transpricing link. So the key areas are the lease portfolio, the housing loan portfolio and also some of the personal loan exposures. There is a question, NDB still growing the deposits at a higher rate. Is this going to continue? I must say that we are not growing at a higher rate. If there's a perception like that, should not be the case. We are paying actually sometimes below market rates. I think that's our privilege banking, one of the best franchise so far and also retail also have done a great job in getting more granular deposits. So we have been -- and also broad based in the deposit base rather than looking at providing a high rate and getting a large chunk because there is some -- that losing is also a high moment, somebody offers a high rate that deposit moves to another. So certainly, that's not the case. But we have been building our liquidity by growing deposits. And naturally, the tendency in the market last year was the most of the savings got converted to fixed deposit even because as a gap was quite significant. So there was a tendency some other savings customers, they moved into even 3 months deposits because still the gap was very weak compared to what they get in savings. But certainly, we consciously didn't offer high rates. So -- but grew our deposit base mainly on using the granular deposit, especially through the network -- branch network and also the privilege customers. There's a question, is there a possibility of ISB too will be repaid in LKR just like SLDB? Do you think the external Eurobond holders will be okay with that considering equal treatment principle? Good question. So we had -- I mean the -- about 10 banks are holding on to ISBs. And I think all in all, of the total ISBs issued, the banks -- local banks holding is about 12% to 13%. That's a sizable portion. And we had that opportunity to meet some of those advisors for the private creditors on the private ISB holders. They are quite open to that option as well in case ISBs are paid in rupees for the local holders like SLDB so that the available dollar composition for payment of theirs remain intact. But it's most likely the government, how the treasury, the finance ministry negotiate with these bondholders. So my gut feeling is there is a possibility of some portion of these ISBs being paid in LKR for the local holders. To ensure that the equal treatment principle is applied, they might give the same option for the overseas ISB holders, but unlikely they would take it so that [indiscernible] and some banks -- based on the ISB holding as well for banks to accept entire ISBs, you need to have NOP limits. You need to look at your foreign currency liquidity, all that type to be considered, but the option, there is a possibility. Niran, there is a question. What is the interest rate on bonds used to settle SLDBs?

There is a standard policy there. Generally, they give you the previous auctions weighted average rate. So that is the standard which has been a practice over a period -- over the -- on the maturities. So if there are to be any maturities in the recent months, they will go back for the very recent treasury bill -- sorry, treasury bond option and the weighted average yield of that.

What levels of the organization structure has staff attrition affected? I think all of us have been affected by high staff attrition. The entire industry is faced with that challenge. But that's where one is redeploying of our staff, the flexibility of moving staff is also an advantage that we had, thanks to some of the digital process improvement that we have made. So that has helped, despite the staff attrition, to manage the level of service and to continue the level of transactions. But still, all in all, the staff attrition remains a challenge for the entire industry. There's another question, Niran. If ISBs are given option to accept in LKR, does it mean there will be a reversal in provisions which are already made?

You are to get the same answer, yes.

Of course. And by the way, even the recent rupee appreciation also has increased the provision cover. Now whatever the December ISB-related provisions that banks have made, that was based on exchange rate of probably LKR 365, right? So when the exchange rate reduced that rupee because the provisions are held in rupees, so the provision cover has improved. There's a question whether our staff attrition affected the credit control department more than the others? Not really. And in fact, we are beefing up the credit control function media unit to ensure that's an area that we need to focus. So these are all the questions that we have received, right? Okay. So these are all the questions that we have received. So thank you very much for all these interesting questions. And I hope the presentation was useful for you all to understand more about the bank. And we continue to maintain these investor relations through the quarterly webinars. And thank you for taking part and asking these right questions, and thank you for your participation. And hopefully, with next week's IMF announcement and some clarity provided, we have a better picture about how we move forward. Bank is getting ready, and I'm sure the investor community is also looking forward to that. So whilst thanking for your participation and thanking my fellow panelists here, I would like to conclude this investor webinar. Thank you very much.