The stand-out banks in Sri Lanka, Mongolia, Myanmar

Khan Bank, KBZ, Commercial Bank and NDB Investment Bank take the plaudits as our Country Awards turn their attention to frontier markets.

In May, FinanceAsia named the winners of its annual Country Awards for Achievement. Last month, winners were given ther awards at our annual awards dinner in Hong Kong. Today, we continue presenting the rationale for our decisions with a look at three frontier markets: Mongolia, Myanmar and Sri Lanka.

Mongolia's Best Bank: Khan Bank

Mongolia endured a torrid time over the past year due to the effects of the global commodity rout, which left the country’s mineral export-driven economy badly exposed.

That partially ended with the agreement this February of an Extended Fund Facility (EFF) with the International Monetary Fund. Since then, the country’s currency, plus stock and bond markets have all performed much better as investors bet that the country has turned a corner, with the Mongolian government forecasting a return to positive GDP growth of 1.8% in 2018 and a return to the breakneck pre-crisis levels of growth in 2019.

The operating environment for banks, though, remains weak as corporate distress works its way through the system. Khan Bank, our choice for this year’s award, has not been immune to that. According to S&P Global Market data, NPLs at the bank stood at 8.29% at the end of 2016 compared with 6.88% a year earlier.

Over the same period, Khan Bank’s net earnings dropped to $49.23 million from $61.54 million, while the return on its assets slipped to 1.84% from 2.42% and the bank’s net interest margin narrowed to 4.83% from 5.86%.

Under the government’s direction, though, the bank has bolstered its capital cushion and provisioning levels to deal with the expected deterioration. As a result, Khan Bank’s overall capital adequacy ratio rose to 25.3% from 22.59% between 2015 and 2016.

One of the conditions attached to the IMF package, which includes a $440 million three-year loan and access to $5.5 billion in multilateral loans, is an overhaul of the Mongolian banking system. The government has until November to complete its review.

Myanmar's Best Bank: Kanbawza Bank

This is the second year Myanmar has been part of the awards process, a reflection of the challenges and opportunities the country faces as it opens up its economy following the removal of the final US trade restrictions in October 2016.

And there is really only one contender for the award, Kanbawza Bank (KBZ), the country’s largest private sector bank on any given multiple.

Myanmar is under-banked and it is the private sector banks that are working hardest and fastest to turn the situation around, eating into the market share of slower state-owned rivals. A recent report by consultancy firm Roland Berger estimated that state-owned banks saw their market share drop from 67% in 2013 to 43% in 2016.

KBZ Bank now has a 40% overall market share in deposits and commercial banking. As a result, its asset base has been growing fast. Data from S&P Global Market Intelligence shows it grew by 13.16% between 2015 and 2016 to $6.2 billion. 

Loan growth was also strong, rising 25.4% to $4.19 billion in the 2016 financial year. This equated to a loans to asset ratio of 67.48% up from 60.89% in 2015.

Roland Berger warns that Myanmar’s economic growth potential could be stymied if banks are not able to keep up with demand. It forecasts an industry-wide compound annual growth rate (CAGR) for loans of 29% and a CAGR for assets of 23% through to 2025. This should help Myanmar close the gap with some of its Asean peers such as Indonesia, which has a 57% banking-assets-to-GDP ratio compared to Myanmar’s 49%.

It is estimated that 77% of Myanmar is unbanked and only 2% of the population hold a debit card. Therefore, industry growth is very different compared with much of the rest of Asia, where bricks and mortar banking is being replaced by automation. KBZ already has twice as many bank branches as its nearest two rivals combined, but wants to double the figure again to 1,000 by 2020.

It is also partnering with a telecoms company to establish mobile banking and leading the country’s charge to forge trade links around the region. Last August, it became the first domestic bank to establish a representative office in neighbouring Thailand. In October, it followed up in Singapore, the country’s second biggest trading partner after China. Next up is Kuala Lumpur.

Faster growth is, however, putting some pressure on efficiency ratios. The bank’s net interest margin fell to 2.99% in 2016 from 3.8% in 2015, while the overall capital adequacy ratio fell to 11.12% from 12.33%.

Return on assets and equity also came under pressure. The former fell from 1.42% to 1.07, while the latter dropped from 40.3% to 31.19% according to S&P Global Market Intelligence data.

Sri Lanka's Best Bank: Commercial Bank

Commercial Bank has long been the recipient of this award and it continues to maintain its edge thanks to heavy investment in digitisation and IT.

There have been quantum improvements across the board, which have resulted in a spate of new online and mobile offerings, more automated branches, and a slick website that no longer looks out of place against banking peers in more developed countries.

That investment has come at the expense of the bank’s cost-to-income ratio, which Commercial Bank hopes to stabilise in 2018. Between 2015 and 2016 it crept up from 48.92% to 51.06%.

But the results of its efforts are already paying off in terms of new customers and transaction volumes. The bank re-launched its corporate banking website in 2016, with transaction volumes growing 26% over the course of the year. It also introduced a host of new initiatives across its mobile banking platform, which boosted customer numbers by 70% to 450,000 and lifted transaction volumes by 36%. One of its biggest initiatives was the launch of e-Passbook, which enables retail customers to check their accounts and card balances via an app.

A second big push has been across debit and credit cards, where it hopes to put more pressure on market leader HSBC. Thanks to a host of incentive programmes, the bank saw its credit card base grow by 40% year-on-year. Commercial Bank became the first Sri Lankan bank to introduce contactless payment for credit cards. It also launched a number of sector-specific credit cards, including one for workers in the garment industry, and now has the highest point-of-sale market share in Sri Lanka for credit and debit cards. 

Remittances are a big pillar for the Sri Lankan economy. Here Commercial Bank introduced its first ever remittance card, enabling beneficiaries to receive funds direct to their bank account rather than having to go into a branch. Commercial Bank also established a money transfer operation in Italy during 2016.

The whole of the Sri Lanka banking sector witnessed strong asset growth in 2016 and Commercial Bank was no exception, with assets topping Rs1 trillion ($6.4 billion) for the first time, up 15.05% year-on-year.

Loan growth was particularly strong, up 20.38% to $4.1 billion. So far the bank has been able to keep non-performing loans in check, with the ratio declining from 3.10% in 2015 to 2.51% in 2016, S&P Global Market Intelligence figures show. 

Standard & Poor’s has cautioned domestic banks to improve their capital buffers in case of weakening asset quality. Commercial Bank is now in the process of raising Rs10 billion to bolster its capital adequacy ratio, which stood at 16.01% at the end of 2016.

Best Investment Bank: NDB Investment Bank

This is the first time we have given an award for best domestic investment bank in Sri Lanka. That we decided to do so is a testament to the strides the country has made since the ending of the civil war in 2009 and Sri Lanka’s strategic importance to China’s Belt and Road Initiative, which should result in far greater deal-making over the coming decade.

Local bankers also expect the government’s long mooted privatisation programme to kick into gear over coming two years. If it does, it should result in a marked increase in transaction sizes given that the average size of most IPOs in Sri Lanka is only a few million dollars.

One exception is the IPO for the Maldives subsidiary of global telecoms company Ooredoo. NDB Investment Bank  (NDBIB) is the sole lead manager for the $114.95 million offering, which began bookbuilding at the very end of this year’s awards process. When it lists later this summer, Ooredoo Maldives will also be the first to have a dual listing in Male and on the new dollar-denominated board of the Colombo Stock Exchange.

In assigning the award, NDBIB was the clear winner. The government-owned institution is fairly unusual compared with other frontier market peers in having a platform across equity, debt, and M&A.

Its 2016 revenue breakdown shows a split of 32% loans, 30% bonds, 24% securitizations and commercial paper, with equity accounting for the final 14%.

Best International Bank: HSBC

As it prepares to celebrate its 125th anniversary in Sri Lanka, HSBC remains the country’s largest foreign bank on any measure. It also appears ready to regain its stride after a difficult few years marked by a shedding of retail customers to meet the bank’s more stringent anti-money laundering rules.

The bank’s even deeper roots in Greater China should stand it in good stead too if Chinese foreign direct investment starts to flow into the country as anticipated over the coming few years.

The bank’s deposit base continued to ease in 2016 but it rapidly expanded its loan. According to S&P Global Market Intelligence data, loans grew from $1.28 billion in 2015 to $1.4 billion in 2016, while deposits shrank from $1.28 billion to $1.24 billion.

Overall assets grew from $2.68 billion to $2.77 billion, making it one of Sri Lanka’s top-10 commercial banks by assets. It was also able to buck the trend for declining net interest margins by recording an increase to 4.46% from 4.38%.

The bank remains the market leader in terms of credit card spending, although it is under a lot more competition from domestic banks, resulting in a market share decline from 29% in 2015 to 27% in 2016. However, HSBC’s credit card spending notched up a record Rs5 billion last December.

On the commercial- and investment-banking front, HSBC arranged two deals, which were small by international standards, but large by Sri Lankan standards. It arranged a $25 million guarantee facility for Colombo International Container Terminals and a $26 million loan for a subsidiary of the country’s largest conglomerate, John Keells. This will finance a new ice cream manufacturing facility.

In terms of overseas bond sales, the only issuing entity remains the sovereign, which has tapped international bond markets a number of times over the past few years to re-finance existing deals and build up foreign exchange reserves. HSBC has been a global co-ordinator for every single deal.

In the last 12 months HSBC has acted on two deals, including one during the review period, raising a combined $3 billion. It also acted as mandated lead arranger and bookrunner for the sovereign’s $700 million syndicated loan facility.  

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