In a candid interview with Emmanuel Daniel, the bank CEO looks back at the company’s transformation, talks about plans for digitalisation and shares the legacy he wants to leave behind
Jonathan Alles, managing director and CEO of Hatton National Bank, was conferred the CEO Leadership Achievement Award and the bank was recognized as the Best Managed Bank in Sri Lanka by The Asian Banker in 2019.
Under his stewardship, the bank emerged as the most profitable privately-owned bank in Sri Lanka in 2016. He also charted a clear digital growth strategy and led the bank to heavily invest in Smart ATMs. The upgrade of the bank’s electronic banking platform has led to a significant increase in its internet and mobile banking customers and usage.
Alles also set up dedicated sales teams and drove an incentive-based reward structure while working and engaging closely with his stakeholders and top teams. His leadership trademark includes a personal touch in customer service, regular visits to regional branches and encouraging his top team to follow suit.
In this interview with The Asian Banker chairman Emmanuel Daniel, Alles shares his career history and significant business insights.
Emmanuel Daniel(ED): I’m very pleased to be able to speak with Jonathan Alles, the Chief Executive of Hatton National Bank, which is part of a group, with all of the other components put together, the largest privately-owned financial services conglomerate in Sri Lanka. And your own history, Jonathan, is that you were chief executive before, and then you went away and then you came back. Tell us a little bit about your association with Hatton Bank and how things have changed when you’ve been away and come back. And then, what has your focus been since?
Jonathan Alles(JA): So, in terms of background, I’ve got about 20 years of experience with HSBC, enjoyed getting back at the age of 35 in the early 2000s to HNB as its AGM in its new building, a great edifice, probably the best building in Sri Lanka, HNB Towers and ran the branch downstairs, which was the merger of the former Darley Road andthe Suduwella branches. Spent some time there, and then went back to the Middle East, rejoined HSBC, and then was very pleased to come back in 2010 to this institute, HNB, which has a great legacy as of today, 130 years, built on trust, on stability. However, it was a bank that had plenty to do in terms of, while we had built a great culture, a unifying culture, a great team, we needed to support that team with better technology, better processes, more updated, let’s say, systems, etcetera.
So in 2013, when I took over as Managing Director CEO, as I joined in 2010, there were 28 in the top team, very senior bankers who had spent 30-40 years in the bank. And then, the interesting part in 2013 was I was left with 13 of us, all very young, in the deep. So, there was also a confidence factor in terms of like the 5,000 staff that were wondering, now, is this bank secure. It’s huge. It’s a young team.
So the first thing that we had to do was not about getting strategies and putting qualitative plans and visions. It’s about hitting those numbers and ensuring that we could actually do it. Around that time, ironically, we had the gold debacle as well. And at that time, HNB had around 16% of its portfolio on gold loan. So, we took a significant hit in two consecutive years, 2013 and 2014. We lost $2 billion each on gold. So, they were really difficult times. We had a few staff leaving as well. Commercial Bank, which was the premier bank at the time, had a $2.5 billion lead on us on profit after tax and nobody gave us a chance. I was delighted, actually, the way we got together, rallied the team, made them believe, and we thought it would take longer. But from about 2015, 2016, 2017, 2018, we have been the most profitable private banking group now surpassing, catching up that $2.5. And also, then leading it by sometimes it went up to about $1 billion. A lot of initiatives were done, but I would love to share some of them.
Setting the benchmark for excellence
ED: So, at the time you were taking over, the balance sheet had also a very huge cost side of the business. And on top of that, the gold-backed loans in Sri Lanka. So, Sri Lanka itself was going through a transformation. Banks had to adapt to make that transformation. You had to be more liquid, which liquidity might have been a problem. Liquidity, quality of loans, and your cost-income ratio. Now, tell us a little bit of the priorities that you had at the time you took over, and how that changed over time, and what are your priorities now?
JA: So spot on, in terms of early 200s when I joined the first time, cost incomes in the range of 70-plus percent. When I joined the second time, it was around 56-58%. We have now brought it to under 35%. Over 20% we have dropped it over two years.
As I said, first priority – the first four years the priority was about bringing confidence to the team. And the easiest way to give that confidence was to hit numbers, hit KPIs, claim industry leadership, win awards, get everybody involved. The first thing I also did, we were historically known as a one-man show, one person owning the bank, from the Wijetilleke era. They were great leaders of our time. But my job first as I came was the very first month, I appointed a top team of 100. I plan to make it 500 in the next year so that I have succession already in place
The first four years, numbers to do that drove cost-income ratio hard, not by affecting people. Yes, the headcount reduced drastically from 4,780 to 4,190, but the more important thing that I did was as I went, I set up a BPRE, a business process range engineering. And I hired executives from outside, and then revamped our processes, brought in automation, and we were nicely positioned sometime 2016 to plan Vision 2020.
Having done the numbers, it was not fair for me as CEO to just continue to drive the numbers. Now, I have left it to the next year and my focus is purely qualitative. So, Vision 2020 is all about achieving qualitative goals, having achieved the quantitative, and having done the numbers. Now, by doing what the bank and its people needs, I expect the bank and its staff to respond and then deliver on the numbers just to keep it at its highest level. It’s about to be the most profitable commercial bank as part of Vision 2020 using integrity, teamwork, commitment as values.
Being the best commercial bank, not limited just to ROE in terms of most profitable, but to be the best customer-centric bank, highest NPS score in the industry, best value employee, great places to work. There is a benchmark that is set in order to measure whether we have achieved it or otherwise. Those are set. And then, the proposition, the value prop is making banking enjoyable, a happy and bright clientele, a happy and bright HNB workforce is what we are looking at in the next few years. Creating that future-ready HNB systems, processes, and most important, the people by 2021 is probably the legacy I want to leave behind.
ED: But even as you are preparing for a legacy, what’s interesting is the financial services industry is changing dramatically. And when new agendas were put on you, which is way over and above the traditional enterprise-type institution that the banking industry used to be. Right? So some of the things that you talked about, business process and re-engineering, is just automating things that the institution was doing before.
But if you look outside Sri Lanka, you look at China, you look at a lot of the developments in Europe, even in Africa, you’ll see extending financial services to the bottom of the pyramid. And digital transformation, which is not the bank, but the customers. The customers are interacting on social media and all of that. So, finance has to plug into what the rest of the world is becoming. How far are you with that right now? And I’m not just talking technology for technology’s sake, because we can talk about technology in the way that bankers used to talk about it, which is enterprise. Today, technology is open. The very technology that you are trying to access, not even create, exists in the open space, in the open platforms and so on. Where are you with that? Where are you in the journey? Are you in danger of introducing a new payment platform that Sri Lankans can do peer to peer very quickly and that sort of thing?
JA: So, a great part of this Vision 2020, there is Everest bank transformation project that we have created. It’s a huge one. To support us through it, we have got Deloitte’s on board. It’s a three-year journey, which ends in May 2021. A great part of it involves digital. We have hired a chief technical and digital officer who runs two verticals: the digital banking as well as the CIO function. And in that, like you correctly said, in the front-line transaction migration to various machines, kiosks, cash deposit machines, recyclers, product development that takes place take into account what the client wants as opposed to what we think we should be developing based on research, market surveys, etcetera. When I talk of BPR, and it’s not only just systems, so it’s not about bringing machines, which we call digital. It’s about digitalisation, which is it could be automated. It’s new thinking, which may not have technology at all. And it’s about having the best process, the most appropriate, sometimes not having the process itself. And then you have your back end. Having the right data scientists in place in order to get the appropriate analytics to manage risk as well as them pushing up data to do your CRM layers and stuff to do business.
Just one point in terms of where you mention, ‘Are we trying to do everything by ourselves?’. Not really, we have got an ESB, our enterprise service bus on top of which, we are planning to bring in a digital banking layer so that you can have thousands of APIs integrated. It’s open banking at its best. We have already signed an agreement with the Colombo University. We’ll be signing shortly with Moratuwa University, these are all engineers and mathematicians and with the Sri Lanka Institute of Information
Technology (SLIIT) so that we co-create rather than HNB having loads of programmers and software engineers, we use all these undergrads and post-grad students to work with us. It gives a great opportunity for them as it becomes a great place for them to come and work as well because they have seen us for the last year. So, there will be a lot of development taking place in terms of product development, middle office efficiencies, and an important piece that HNB needs to get it right in the next few months is getting its data analytics in place. So, as we speak, we are talking of multiple collaborations with the likes of telcos. We will work with supermarkets. We will work with fintechs, all who would like to plug and play on our systems for revenue share.
The advantage we have here is currently, the central bank is somewhat supportive while they like to bring in fintechs and others, they also enjoy the convenience and the security because they know that banks are very well regulated and stuff. So, the model to collaborate and work with us is what is being promoted now whether it’s through our national payment system or otherwise, these guys will have to come through us.
The track record to follow
ED: How is your capital management structure and the cost of funds that you have, your liquidity, are you paying a premium for your capital? Because Sri Lanka’s net interest margin is one of the best in the world. So, in a way, in one sense, banking is a no-brainer business in Sri Lanka. You will make your margins anyway. Of course, the margins are shrinking over time, but still much slower than a lot of other countries as a result. So, just on the balance sheet side, do you have time to make the changes you need to and at what cost are you running a banking business today?
JA: So, I think that’s a really good question. But you know, sometimes, asset quality being under threat as well as more stringent IFRS 9 regulations coming in on the back of Basel IIIrequiring increased capital buffers. It puts a lot of pressure on capital, so capital becomes a real premium. So you’ve got to use your capital very carefully.
So, what we at HNB are doing is looking at quality credit lending, looking at new opportunities to lend, looking at opportunities like payments and cash management, other fee-generating areas, advisory services, and pushing our CASA so going forward, you may not see the 20-25% loan growth like you have hitherto seen, and loan growths might be around 15% but supported with lots of ancillary business. And to that end, we need to support our subsidiaries also to grow.
So from being something like 15% non-interest income to total interest, you will see banks growing their non-interest income portfolios to 20-25% and reducing stress and leverage of the balance sheet, given the current global as well as economic environment.
ED: But do you source some of your capital from your loan capital? I mean, do you source it from more expensive sources outside Sri Lanka?
JA: Generally, HNB has been fortunate that it has been borrowing at significantly lower rates than the market. We borrow at maybe 100-200 basis points lower than the government also for the same tenor. So, in addition to our usual capital structures like let’s say having Tier 1 capital, we raise the benches to support Tier 2 over royal capital under the new IFRS mechanism, but HNB for the last maybe six, seven years, has been raising a lot of money from overseas. That exceeds about $500 million. Currently, transactions in the pipeline exceed $300 million in terms of…
ED: What is that, a percentage of your borrowed capital?
JA: Very insignificant, very insignificant and none of those are part of our capital. They are all loan capital. So, let’s say, I said $400 million dollars is maybe a $10 billion. That’s less than 10% or 8% of my overall net worth. So, the likes of ADB, the likes of the Chinese banks, and you have the DFIs (development finance institutions) like FM or PROPARCO and all of them have participated and you know funded us at various times, they continue to do that.
ED: There is a history of that. So, that is a good track record.
JA: And many of them have done multiple transactions. That is, the moment one is paid, the second one comes along. None of them, at this stage, have ever refused to look at a new transaction at the end of the previous one. Most have looked at a second transaction while the first is still ongoing.
ED: So, final question. The future of Sri Lanka and the economy in which you serve, what are the pillars of the economy, which of these pillars are important to you?
JA: To me, I like to see reduced leverage at high end import expenditure bringing the necessities, drive exports, drive foreign exchange income earning areas, like I know the 21st of April has set us back a little bit, but I think tourism will rebound. Ancillary business around tourism is important like the supply chain. Exports is important driving the IT services, BPOs, KPOs, and making that a $5 billion industry is important because it’s all about using other people and the technology and their intellect, and not so much on manufactured services. And we need to probably get agriculture. We need to do it a little more efficiently.
So, just to sum up, health, hospitality, let’s say manufacturing, trading remains key. But we need to support it with youth empowerment, entrepreneurship, continue to do the microfinance that we do, the same as we need to get our support. But I like to see the IT industries developing in a big way.
ED: Jonathan Alles, thank you for giving us a snapshot of where Sri Lanka is and the pillars of which you are building your business, and the transformation on the balance sheet, the cost structure, and the process of the automation that you’ve already put in place, and also the future that is very bright and the opportunities that might be there for you.
JA: Thanks very much, Emmanuel. Thanks for having me here. Thanks very much.