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

Good morning, ladies and gentlemen. Welcome to National Development Bank Plc's quarterly investor webinar to discuss the financial performance of the bank for the 9 months ended 30th September 2024. Today's webinar follows the same format like our prior webinars where the Bank's Director and Chief Executive Officer, Mr. Kelum Edirisinghe, will take you through a prepared presentation. At the end of which, he will open the forum for questions and answers. Today's panel comprises, in addition to the CEO; K V Vinoj, Deputy Chief Executive Officer; Sanjaya Perera, Senior Vice President, Personal Banking and Customer Experience; Hasitha Athapattu, Vice President, Finance; Alex Perera, Vice President, Risk; Damitha Samaranayake, Assistant Vice President, Treasury. [Operator Instructions]. On those detailed notes, now I would like to hand over the proceedings to the CEO, Kelum. Over to you. Thank you.

Thank you, [ Kumudari ]. Good morning, good afternoon, everyone. Thank you for joining our third quarter webinar. I'll take you through the presentation that we have prepared for you. And in summary, we made good progress for the quarter ended September 2024, aligning with our strategic priorities established at the beginning of the year. A couple of key callouts there. Our NIM has been above and -- sorry, 420 basis points for the third consecutive quarter. The quality of the book has improved, thanks to the efforts that we put in to reduce our Stage 3 loan book. And in that regard, Stage 3 loan book was down to 6.45% from 8.58% in December 2023. We delivered a strong PBT of LKR 9.4 billion. This was marginally lower compared to September 2023. We will discuss that in more detail in the slides to come. In line with that, we saw EPS improving along with the earnings. So taking you through the financial performance in more detail. Our NII was only marginally down despite operating in a low interest rate environment. This actually validates the focus that we maintain on our repricing strategy. We have been repricing our deposit book, and we have also been very focused in getting the right price for our assets. Operating income was only 3% down due to a combination of factors, including lower business volumes, particularly on the trade front and also the appreciation of the rupee, which had an impact on FCY earned revenue. Our operating expenses were up 19%, which was largely as a result of the increase in personnel expenses. So we have not brought in any new expenses in this regard, and this actually keeps the same cost trajectory that we spoke earlier. As a result of higher expenses, the 9% year-on-year gain that we had on operating income was negated. And as a result, our PBT ended up at LKR 9.4 billion, which was marginally down compared to 2023. On customer loans and advances, the growth was again muted. As you know, there wasn't a lot of credit demand in the market. And additionally, we had an impact of the appreciating rupee as a result of which the revaluation of the FCY loan book had an impact on the nominal value of the loan book. The same applied to our deposit book as well. We have a significantly large foreign currency deposit book. And given the appreciation of the rupee, when we convert that into LKR reporting, the value of the deposit book contracted as well. On capital ratios, there was a marginal movement as a result of the rates movement, but this has now more or less reversed. Just to touch a bit more on NIMs. As explained in the previous slide, we continue to put a lot of efforts behind protecting NIMs, and we continue to look at our margins on the deposits and assets. And as I've said previously, we have been successful in maintaining NIMs in excess of 4% for the third consecutive quarter. So we will continue to do that. And as you can see in the graph, it has come off slightly about 5 basis points in the third quarter. But when you look at how the rates have moved in the market, I think this is a very commendable performance. On fee-based income, so there was obviously an area that was challenged a bit, again, largely as a result of lack of business in the market. And we did see some challenges, particularly on the trade side. So overall, our fees were down by about 12% compared to last year. But having recognized some of these, we are taking the necessary steps to increase our wallet share with the customers, and we are also looking at some of the tech solutions to make it easier for clients to bank with us so that there will be more straight-through processing. And we expect a good quarter in Q4 as well as we are building up a good pipeline for year 2025. On credit quality and impairment, this is an area that we put a lot of effort, and I'm happy to say that we have come on top on this particular aspect. So as you can see from the numbers, our Stage 3 loans ratio has come down to 6.45%. And again, along with the impairment buildup that we wanted to do to protect downside risk, we have been able to increase our impairments up to 49.4%, up some 830 basis points compared to December 2023. And if you look at the impairments as a percentage of where the book is compared to 2023 September, I'm happy to say that we are down by 21% year-on-year, and we have booked LKR 11 billion for the quarter ended September 2023 -- sorry, LKR 11 billion compared to -- LKR 11 billion in quarter 3 September 2024 and compared to LKR 13.9 billion compared to September 2023. From a modeling perspective, I think this is probably something that might be useful for those who are looking at our financials. Now we have good visibility of our impairments. So when we look at the year, again, something that I shared previously as well, we expect our year to end a lot better than what we experienced in 2023. On operating expenses, again, explained in the previous webinars, the major cost driver here for us is the personnel expenses. So this was up 30% year-on-year, and that is largely driven by the increases that we did on employee salaries. When we look forward, at least for the fourth quarter this year, we don't again necessarily see a massive change in the cost structure, and we have brought in the right disciplines in managing our discretionary costs, so we have a good visibility of that as well. So again, from a modeling perspective, if you look at the cost that we have put in for the 3 quarters, you can play that forward for the fourth quarter as well. On taxes and profitability, banking sector continues to be one of the highest contributors to the state coffers. We have contributed in excess of 50%. When you look at the effective tax rate, our tax rate is slightly higher in excess of 50%. And this is largely as a result of staff emoluments being contributing to a higher percentage of operating income. And since that is a tax deductible, the effective tax rate is slightly higher. On customer loans and deposits, taking customer loans as a first aspect. Again, the market wasn't very conducive. There wasn't a lot of credit demand available. So we saw a general contraction in the credit book. But if you look at things in context, we were able to put in about LKR 15 billion in additional loans and advances. But because of the exchange rate impact, it was negated by about LKR 10 billion. So the net impact was about LKR 5 billion. On the deposit side also, the narrative is pretty much the same. We did grow the deposit book by about LKR 11 billion. But given the appreciation of the rupee and a sizable deposit book, the net impact was actually negated as a result of the FX impact. Having looked at the way the book is positioned, we are putting a lot of effort to build our CASA book. And if you look at from year-on-year, September 2023, it was 22.6%. We were able to grow it up to 25% in 2024. And this is another area that we are focusing on, i.e., broad basing our deposit base, which will be a key driver to reduce our low-cost funding, and there are strategies in place for that, and we will continue to focus on this in the fourth quarter as well as in 2025. On capital ratios, again, the slides are pretty self-explanatory. We are well above the regulatory capital limits. Tier 1 is expected to go above 12% when we crystallize our 2024 profits. and CAR will be in excess of 17% as well. We have completed the first tranche of the debenture issuance so that was LKR 5 billion. The second tranche is almost done. So we will be able to finalize that as well. So with that, our debenture issue would be concluded, and we would have completed the regulatory commitments that we did to Central Bank in terms of shoring up our capital ratios. On the key ratio, so we saw the increase in stock price. It was at LKR 78.30 in September, but it has picked up to about 85% with the general rally in the market and particularly the interest that the investors had on banking stocks. On the ROE front, we have seen a mild increase on that as well, but we expect further upside in Q4 and year as we continue to drive the bottom line as one of our key strategic imperatives. If you look at the liquidity and NSFR ratios, again, they are well above the regulatory limits, and we are a bank with a lot of liquidity available at our disposal, and that will provide a strong base for our growth aspirations in 2025. In terms of awards, again, this is pretty self-explanatory. So we won a number of awards, Euromoney Awards for Excellence for the Bank, Best Bank for Corporate and Diversity and Inclusion. We were also recognized for our contribution in the retail banking front and were recognized as a Domestic Retail Bank for the year and the Bank for Women Initiative of the year. So we -- again, I mean, this is an area that we are focusing on particularly being a good corporate citizen and making our contribution felt in the economy. In terms of the way forward, I can say that I'm extremely pleased with the positive trajectory that we have shown in NIMs, our strong cost discipline and improvement in the credit book, particularly with regard to the Stage 3 that we have shown this year. All these are as a result of the focus we maintain and our strategy being committed to deliver sustainable returns and enhance shareholder value over a period of time. With the strong foundation that we are building and areas that we are focusing and of course, with the economy that is poised for growth, we are really optimistic about the future and the role NDB can play in supporting the economy. So with that, I would like to end the presentation and maybe hand it over to the Q&A.

[Operator Instructions]. So the first question is on interest rates. Let me forward this question to Assistant Vice President, Treasury. It's -- so the question is where we expect the interest rates to move and over the next year and also the movements expected towards the end of this year.

Thank you for that question. I believe now there are certain positive things developing in the market that is the expectation of positive outcome of the IMF review and then restructuring finalization is also in the card, so which will give Central Bank more room to adopt easing monetary policy stance for the coming quarters. So therefore, the expectation is for interest rates to trade slightly lower from the current level.

The next question is on NIMs. If I may forward this to Kelum. What are the expectations on NIM moving forward?

Yes. I think it's a very relevant question. So if you look at what we have done so far with the NIMs, the way we have been able to protect that is largely as a result of repricing the deposit book. And I think we had this discussion in the second half -- sorry, in the second quarter presentation as well. So we see that kind of coming to an end. And so as a result of that, we'll probably see plateauing of the NIMs and maybe even a slight decline. How we are looking at this is that we really want to broad base our deposit base, and that's the reason to drive CASA. So that will have some amount of NIM uplift. And perhaps the second point is if you look at the Stage 3 loan book, which we are really sort of driving to reduce it, with that coming off the assets and maybe going back into the performing book or completely getting flushed out, we'll also have an upside on the NIMs. But on balance, I would think the current NIMs to remain at this level or slightly decline given the low interest rate regime.

Yes. The next question is one which gets raised at every webinar, I would say. Can you comment a bit on what is happening in relation to the Parate executions?

So let me take that. So actually -- so as you know, this was temporarily suspended till mid-December. There were a number of discussions around this. So the bank has also met the President. And during the meeting, we think this was one of the discussions that we had. And subsequent to that, there are the lobby groups have also gone and met the President. So as we speak, the suspension actually still stands. So there are -- from the banking sector, our call out has been that the quantum of the loans which are subject to such Parate action is it's very small and it doesn't necessarily move the needle. So we've requested the Central Bank to -- and also the policymakers and the decision-makers to allow the legal frame to stand on its own. We hope that there will be some resolution on that. But as we speak, the Parate remains suspended.

The next question, is there a particular reason why NDB has not seen a credit growth? This was detailed out in the presentation as well. Any further comments that we would be adding on to this?

Yes. So maybe I'll just give some context to it, and I'll also give this -- give an opportunity for Vinoj and Sanjaya to comment on this as well. So it's not that we have not seen it. I think you got to look at this in the context. So we did put on about LKR 15 billion worth of assets. However, our growth in the loan book was muted because of the FX impact. And on a net-net basis, we haven't seen an increase like in the double digits, if that's the expectation is. So that has been the past. And again, we have been very cautious with what we want to book, particularly looking at on the pricing strategy. So when you try to marry both, sometimes you have to sort of compensate one for the other. Having said that, when you look at the fourth quarter, we are very, very confident in terms of the asset growth and where we want to end up with, particularly to build the stronger base for 2025. Maybe Vinoj, you can give a bit more context on the corporate side.

In terms of the during the year, it's mainly is coming from the corporate banking book and also from our infrastructure book, which is predominantly from the energy sector. I think there, we have seen a strong pipeline, and we have disbursed most of the loans. And like Kelum alluded at the presentation, there is more to be disbursed in the last quarter. Going forward, we also will see a strong demand coming from the SME book, where we have been -- where the demand and also the appetite has been kind of muted in the last maybe 3 quarters, but we are seeing positive momentum coming from that aspect as well. So probably you will see in the last quarter and the quarters beyond that in 2025, strong growth coming from SME book.

Sanjaya, do you want to comment anything on the retail side?

Yes. I think even on the retail side, there is positive sentiments in terms of borrowing. So we are working on it. And as Kelum rightly mentioned, most of the growth is negated by the appreciation of the rupee because we have a big portion, mainly on the corporate side in foreign currency. So the growth in the retail side in the rupee advances are growing.

Okay. Interesting question. How has the loan growth been post-elections? A little too soon to comment, I suppose.

No, let me pick that up. I don't think we have seen a massive change either way. I think regardless of the elections, what drives the loan growth is a general demand for consumption on the retail side and on the corporate side, how they would be part of the economy. But quite apart from that and to sort of validate what Vinoj said, in fourth quarter, we are looking at a lot more positivity with regard to the assets that we have in the pipeline to book. So I think when we have this presentation in 2025, looking at the full year performance, there will be probably something more positive to share.

Yes, we do have some questions on impairment. Let me try and amalgamate them. So do you think current impairment provision cover on Stage 3 is adequate? Or do you expect more provisions required looking at the industry and also the impaired loans, the impaired ratio reported was 6.45%. And in which sectors the bank is having higher nonperforming loans? And any comments on the progress?

So let me again pick this up and then pass it on to maybe Hasitha if he has any more comments to make. So I think if you look at what we've kind of started the year and how we wanted to really sort of build the trajectory, reducing our Stage 3 impairments was one of our key priorities, and you are seeing the sort of progression. To talk to the numbers at the beginning of the year, our Stage 3 loan book was about 82%. We are now down to about 75%, and we see further progress -- we will see further progress in Q4 this year. When you look at the impairments as a cover, so we have been able to progressively build it about 830 basis points so far. So we are now at about 49%. And I think this now gives us a lot more confidence about the level of cover that we have built. Again, it's not a case of chasing behind the target. It's how we look at our book, looking at the resolution plans that are in place and making sure that we have covered the downside risk. So that is how I look at it. Industry, if you look at the banks, there are percentages at varying levels depending on where the book is and the level of collateral they have and the resolutions plan, each bank looks at, but we are looking at it more from an independent perspective as to our level of comfort. So that's the way we look at it. And just to give further context, when you look at the reduction of the book, we are seeing the reduction coming from retail as well as wholesale. So that sort of pathway will continue. And even if you look at the more early signs of like the 30-plus on the credit card book, on the leasing book, that, again, is showing good progress. And we're also seeing on the wholesale side, there have been more recoveries coming through. So that's the general sort of the picture of the book. Hasitha, is there anything more that you want to add on impairments?

There is also a question on Stage 3 impairment. What has caused the Stage 2 impairment write-backs during the quarter? Has there been any movement of impairment from 2 to 1?

There's no write-back from income from Stage 3 to 2. And a few movements from Stage 2 to 1 because of the credit quality increased. That will be the main reason for movements.

We also have a question on debt restructuring. Can you comment on the additional potential impacts of government's debt restructuring deals on NDB?

This is regarding the ISBs?

Yes.

Okay. ISBs, now the status is like government has offered 70% in dollar bonds and 30% rupee bond. And out of that, probably there may be reversals. It may be depending on the discount rate, what we are going to apply and the amount, the quantum, we have taken that we have quantified it. But there may be uncertainty about the deferred taxes. So we may not get the same -- we may get a reversal, but it will be negated with the deferred tax reversals because currently, the IRD is not in a position -- like IRD is sort of a contradiction with the write-offs as well as provisions as allowable expense. So we already made deferred taxes. So probably those deferred taxes may reverse. So ultimately, whatever the reversals of the provisions will negate with the deferred tax reversals. So we don't expect much impact on the bottom line.

Hasitha, I think you also answer this question, which is when do you expect reversals on ISBs to be recorded?

Probably now we had some few discussions. December will be the expectation, but it's not yet finalized. But the government is expected to complete the debt restructuring during December. So we will expect some reversals during December.

Let me direct this question to Vinoj. Are there particular sectors do you -- that you still want to refrain from lending?

Not exactly. I think probably what you refrain is some particular clients rather than the sectors, like we will be very selective in choosing our clients rather than the sectors. But I think to be fair, by the economy, I think that most of the sectors are now have turned around and performing well. So we will be very selective in picking the clients more than the sectors, I would say.

Okay. A similar question, are you seeing any uptick in inquiries for new loans from any particular sectors such as construction?

Not really from construction per se, but I think we have seen a lot of demand coming from the infrastructure projects, especially on the energy side. So that's where we've seen the most of the loan growth coming from.

Okay. And can we comment on what percentage of our deposits is in foreign exchange?

Hasitha can pick that up.

It is about 23% of our assets are in foreign currency. So that's kind of the rough mix.

Also the deposits.

Deposits also.

We have [ USD 541 billion ] deposit base that counts somewhere around 20% of the total deposit book.

Sanjaya, this one is for you. What is the current average LTV for leases? And will there be a significant impact with the vehicle import ban coming off?

So roughly, we go up to about 70%, and it depends on the vehicle as well. So we don't see a huge impact on -- if you start importing the vehicles, we have taken adequate measures to cover that. So I think 70% seems to be adequate. That is also the maximum that we go.

Kelum, this question is to you, which links to costs. What is the frequency of salary increments?

Yes. So our salary increments are generally baked in with the plan and given at the end of the first quarter that is -- so for 2025, we are looking this to get finalized in March, April, and the increments are generally done once a year. I know there may have been some exceptions that were done in the past because of the challenger staff is. But generally speaking, the pay increase cycle or the pay review cycle is every year.

We have come to the end of the questions that are posted on chat. Any other questions from the participants, please? Any more questions, ladies and gentlemen? Perhaps we'll -- yes, wait for another 30 seconds maximum before we wrap up the session. Well, it seems that there are no more questions from the panel. So thank you, ladies and gentlemen, for your participation, and we look forward to your continued participation and support. Thank you, and have a pleasant day ahead.