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

Good afternoon all, and good evening to those who have joined from Far East. Thank you for connecting, and welcome to National Development Bank PLC's Quarterly Investor webinar, where we'll be discussing the financial performance of the bank and the group for the quarter ended 31st March 2024. Today's webinar will follow the same format like our previous webinars. Kelum, our CEO, will start and take you through a prepared presentation. At the end of this, we will commence the Q&A session. The senior management team present here will be accessible to you during the Q&A session. [Operator Instructions] Thank you again for your participation. And I now hand over to Kelum to take presentation forward. Thank you.

Good morning, good afternoon, everyone. Before going through the presentation, I would like to make a short opening remark about the change we carried out to the organization structure. DCEO Vinoj is now directly overseeing our wholesale lending units, coupled with cash management trade activities. We felt this change is necessary to drive efficiencies across entire value chain and look at client profitability more holistically. With that, I will go on to the presentation. Similar to our previous announcement, Q1 '24 results have 4 parts, consisting of operating environment, financial performance, way forward, and then we can have the Q1 decision last. On the GDP front, we still don't have Q1 data. However, the trajectory looks positive. In fact, the World Bank has revised its GDP forecast for Sri Lanka and is expected a 2.2% growth in 2024. On the headline inflation front, the trend is positive there as well, although there's a slight uptick in inflation in April to 1.5% compared to 0.9% in March, driven largely by nonfood inflation. Overall inflation, however, is well under control. On the currency front, in Q1, we saw rupee strengthening by about 6%, and it came below LKR 300, supported by strong remittance flows, tourism income and muted imports. Tourism wrapped up about $1.5 billion, up 8.7%. And -- sorry, remittance flows was about $1.5 billion, up 8.7% and tourism about $1 billion, up 103% compared to previous year. April reserves at $5 billion, highest since January 2021. We see interest rate steadily declining as well. AWPR is currently at 9.6% levels and is very close to the policy corridor. As far as IMF program is concerned, whilst Sri Lanka has made agreements with China, India and Paris Club members, we believe conclusion of the EDR is really necessary to fulfill IMF conditions. And hopefully, it'll be concluded before the presidential elections in October 2024. So in summary, I think we have made good progress in managing inflation, accumulated reserves and showing signs of initial economic growth, all these while preserving stability in the financial system. However, there are some downside risk, given the current domestic and global economic conditions and geopolitical uncertainties. On the operating environment front, continuing that, in Q1, Central Bank reduced policy rate by 50 basis points, supported by well-anchored inflation expectations. On banking loans and advances, demand continue to be muted, resulting in a modest growth in Q1. This is also reflected in our own performance, which we'll discuss in later slides. Due to falling interest rates, there has been a decline in banking sector deposits, and we believe this may -- this trend may continue as depositors would look to put their money in better-yielding assets. On the financial performance, so this snapshot is pretty clear. And I think I would probably look at 3 things. PBT is commendable at 31% compared to first quarter 2023. Loans and advances have marginally gone down to LKR 486 billion due to the combined effect of foreign currency loans being converted at low exchange rate and a modest degrowth of the book. Capital ratios are strong. Tier 1 is at 11.93% and total CAR at 16%, both well above the regulatory minimums. Going a bit more into business on income. I will focus on NII since interest income and expenses have some noise due to interest rates coming off rapidly. We delivered strong NII in excess of LKR 8 billion. This was only 5% lower than history. And despite NII being lower, we were able to increase our NIMs from 3.96% in December to 4.23% in March, and this was largely as a result of our proactive action taken to reprice the book. And as one of our key strategic priorities, we will continue to focus on NIMs and drive margins. On fees and commissions, they have also dip of about 7%, and this is largely as a result of lower transaction volumes, particularly on imports. And of course, the strong rupee which resulted in some of our dollar fees being converted at lower exchange rates and, therefore, having a slight loss compared to the last year. Looking at nonfund-based income, it includes a loss of LKR 1.3 billion stemming from revaluation of FCBU reserves at low exchange rates as well as gains from our disposal of government bonds as per our bond investment strategy. Coming to impairments, a couple of points to highlight here. Continuing on our prudent impairment policy, we took on an additional LKR 4.3 billion this year. It's actually 9.4% lower compared to the previous year. As a result of the additional impairment, we were able to increase our impairment cover from 44.74%, about 360 basis points compared to quarter 4 2023. Coming to ISB holdings, they are holding ISB provisions in line with what CDSL has wanted the banks to hold. The cover is slightly in excess of 50% and is held in dollars to prevent a downside risk due to currency fluctuations. Looking at the impairment trajectory, from Q2 onwards, we expect impairments to remain muted, supported by our strong recovery efforts. Looking at our expenses, compared to history, first quarter staff cost was elevated due to salary increases. On other expenses, the increase was largely due to the rise in energy and software and maintenance expenses. However, despite these increases, we continue to -- maintenance from cost discipline. And in fact, some of our costs beyond a particular threshold is governed by a Board subcommittee for driving better discipline. And given this cost focus, we don't actually expect a further increase in the cost trajectory beyond the first quarter 2024 levels. On profitability and taxes, as shown in the slide, we actually had a strong quarter, and our PBT was LKR 1.8 billion, 31% higher than history. However, due to the high effective tax rate that is arising from financial VAT and employee emoluments being excluded from that, our bank level tax saw a twofold increase, resulting in 11% reduction in profits for the quarter and then settling at LKR 720 million. With regard to the effective tax rate, we expect it to taper off on the go forward. At group level, our PBT was 37% higher. But similar to the previous comment that I made, the increase was negated by higher tax rates, and the final amount actually ended up similar to Q1 2023 level. Looking at the balance sheet, total assets reported a reduction, largely stemming from the reduction of the investment portfolio. And when you look at the loans and the deposit book, that is well explained in the waterfall chart. Most of the reduction's actually coming as a result of the FX issue. We also retired part of our borrowings, and it now stands at about LKR 56 billion. In summary, while the operating environment is challenging, we are focusing on building a good loan pipeline in certain asset classes and are confident that we will be able to grow the balance sheet from hereon. On the investor ratios here, again, it's quite self-explanatory. So I will pick up on 2 data points. Firstly, looking at the stock price, since March 2024, NDB stock price has picked up. And as of close of business yesterday, it settled at LKR 78. Coming to ROE, it's important to note that this ratio has been calculated by annualizing first quarter PAT. However, modeling of PAT, the rest of -- for the rest of the year, 1Q actually will not keep the right benchmark. As I said earlier, the impairments for the rest of the year is expected to be muted, coupled with our strong cost discipline and gradual tapering off of the effective tax rate, we expect our ROE to improve as we go forward. On capital and liquidity, again, we are on a very strong footing, both Tier 1 and total capital are well above the regulatory limits by a significant margin. With regard to capital augmentation plans, the Board has already approved a LKR 10 billion debenture issuance. And we will enter the market at the most opportune time to take advantage of low rates, and then we can build up capital buffers to support our loan growth. Similarly, strong capital ratios. Both LCR and NSFR remain at healthy levels, underpinned by our strong liquidity position. So in summing up, just to give some context to the way forward, the leadership team and I remain fully committed to the great strategic priorities, namely broad-basing our deposits to improved cost of funds, drive transaction banking to increase fee revenue and enhance our asset quality proactively to reduce Stage 3 ratios and improve good quality assets in Stage 1. We are also looking to enhance our digital capabilities to improve process efficiencies and customer convenience. Needless to say that the current low interest rate environment and the lack of demand for new credit makes the task at hand a challenging one. But with the support of my leadership team and the dedicated staff at NDB, I'm confident we will be able to deliver sustainable bottom line growth and a stable return to our valuable shareholders. Thank you. And with that, we can now move on to the Q&A session.

All right. Thank you for the questions I picked up from our Q&A portal. So there's a question on post reporting debt, how has the performance been? So if the question is with regard to how our performance has been in May, that is largely positive. But obviously, I'm not in a position to give further details. But with the strategies that we have in place, the 3 strategic priorities that I discussed previously, we are hopeful that, in our second quarter, the numbers would be much more positive. So when those numbers are available, we'll be able to make that announcement to the market. So there's another question on what were the proactive strategies the bank used to improve your NIMs despite the declining interest rate environment. So we have been able to do this largely by repricing our deposit book. We continue to do that. And similarly, we are. Also looking at assets that are giving us the right margin. That is part and parcel of our asset growth. And both, combined, have given us the positive NIMs. Niran, do you want to pick up the question on can you give some indication on the interest rate for the debentures?

So it depends on the [ currency ] as well. So currently, we have see a decline in interest rates, even today's [indiscernible] rates. The auction results are just out, and the 3-month [indiscernible], that come down to 8.76. So I think even the bond pricing also has been -- I think, has come off during the last couple of weeks. So it will depend on the time that we will go. So it's a little too early to state right now.

[indiscernible], you can also pick up the question on, can you give some commentary on where you see the interest rates moving in the period ahead?

Actually, we still see some room for interest rates to decline. So with the current activity is and probable -- so there is a policy meeting also due next Tuesday. So we have to wait and see what certain out is going to be. So overall, we feel that there is some more room for interest rates to decline in the longer term and also in the shorter end.

Thanks, Niran. So there's a question on, do you expect any impairment reversals in the coming quarters? So this is a part of the BAU process. Like what I said in my comments, we have a robust recovery process in place. And we are putting all our efforts to reduce our NPL percentage. And so as part of that recovery process, naturally, there'll be some ECL reversals. So there's a question that has come through, and this is with regard to -- given that Mr. Eshana Silva tendered his resignation effective 30th June 2022, prior to receiving the CBSL letter, and that CBSL has requested us to notify the public of the deemed vacation of office as per the letter dated April 17, we are obviously curious and would like to discuss the following. So there are 3 parts to the question. Scale of nonperforming loans, could you please provide details in the scale of the transaction and the nature associated with the noncompliance? The question number 2 is safeguards to prevent recurrence. What safeguards and measures have been implemented to prevent such occurrences in the future? And the third question is Board succession planning. How is the Board planning to handle succession in light of this development? So I'll take the first question with regard to the scale of the nonperforming loan. So this facility was never a nonperforming facility. It was a performing facility. That's point number one. Safeguards to prevent reoccurrence of this, so the Board and the Board Secretary keeps directors apprise of the need to make disclosures, and this message is reiterated periodically. And I think we can draw comfort from that. With regard to Board succession planning, this is something that Board is very diligently looking at, and necessary succession plans are in place. With regard to this particular incident of Mr. Eshana de Silva [indiscernible], it actually took place in June '22. And since then, there's a new Chairman that has been appointed. That is Mr. Sriyan Cooray. So there's a question with regard to what is the loan proportion among SMEs, corporates and retail? So this is fairly equally spread, slightly weighted more towards corporate and retail and slightly a lower amount for the SMEs. There's also a question on if ISB hits are to be taken at 30%, would there be a write-back to the bank? And if so, any indication on this? So there are -- this actually has several parts to it. So as I said in our ECL projections, we have covered ECLs slightly more than 50% based on Central Bank guidance. So whether there is a 30% haircut and the ECL reversals would also depend on the duration of the new instruments and how that would -- and how those would be value on day one and what the day one impact might be. I don't know, Niran, whether you or Hasitha want to add anything to what I said.

Not really, Kelum bhai. It will depend on the -- as you said, on the duration. There would be a day one impact and also the -- what sort of ECLs that we need to take overall.

So with regard to -- there's a question is, what is expected loan growth for 2024? And what are the loan products that will deliver the expected loan growth? So I'm not in a position to give an absolute percentage, but what I can say is we are putting a lot of effort to building a strong asset pipeline. And we have obviously targeted certain sectors to do that, and that is the case of both retail and wholesale. Of course, and as you would appreciate, the market is challenging. There isn't a lot of credit out there, but we will make every effort to garner some market share. So there's a question on what are the reasons for deposit contraction in the last 2 quarters? So this is -- again, there are 2 parts to it. Firstly, the appreciation of the rupee, and we also -- I mean, we have quite a large FCY portfolio. So when it's revalued at the lower exchange rate, that's largely the impact. And as you would've seen in the waterfall analysis, which we did for the first quarter, our net deposit contraction is actually quite small. So there's a question on how does the bank feel that single borrower limits will affect the industry? And is there any trickle-down benefit or impacts to NDB? Thank you. And I think it's a very relevant and important question. So obviously, what the single borrower limit aims to achieve is not having too much of exposure to a single name. For NDB, I think we will stand to benefit where if there are larger borrowers who are banking with other banks and they are up to limits and as they would look for facilities, I think we can actually stand to benefit. But I think more broadly, this would also perhaps lead to capital markets becoming more efficient and borrowers looking to raise money from capital markets, not necessarily through banking side. Vinoj, anything that you might want to add on the wholesale side?

So we have seen the benefits already. I think being a midsized bank, we have already -- some of the clients who are large corporates like who have been -- they are multibank anyway. So they have approached, and we have got those facilities approved. But in the overall scheme of thing, I think what we need probably [indiscernible] is like there are internal limits as well with a stringent to the parameters set by the regulator. So we need to adhere to that anyway. In terms of benefit, yes, as a midsized bank, definitely there's a benefit, and we have already seen that benefit coming through.

Thank you, Vinoj. So there's a question, have there been any new vehicle leasing business by way of import in recent months or in the reported quarter? So we do have quite a sizable leasing portfolio, but most of our leasing have been based on secondary market trades. Sanjay, in case, if you want to add anything to that.

Yes. As Kelum rightly said, the business is mostly on the secondary market sales. So we have not seen any new vehicles coming in. It's mostly the accommodations and the secondary market sales.

Thank you, Sanjay. So there's another question on have you adjusted your impairment model parameters recently? So I'll probably let Alex to sort of give comments on this. But maybe just before I hand it over to him, I think our impairment models go through validations and ever so regularly looking at how the model is behaving and how the market is behaving. And this is something that gets validated by the auditors as well. But in -- Alex, in addition to that, if you want to make any specific comments on the model itself.

So on the models front, the basic constructs of the models have not changed. It has gone through the annual internal and external validations, as Kelum said. So on the parameter-wise, there would have been certain input and output changes, but basic constructs remains the same. Thanks.

Thank you, Alex. So there's a question on any plans for debenture issuance? So we have -- I think I briefly covered this in the presentation also, and it was covered in the AGM as well. So we have got Board approval for debenture issuance of LKR 10 billion. We are looking at the ideal timing for that. And depending on where the rates are, we will enter the market when we feel it's most appropriate for us. Okay. So there's a question on what is your view on collateral price risk on the leasing portfolio post relaxation of the vehicle imports ban? So I think what we look at is when you're underwriting leasing, we do take precautions when it -- I'm looking at the type of the vehicle and have our own internal LTV ratios. This is something that we are quite -- following quite diligently. So obviously, when the vehicle imports are relaxed, there will be some imports to the market. It's something that we have to take a view at the time and as to how the market prices would also react. I think it is fair to say that prices would still remain elevated if you're importing. And therefore, on the secondary market, I feel that our position is fairly well-secured. Sanjay, if you have any other thoughts in addition to that?

Yes, I think we addressed that through the LTV and mostly the quality of the customer. So I think with that, we are quite comfortable even if the imports start coming.

The question, will the larger banks offer joint facilities with mid-to-small size banks for clients who exceeds 25%? Is this a possible trend? Okay. So I'm not quite following the question. But if this is in relation to the single borrower limits and whether banks can offer facilities jointly, the single borrower limit would still be applicable for that particular bank and that will be 25%. So even if 2 banks were to join together and lend, they will still have to be guided by the 25% cap so that I don't think it would actually make a material change. But in any case, even when you lend facilities now, we do syndicates as a result of either because of the risk appetite or because of the single borrower limit constraints. So there's not going to be a huge change to that. So there's a question on what are your views on the impact of the Parate suspension? I think this was a question last time as well, and this gets heavily debated and discussed in all the forums. So the suspension is, for all intents and purposes, temporary. That is what we read from the decision. And we hope post-December, this will be brought back to what it was previously. I think it is also important to acknowledge that we don't use Parate as the first course of exit. This is something that we do as the last resort. Prior to that, we engaged with customers. We do whatever that we can to restructure facilities and give them an appropriate restructuring plan. Of course, having Parate makes it easier for us to sometimes bring the customers to the negotiating table. And therefore, we hope that post-December, when the suspension would be lifted, then we can go back to our normal course of business and make use of the vehicle frame but -- as to what it was before. There's a question with regard to lifting of the vehicle imports restriction, how do we expect your leasing portfolio to grow? Sanjay, maybe you can give a [indiscernible].

Yes. Definitely, there'll be opportunity to grow the portfolio. When imports come, there'll be opportunity to lend for new vehicles as well as the secondary market also will improve when the existing vehicles are to be sold. So there's definitely going to be opportunity.

Thank you, Sanjay. So there's another question on which sectors do you focus for loan growth? So that is, again, I think almost equally split between retail and wholesale. So if I'm to just take retail, we want to increase a bit more focus on, say, [indiscernible], for example. We have looked at credit cards as well, depending on, again, certain segments of the economy that we want to grow. Similarly, on the wholesale side as well, we have identified certain asset classes or client segments. I think we can take a bit more appetite. So there's another question again on Parate. So the question is what percentage of NDB's portfolio will be able to pursue Parate execution? Is this is a significant portfolio of loans of the industry? Or is it relatively a smaller component? And the second part is that what incremental benefit can be assumed once Parate actions are allowed to be back? So the percentage is relatively small, again, it could depend on the segment of the client and the kind of assets that we are holding. And if it is brought back, I think, for us, it'll actually give an additional negotiating tool. So that is what we are looking at. And at the end of the day, this is a lot that has been in place for some time. And I think it is fair to say that banks have been using this paring, and in fact, governor spoke to some of the numbers previously, and bringing this back would actually give us one more negotiating tool. There's a question on there was an improvement in the interest yield in the March quarter, which, together with declining interest rate cost, helped the quarter NIMs. What was the reason for yields on interest rate -- on interest assets to increase, given market rates are falling? So perhaps maybe I need to make a slight clarification. When I say that we increase NIMs, we also looked at both the assets and the deposit side. But I think probably we were more proactive in repricing our deposit book, and therefore, there was a bigger contribution to NIMs from the deposit side. There's a question on -- with regards to the restructuring of bonds, will mature bonds be treated differently to bonds maturing in the future? Also, an indication on PIB of ISB [indiscernible], how it will be treated. Hasitha or Bimal, do you want to sort of give some comments on this?

I'm assuming this is on the ISBs. Of course, we cannot disclose too much information. We are bound by NDA. So there are different options given, I mean -- and these options go back and forth from the authorities as well as from the bondholders. And also on the PIBs, so there was proposal from the [ adult ] group, and then there was a counter offer from the authority. So there is -- this is pretty much still -- most of it is in the state of flux. I mean, we don't want to overestimate or make any assumptions on the final deal structure. We will wait for other developments and authority respond to the last set of proposals. And then only we would be able to actually make a call on where the final treatment would be.

Thank you, Bimal. So there's a follow-up question again. It says, yes, but interest yields improved by about 100 basis points versus other banks, which saw a decline? Was this due to a change in the lending mix?

Yes. Just to give you a quick answer to that, I think these -- the banks are still benefiting from the high-yielding -- some of the high-yielding government securities, which are held. So that is likely to give this a better advantage in the interest fees.

Thank you, Niran. So there's another question on how close do you think we are to the final agreement on the EDR? So there was a -- I think there's an article in the papers today by the State Minister. He says that this will be done in due course, hopefully, around June or maybe July. But as far as we are concerned, there is no date that has been given to us. But all intents and purpose, and I think it's good for the country to move on with the EDR. So there's a question on -- is there any indication of where the credit card rates are heading and if the CBSL is likely to indicate a new ceiling next week? Sanjay, any thoughts on that?

Yes. We have not received anything as to a ceiling. But at the moment, credit card rates are running at the market rates. And this is -- we can't expect that to be less compared with the normal rates on the absolute value, because the way the interest is calculated is different to a normal loan. So this will be as per the market. So as of now, we have not heard anything like that.

So there's a question on, in the event of a macro-linked bond, how will it be -- how will the calculation work? Will it be an annual assumption? Sorry, this is not something that -- I mean we don't have any details. This is -- again, it is something that has been widely discussed. We'll have to wait for the formal announcement to be made by the authorities for there to be more information. Niran, there's a question on why does the bank have no viable rate and would be bench -- sorry, no variable rate for debentures, apologies.

Actually, if you look at the markets also, there's not much of appetite for that. And the other thing is that in the past issuances, we have actually given that option, maybe not in the recent past, but initial bonds, where there's a fixed rate plus percentage over the -- over a benchmark. So we have done that. So looking at it, I think there may be similar debentures might come into the market once again.

Thank you, Niran. So there's a question on what percentage of the loan book will get impacted by the single borrower limit linked to Tier 1? Vinoj are you able to give a broad view without disclosing something that is not...

I don't have an exact number. But I know that couple of clients probably, given a midsized bank, will have this -- we are looking at that, but that also again -- I mean it's a [indiscernible] utilization. So I can't say huge impact, but I don't have a number to discuss today.

And I think it's also important to note -- take note of that, that's a glide path and some of it will come to effect only in 2026, right? Niran, there's a question on how should people bid in the June bond issuance, if you have an answer maybe.

I don't think I should actually give you an answer for that question. It will be market-sensitive and price-sensitive. So thanks.

This other question is NDB's provisions for Stage 3 loans is still below industry average at circa 44%. Do you expect to increase this above 50% by end of the year? Yes. Look, I think -- so there are various benchmarks that are being taken against the industry. It's not a very straightforward percentage because you -- one must also look at the mix of the portfolio and the collateral each bank is carrying. We have looked at double collateral position. And most of our loans are, in fact, covered by primary mortgages of good collateral, and therefore, our provision figures would be in proportion to the downside risk we see in customers. With regard to the impairments of provisions that we booked in Q1, that is as part of our ongoing impairment policy or the normal sort of business as usual, prudent to taking impairments where necessary. So we don't have a percentage as such. But if we feel that there's a certain sector or a client who's facing [ announced ] credit risk, and then we will take appropriate provisions. So the question is, where do you see the NPL ratio normalizing by year-end 2024? So at the moment, it's about 16%. And again, I can't give a forward-looking view based on just our first quarter numbers, and I don't think that is appropriate either. But for an analyst, I think you can take comfort from the fact that out of our 3 strategic priorities, one is about enhancing portfolio quality. And that has 2 parts, one being recovering our Stage 3 assets as well as improving more on the Stage 1 assets. So that is what I can share with you for the moment. But I can tell you that when it comes to recovery efforts, it's receiving close attention from the Board and management downwards. There's a request to have the investor presentation. I believe this will be uploaded to our website, so you can actually take it from that. So maybe the last question -- again, there's a question on how would the NIMs be for the end of 2024? Again, I wouldn't want to give a forward-looking view as of now based on what we are seeing today. But again, to the 3 points that I mentioned earlier, NIMS remains one of our key strategic priorities, and we are looking at that very closely. And currently, it is at 4.23%, and that's something that we want to improve on. So thank you for the question, but I'm not in the position to give an absolute number as of now. So maybe we have time for maybe one more question before we wrap up for today. So there's a question about whether we would have -- do you have any plans to buy an ailing finance company? Not for the moment. But I'm sure if we ever do consider that, we will make an announcement to the market. All right. Then with that, perhaps we will end today's session. And again, thank you for those who took part in the presentation. Thank you for my leadership team. We will continue to focus on growing our business and improving the franchise value and delivering a strong bottom line performance, as I said in my presentation. Thank you, and then we will be -- we'll be coming to you again with our second quarter performance, probably around July, August. Thank you.