By Eric Ellis
|Illustration: Jonathan Williams|
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Colombo’s famous seaside common, the Galle Face Green, comes alive when dusk falls and Sri Lankans take their sunset constitutionals, fly their kites, hold hands and nibble on isso wade, the greasy prawn fritters much loved by local flaneurs.
It’s a tradition that goes back generations, but for how much longer? Things are changing fast in the Sri Lankan capital, and Colombo’s beloved green lung is no longer such a peaceful place to promenade, thanks to the relentless dredging of a new harbour and a chorus of jackhammers from nearby building sites.
The new skyline of cranes, office towers and luxury hotels in various stages of construction eclipses one of the most graceful colonial cityscapes in south Asia.
It could also spell trouble for the banking industry at a time when it faces plenty of other obstacles to growth, ranging from how to deal with the undeveloped north and the legacy of the Rajapaksa era, to coping with antiquated exchange controls, a confusing tax regime and the balance between bricks or clicks banking.
“There is a bubble,” Jegan Durairatnam, CEO of Commercial Bank of Ceylon and one of the country’s most experienced bankers, tells Asiamoney, and he’s worried about the impact of a potential property collapse on confidence.
In a prime location overlooking the green, a $500 million trio of towers based around a Shangri-La hotel nears completion. A little way inland, the spiralling Lotus Tower – Colombo’s $150 million answer to Toronto’s CN Tower – is on its way to becoming south Asia’s tallest building.
The soaring skyscrapers and transformed shoreline are part of what the Sri Lankan government extravagantly calls the Western Region Megalopolis, their hoardings boasting all manner of upmarket metropolitan lifestyles, from ‘Responsible Luxury’ to ‘Extravagant Living Experience’ and even ‘Residence of World Leaders’.
Development doesn’t stop at the Shangri-La and Lotus towers. Casting morning shadows over the official prime ministerial residence is the $300 million Altair, Colombo’s version of Singapore’s landmark Marina Bay Sands complex, designed by the same architect. The four-towered $600 million Krrish Square in downtown Pettah is destined to go up on the Sri Lankan central bank’s old car park.
Then there’s the $350 million Altitude, a 96-floor tower dedicated to Sri Lanka’s 1996 triumph in cricket’s World Cup, the $200 million 50-storey Acheillon Tower, the 110-floor World Capital Centre proposal, and on. Connecting them all is a proposed trans-city monorail, to be linked to a new national rail network that binds the once war-separated north to the capital and beyond.
Sri Lanka has already felt the financial consequences of a rash of ambitious Chinese-driven mega-projects commissioned during former president Mahindra Rajapaksa’s rule, some of which turned out to be white elephants. It’s not clear there is much demand for the latest batch of residential and commercial real estate projects.
Sri Lankan economists say the cost of these new developments runs to at least $4 billion, in an $80 billion economy that is on IMF support and that already owes an estimated $65 billion to $80 billion to its international creditors. Prime minister Ranil Wickremesinghe recently admitted to the island’s parliament: “We still don’t know the exact total debt number.”
Crisis? What crisis? Ask any Colombo mogul and they’ll assert that their island is at last poised to deliver on the promise of its geography, the Indian Ocean’s thrusting entrepôt, its Dubai/Singapore hybrid, and then some. Eight years after the end of a crippling 26-year-long civil war, Sri Lanka is impatient to write its chapter of booming Asia’s development story. It has delivered real GDP growth of between 3.4% and 9.1% a year since the end of the war, and the IMF expects growth of 5% this year.
But ask any local banker who is actually paying for all this soaring ambition and the answer seems elusive.
If a borrower defaults, some NGOs are pushing these borrowers not to pay the loans back, telling it’s like a grant. That is a culture there that built up soon after the war. A change in the borrowing culture is needed- Dimantha Seneviratne, NDB Bank
True, some of the new towers have been pre-financed by foreign developers, as is the case with the Hong Kong-owned Shangri-La Group’s One Galle Face complex, which is being built by a Chinese state firm and is set to be Colombo’s best hotel when it opens perhaps later this year – three years late and six years since ground was first broken on the prime site. Financing of the nearby Grand Hyatt tower, which is still under construction nine years after it began, ran into difficulties and is now in the hands of various state institutions.
But local firms are promoting many of the other developments, so who among Colombo’s bankers is backing them? There is scant public information. According to Dealogic, Standard Chartered Bank, Commercial Bank of Ceylon (ComBank) and Hatton National Bank were the mandated lead arrangers for a $395 million syndicated loan to Waterfront Properties Pvt Ltd, part of Sri Lanka’s John Keells group, in June 2015. The project involves a hotel, residential apartments, commercial space and a shopping mall.
When asked if they have any exposure to property now, it’s a different story, suggesting any exposure has been sold on.
“We don’t have a single (exposure),” says Durairatnam at ComBank, the island’s biggest private-sector bank. Nor does Hatton National Bank, the second-largest private-sector bank, according to its chief executive Jonathan Alles: “It’s not something we’ve involved ourselves in to any significant degree.”
Other Colombo bankers suggested that HSBC, which alongside StanChart has long been the preferred banking network for wealthy Sri Lankans keeping cash offshore, was exposed across the sector. An official at HSBC in Sri Lanka told Asiamoney “we have checked with the subject matter experts from this end, and we are unable to comment on anything at this juncture.” Jim McCabe, country head for Standard Chartered, which vies with HSBC as the biggest foreign-owned bank on the island, did not elaborate about the bank’s property exposure either.
Of the leading banks, the only one that claims any meaningful exposure to the property sector is NDB Bank, the one-time state-owned National Development Bank.
“We are quite involved,” admits CEO Dimantha Seneviratne, who has only been at NDB since January. “In two large ones we are the lead arranger, with quite a sizable funding stage that we have taken,” he says. NDB has also funded five or six larger projects from inception and arranged tripartite funding for the prospective investors, he adds.
Seneviratne points out that national development remains something of a guiding charter for NDB, citing its project finance backing of a new highway upgrade to connect the island’s war-ravaged north with the south.
Does he think there is a property bubble forming? Seneviratne says he’s comfortable with NDB’s exposure. “When we fund, we are quite selective,” he says. “Of course, there may be a kind of bubble forming in the middle-market category where so many apartments are coming up in certain areas.”
The Sri Lankan diaspora and foreigners from India, China and the Middle East who want a bolthole on the island are buying into the high-profile city developments, Seneviratne says. “There are affluent Sri Lankans residing overseas who want to buy something like this as an investment. And we are seeing quite a demand coming from overseas investors.”
But ComBank’s Durairatnam disagrees. He’s in no doubt about what’s happening in property, and he wants ComBank to have nothing of it.
“The Shangri-La will sell and the Altair will sell,” Durairatnam says, “but there are about six other projects that won’t sell.” He cites one foreign developer who is building 600 apartments and, he claims, “not even 20% is sold. They’re unable to sell. The company that I’m talking about has deep pockets, so they can absorb the hit, but the smaller companies, they’ll experience the bubble at some point.”
Mafaz Ishaq, partner of private investment house Calamander Capital says: “If the property market pops, there is going to be a very serious sense of mayhem in the banking sector.”
The new central bank governor, Indrajit Coomaraswamy, may also have noticed the new towers around town. In a monetary policy review statement released in February, the central bank said that year-on-year growth of credit extended to the private sector by commercial banks remained high at 21.9% by the end of 2016. About one fifth of the lending by commercial banks is for construction, according to central bank data.
Some warn of similarities to Dubai. Hiran Embuldeniya worked for McKinsey there for several years before returning to his homeland to set up investment banking and private equity ventures. He witnessed the emirate’s mid-2000s property meltdown and sees hints of Dubai’s collapse in Colombo’s boom with, as yet, too few people and businesses to fill the city’s many new towers.
“Yes, there’s definitely a developing question mark,” Embuldeniya says.
The war’s end in 2009 led to an immediate spike in infrastructure projects as the triumphant Rajapaksa government of the day handed out contracts, often to cronies, to consolidate the denuded north with the more developed, Sinhalese-majority south. New railways and roads were built, and the banks followed close behind the bulldozers, setting up branches in relatively under-banked territory.
Mullaitivu, the northeast coastal town that became the end-of-war refuge and last stand of the Tiger leadership, had a single outpost of the Tigers’ so-called central bank, the Bank of Tamil Eelam, during the long years of Tiger rule. Now five Sri Lankan lenders, all Colombo-based, have branches there.
But the initial post-war euphoria has worn off, and ComBank’s Durairatnam, himself of Tamil origin, believes that “the north is still not producing, not contributing enough.” He says: “The government thinks the banks are not lending there, but our view is that there are not sufficient lending opportunities with the kind of compliance requirements necessary in today’s world.”
In the east of the island, where there is a good mix of Tamil and Sinhalese, the economy is picking up, Durairatnam says, but in the north, there are no new projects to finance, only the maintenance of existing infrastructure, and he notes that the Tamil diaspora, which was expected to flock home after the war, has neither invested nor returned to the island. ComBank now operates 16 branches across the island’s north.
At HDB, Alles says he has 48 branches across the north and northeast, compared to none before 2009: “Not all of them are doing well, but it is a show of solidarity. I don’t think there are too many more that we need. There is still a lot of work to be done.” NDB’s Seneviratne agrees. “So much expectation was there after the war but something has been lost somewhere down the line.” He says nearly three decades of war has taken its toll on management skills in the region. When it comes to local businesses in the north and northeast, “there are good entrepreneurs at the leadership level, but in the secondary levels, the calibre is not what we are used to. There is a knowledge gap.”
Another issue inhibiting bank lending to the north, he says, is disarray in official records, such as property titles normally used as loan collateral. “There are deficiencies in legal documentation which have to be addressed.” Seneviratne also points a finger at some foreign NGOs involved in microfinance in the region, which he says have “inculcated bad practices.”
“If a borrower defaults,” he says, “some NGOs are pushing these borrowers not to pay the loans back, telling it’s like a grant. That is a culture there that built up soon after the war. A change in the borrowing culture is needed.”
The 2015 election brought an unexpected end to Rajapaksa’s decade in power and set down something of a marker for the new Sri Lanka. Under president Maithripala Sirisena, backed by the traditionally pro-business United National Party, bankers say the historically divided country is more confident and keen to join the mainstream.
The election also prompted the departure of Rajapaksa-era appointees at some of the banks. Just weeks after Rajapaksa was ousted, his brother-in-law Lalith Chandradasa stepped down from the DFCC Bank board, while another Rajapaksa acolyte, Lakshman Hulugalle, abruptly quit ComBank.
Years earlier, Hulugalle had been convicted in the Colombo high court for his role in a business scam and was sentenced to two years in prison at the time. Section 42 of Sri Lanka’s Banking Act disqualifies any person who “has been convicted of an offence involving moral turpitude and punishable with a term of imprisonment” from serving as a bank director. In flagrant contravention of the act and despite no banking experience, Hulugalle served four years on the ComBank board from 2011, a reward, it would seem, for his running of Rajapaksa’s war-time propaganda unit.
The two appointments illustrated the excesses of the Rajapaksa era, but neither came close to the controversial selection of Sumanadasa Abeygunawardena, Rajapaksa’s personal astrologer, on the board of the National Savings Bank (NSB).
Abeygunawardena had predicted a great many things, including Rajapaksa’s initial election triumph in 2005, Barack Obama’s in 2008 and, as Tamil Tigers were reduced to a few diehards, the end of the Sri Lanka civil war in 2009. But his clairvoyant skills didn’t prevent NSB suffering some poor years, nor a crippling share-trading scandal in 2012, nor, indeed, his presidential patron’s loss of power in 2015, and Abeygunawardena’s own resignation from the NSB board a few days after that defeat.
The Sirisena government has not been without its dramas either. For much of the last two years, the central bank has been paralyzed by a scandal that engulfed Arjuna Mahendran, who was appointed governor after the 2015 election following several years as HSBC Private Bank’s head of Asian investment strategy, based in Singapore.
|Indrajit Coomaraswamy, governor of Sri Lanka's central bank|
A few weeks after Mahendran became governor, his son-in-law Arjun Aloysius, a Colombo financier, cornered the market in a CBSL Treasury bill auction. Mahendran denied any connection and any wrong-doing but the scandal and corruption allegations have continued to pursue him. In June last year, not even 18 months into a mandated six-year term, he left the central bank and was replaced by Coomaraswamy.
After a long career in international banking in Asia and the Middle East, Mahendran’s LinkedIn profile now describes him as an investment adviser in the prime minister’s office and senior investment consultant to a private family office. NDB’s Seneviratne says he welcomed Mahendran’s departure: “Ideally this should’ve happened much earlier. It shows again that government is not decisive.”
Indeed, the ongoing drama surrounding Mahendran seems to have dampened the initial ardour the Sirisena government had for calling to account the excesses of the Rajapaksa era, promises that had helped it win power in 2015.
In an interview with Euromoney in June 2015 soon after coming to office, finance minister Ravi Karunanayake said he was committed to rooting out corruption. “This country had gotten out of control and now we are putting it right,” he said “And there will be consequences.”
But Durairatnam says this half-hearted purge of the bureaucracy has led to sclerosis in government decision-making. “Everyone was named and shamed,” he says, “and a lot of people don’t want to take the risk. The bureaucracy is a little slow to respond.”
“Things are still settling down in the transition from the old era. Freebies are slowly being looked at, stopped, which is good. From our perspective, the tax issues, reforms, the various issues don’t get resolved. We have lots and lots of issues, but they just stay there unresolved in the bureaucracy.”
Frustratingly, Durairatnam says “everything has to be driven back to the minister. The bureaucracy needs the confidence to take decisions. It’s one of the fundamentals we need for development.”
He cites the island’s debilitating exchange controls as an impediment to foreign investors. For example, the “over-bureaucratic system limits foreign activity in equities,” he says, citing odious rules requiring proof that a foreigner buying and selling local stocks do so from inward remittance before being allowed by the central bank to repatriate any profits.
“If we want money to come in, we have to have a simpler system. The current system exists to combat fraud, but that can be done through electronic means. We cannot continue to have systems that have to be manually monitored. We cannot grow the country that way. Any investor wants to know if you can transfer money from here to there, and no one in the bureaucracy is giving an answer. That is a big problem,” he says.
On reform, NDB’s Seneviratne says he would like to see more clarity and uniformity on general tax policy, noting clashing views on tax from different government departments.
Still, there are some signs of improvement in the banking sector. Among Sri Lankan bankers, Alles gets high marks from competitors for modernizing HNB, breathing a new dynamism into the bank in the almost four years he’s run it. Those efforts have shown up in HNB’s calendar 2016 performance, when taxed profit rose 41% to come in at SLRs15.7 billion ($105 million) as assets grew 19% to SLRs900 billion.
The generation that is conversant with mobile, with apps, with digital technologies, still doesn’t have the money for cards
- Jegan Durairatnam, ComBank
Alles says that while trade finance, remittances and credit cards accounted for around 60% of HNB’s fee income, there was a big increase in fees from digital banking. “We made a big leap into digital and mobile banking,” he tells Asiamoney. “We’ve invested about SLRs2 billion in the last year to improve systems. In some places, they need to see the building. But we are tending to not build any more brick and mortar. We already have 250 branches in the rural areas.
“Business could be better. We’d like to see development spread out more, not just in the heart of Colombo.”
Alles’ main competitor Durairatnam is positioning ComBank differently in digital, albeit with similarly profitable consequences. Based on its results for 2016, ComBank became the first non-state trillionaire bank in Sri Lanka, topping SLRs1 trillion in assets. Profit after tax rose 22% to SLRs14.5 billion, slightly under HNB’s stellar year.
But Seneviratne’s NDB has been struggling. Taxed profits in 2016 were a sluggish SLRs3.2 billion, around 10% lower than 2015, which the bank blamed on a weak capital market and an increase in provisions. “Our performance was below average,” he says, noting that he’d reshuffled NDB’s senior management in the two months since joining from Pan Asia Bank, where he was CEO. “I’m not on a rescue mission, but we can do much better,” he says.
Durairatnam agrees that capital markets have disappointed, so he re-focused ComBank on its core retail and commercial franchise. “Automation and digital transformation outside the branches is slow to take off,” he says. “What is actually taking off, what we see across our network is branch automation, digital machines inside the bank, so we are automating the branches.”
“We certainly see that automation in-branch will be with us for at least another five years. People still believe that walking inside some real estate is banking, even though every bank has every known digital offering, just like anywhere.”
Durairatnam says he’d like ComBank to be more active in the credit card market, which seems to have been mostly ceded to HSBC and Standard Chartered, partly because it is considered fashionable among monied Sri Lankans to flash a credit card from an international bank. Durairatnam says that in the Sri Lankan card market, NTB and Sampath come after HSBC and StanChart, with ComBank and HNB lagging.
“For all the hype, there’s only 1 million or so cards in the country, mostly Visa,” which he says accounts for 70% to 80% of the issued cards. The biggest problem with credit card usage in Sri Lanka is the relative lack of point-of-sale facilities, he says. “There are only about 45,000 PoS machines in the country,” and mostly at higher end outlets. “It’s an urban situation, very few rural areas have card systems.”
The real growth will come as the younger generation becomes wealthier. “The generation that is conversant with mobile, with apps, with digital technologies, still doesn’t have the money for cards. Once that generation comes of age, their rising prosperity will be another phase here.”