During the lull over the past two to three years, we’ve been restructuring governance and risk management internally. As a result, we are ready to step up when the government gets its policy moving. The immediate effect of tax cuts would be the rise in consumption. That’s an opportunity for us. From our point of view, there is a growing potential for consumer finance.
A second-order impact on the banking of the tax cuts is the lower loan impairments and our ability to engage those sectors. Banks themselves only benefit slightly from the lower taxes like NBT. Financial services VAT remains at 15%. However, the fact that some industries are going to benefit from a lower VAT and have a higher income as a result, would impact our loan recoveries.
We are hopeful non-performing loans (NPLs) will reduce as a result. The income tax relief benefits already stressed areas in the economy. Potential in the SME sector in particular, is great, and banks have an opportunity to play a significant role.
However, we have to watch how corporate confidence unfolds and its impact over the next several months. At HNB we realised in the first quarter of 2019 that there was a rapid rise in NPLs. In February 2020 we appointed a main board subcommittee to overseas this and intensified recoveries. I appointed my number two, Dilshan Rodrigo (the Chief Operating Officer) to completely focus on recoveries. As a result, in the second and third quarters, NPLs remained flat. Not that I wished for it, but in the rest of the banking industry NPLs volumes and as a percentage of lending deteriorated further.
The banking sector needs a new skill in 2020, and that is an ability to track these assets (loans) in the absence of clear cashflows and without upsetting the customer relationship. We use account behavior, turnover, we use cashflows in a big way to give us warning signs. The good news for the industry is that the rate of NPL increase has been slowing. Industrywide 5% gross NPLs will hopefully improve.
What is important is that this reduction comes about because of better loan recoveries, impairment reductions and not just by asset growth and questionable advances remaining on a moratorium in 2020.
For sustainable economic growth, Sri Lanka will need much higher FDI inflows. Those inflows need to come through the banking industry first; otherwise, asset growth will be stifled as domestic savings is inadequate to fund debt as well as growth.
The best things come to those who believe
Hans Wijayasuriya, Chairman, Ceylon Chamber of Commerce and South Asian Region Chief Executive, Axiata Group
I’m optimistic. The word optimism usually comes with some proviso. Often it is about caution. I wouldn’t go there. I think the word that needs to come after optimistic is, expectation, and they need to be radical expectations on two fronts. One expectation is on the private sector to take the signal that is the economic stimulus package, invest and increase domestic production.
I can’t stress enough the importance of the domestic investment responding to this change. If domestic production and the quality of domestic goods do not meet the expectations of consumers, we will drift towards import expansion, and this won’t result in the type of growth we want.
On the government, the expectation is to follow-up the economic stimulus package with strong fiscal discipline, reform the public sector, reduce wastage and cut the deficit. It takes two hands to clap.
The private sector and the public sector need to take quick action to make this stimulus package sustainable. Sentiment is key. In the middle of 2019, when the Chamber board met, the key message we brought out was positivism and growth. That Sri Lanka needs to grow come what may.
Now that the economic stimulus has been announced the state and the private sector should be accountable for making that growth sustainable and inclusive, and also generate quality growth, meaning that it reduces deficits rather than increase them.
The onus is on us, the private sector, to be optimistic about the potential next steps. My message on behalf of the Chamber is to take this signal and other signals the government has given on discipline, cost reduction, reducing waste and professionalizing SOEs. These are signals, and it’s sentiment driven at this moment.
Take the positive sentiments and convert them in to actions rather than wait for prophecies of doom to come true.
Future of digitisation
Sadly, a country that was the leader in digitisation early this decade has slipped blow most of our regional counterparts. Even a digital ID does not exist, whereas countries like Bangladesh and India have moved far ahead of us. So the economic and social inclusion you gain by having digital citizens hasn’t and cannot be exploited because we lack digital ID infrastructure.
If you layer the network, the infrastructure layer is at the bottom. Several quick opportunities here include the release of frequency spectrum on an equitable or competitive basis so that the fundamental resource that Telco’s need to generate capacity is available.
Second is the infrastructure versus retail layers. Today we have a vertically structured industry where each operator is building almost all its infrastructure other than maybe the towers. A preferable solution would be a licensing regime which enables two infrastructure players.
The third layer is the cloud infrastructure of Sri Lanka, keeping in mind sovereignty and connectivity and having the incentives to drive the cost of domestic and global public cloud down.
The next is the applications layer. Here I’m not worried because the IT sector in this county is so vibrant and the innovation quotient so high that the application layer can be fulfilled at low cost.
Above this we have what we know as the presence-less layer, the cashless, and paperless layer. Presence-less layer means digital ID, that’s a quick win. You need a digital ID to eliminate the need for a citizen to be physically present.
Right at the top are big data, AI and analytics. Unfortunately, there is a lot of rhetoric around AI. But AI would be impotent unless your entire citizenry joins the party. You can’t build an internet economy around niche ecosystems, you have internet economies around millions of people, and that’s why inclusion is important. Unless these layers are built quickly, there wouldn’t be the big data for AI to deliver the results that AI can deliver.
Applying technology is easy but doing so inclusively and on a structured framework to enable top to bottom acceleration is requires the technology layers to be complete. There would also need to be some redirection of levies for the longer-term development of infrastructure towards digitisation.
The long-term game here, I think, is to build a digital environment. There are surplus and deficit zones in our county as far as digitization is concerned.
Dialog is fundamentally very strong. EBITDA growth is among the region’s best and higher than even growth markets like Bangladesh. Second, Dialog is one of the leading quad-play or converged play players. There is a rush globally for fixed only or mobile-only players to readjust into a quad-play formulation, something Dialog did years ago. SLT is similar. So, Sri Lanka is unique in that we have two strong converged players.
The question is, why is not the stock’s EBITDA multiple anywhere close to other markets. In Malaysia, it’s above ten times, and for some telco stocks, it’s 14 times.
For Dialog EBITDA multiple is three times. This deficit is in my view because Sri Lanka tends to be a Price to Earnings ratio driven market. Second is the liquidity of the Dialog stock. It is not where it should be. There have been some experiments in the past to create liquidity. But the stock is so undervalued by global standards that any liquidity gets sucked up by the institutional funds quickly. If more growth stocks are listed, then the EBITDA multiple for growth companies should improve.