In addition to enabling business continuity, our digital strategy has facilitated 4.5 times faster growth of the customer acquisition, compared to traditional Banking acquisition, with our UPay customers growing 4.5 times faster than traditional banking customers.

Although the Sri Lankan economy experienced a significant setback due to the outcomes of Covid-19 during the financial year 2020, I am pleased to report to our shareholders an exceptionally good year for your Bank, particularly in terms of financial performance and also with regards to strategic progress.

SDB bank closed the financial year 2020 on a record net profit of LKR 835 Mn., which is the highest profit of the Bank in its history. This successful conclusion can be directly attributed to effective and well-coordinated teamwork. The entire team understood the need of the hour and united to safeguard the Bank. The Bank received 32,000 applications for credit moratoriums announced by Central Bank of Sri Lanka to help revive the economy impacted due to COVID-19 ourbreak, which is over one-fourth of the portfolio and spent approximately LKR 400 Mn. on extending credit moratoriums to customers, which is a fairly substantial figure for a bank of our size.

Building the rural digital economy

As highlighted in our Annual Report’s theme, connectivity was the formula for the year, and the decision to invest in a digital business model has proved its worth. During the year, we experienced exponential adoption of digital technologies by Sri Lankans and SDB bank’s digital systems became the lifeline for business continuity. Our user-friendly digital solutions ensured continuous connectivity with our customers, who are spread island wide and in some of the most remote parts of the country, and digital platforms were used to maintain uninterrupted inter-connectivity among staff and Management, while Board meetings were held as scheduled. We also continued our digital expansion plans during the year, while upgrading inhouse capacities and skills to cater to the new normal.

In addition to enabling business continuity, our digital strategy has facilitated 4.5 times faster growth of the customer acquisition, compared to traditional banking acquisition, with our UPay customers growing 4.5 times faster than traditional banking customers. I believe this rate of growth can be accelerated ten-fold by setting up the correct channels. Sri Lanka existing POS network of 85,000 POS machines which facilitate digital payments for the entire country, which took over 30 years to build, is totally inadequate to meet the growing demand. Meanwhile, Sri Lanka’s mobile phone penetration is now around 30 Mn., out of which, an estimated 10 Mn. are smart phone users, which is anticipated to grow at an accelerated pace in the new normal of the post-COVID world. The combination of growing demand for convenient, non-contact financial transactions, coupled with increasing smart phone projections, augers a large new, rural market for SDB bank. In this regard, LANKAQR, the national QR Code, introduced by the Central Bank, which is strongly championed by SDB bank, coupled with SDB bank’s already extremely popular UPay app, gives SDB bank a unique strategic advantage in Sri Lanka’s emerging rural digital economy.

LANKAQR, the national QR Code, has revolutionised digital financial transactions in the country and will pave the way for a rural digital economy. Within a short period of six months, LANKAQR has grown its network to 200,000 island wide merchants with an estimated 500,000 consumers using the LANKAQR Code. Mass scale adoption of LANKAQR will generate multiple benefits for the national economy, including savings on currency printing and lead to a more business friendly, low interest environment. SDB bank’s UPay merchant-network also expanded by 3,000 merchants during the year, providing online access to 8,000 merchants for UPay customers. At present SDB bank’s digital solutions include Internet banking, which is aimed at SME and cooperative businesses with well over 100 customers, and the UPay payment platform, now coupled with LANKAQR, which is the consumer payment channel. We plan to consolidate our mobile banking version with the more versatile UPay, which has already attracted a loyal customer base. As at the end of the current financial year, UPay customers and debit card customers totalled at around 130,000, each. Consequently, SDB bank is now fairly well integrated into the national digital economy and I believe, has the potential to play a major role in the rural digital economy, to make a significant contribution to the national economy.

Differentiating the brand

The strategic decision in 2019, to relaunch our brand as “SDB bank,” and clearly communicate brand values to the market has differentiated the Bank’s market perception, which has been critical for growth. Following the relaunch, in our first brand ranking in the Brand Finance 2020 review of Sri Lanka’s 100 most valuable brands, we were ranked 45, with a brand valuation of LKR 2.0 Bn., surpassing many of the country’s biggest business names and banks. It is noteworthy that we were ranked number one among first time entrants. The brand ranking and valuation were influenced by the rebranding, customer-friendly branch redesigns, and social media campaigns. The Bank’s recent prominent role in national technology events, such as promoting the LANKAQR Code and various other national activities, have also added to the brand value. My appointment as Chairman of the LANKAQR Committee formed by the Central Bank, which is indeed a great honour, is another platform that has enhanced SDB bank’s public profile.

Developing the SME sector

We believe the SME sector, which also encompasses the country’s cooperative sector, has great potential for growth. SDB bank’s heightened brand presence among rural SMEs has positioned the Bank as a serious contender to provide specialised financial and development solutions for this segment, which will also support the advancement of our traditional customer base the cooperative sector.

Sri Lanka’s SMEs represent 52% of national GDP but is viewed as a somewhat high-risk market. In this regard, I wish to highlight that in spite of Covid impacts across the economy, SDB bank has contained its NPL figure at 4.5%, which is among the best in the banking industry, indicating the Bank’s ability to manage SME related credit risks. The Bank’s high-quality credit assessment-procedures and stringent management of recoveries, was a major contributor to our financial performance in 2020. The stability of the Bank is further evidenced in retained the ratings of BBB- from ICRA Lanka and BB+(lka) from Fitch Rating, with a stable outlook, while the sovereign rating and institutional ratings were downgraded.

Currently, rural SMEs are at a low level of digitisation. However, this situation is now changing and over the coming months we plan to expand our footprint in this sector beyond loans and deposits, into retail transactions utilising our digital platforms.

Building strategic partnerships

One of our core strategies is “partnerships for growth.” During the year, our strategic partnerships with international agencies, the Central Bank of Sri Lanka (CBSL), and corporates, such as Browns, Dimo, Milco and others, have contributed directly towards strengthening the rural agricultural economy. Within six months, the Bank leased 400 tractors to the farming community, which represents 10% of all tractors sold in Sri Lanka, and is a significant achievement for SDB bank.

Our partnership with the Central Bank’s SAPP programme is supporting chili farmers in the North Central Province and in 2021 the Bank will receive a USD 40 Mn. credit line from the United States International Development Finance Corporation (DFC) to develop rural SMEs and women entrepreneurs, while the FMO has committed a USD 15 Mn. loan facility for SME development.

In addition, we have partnered with the Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka) to strengthen the SME sector, not only by channelling credit, but by educating them on business management, through a mentoring programme. In Sri Lanka, 80% of SMEs wind up in five years and family businesses rarely survive beyond two generations. We believe the partnership with CA Sri Lanka will strengthen financial management and governance of SMEs, to allow them to prosper over the long term.

Gearing for growth

On average, SDB bank has sustained a 25% growth in assets, loan book, and equity, within the past 21 months ended 31 December 2020, during my tenure as CEO of SDB bank which is the fastest rate of growth experienced by the Bank. This has been achieved while maintaining asset quality under extremely difficult circumstances. As at 31 December 2020, SDB bank has even surpassed a few other banks with regards to balance sheet size. In addition, a modern digital operating model is being formulated, and a number of measures have been implemented to develop our human capital base. SDB bank’s share price meanwhile, has continued to perform well during the year, reflecting the stock market movements. Against this positive backdrop, building the capital base of the Bank, to fuel faster growth, will be the priority in the new financial year. This will also pre-empt anticipated regulatory changes in the near future where a common banking licence might be introduced for both specialised and commercial banks. Currently, Licenced Specialised Banks benefit from a lower capital requirement compared to commercial Banks, but a single licence might eliminate this advantage for SDB bank, unless we are capitalised to face this eventuality. Therefore, we have planned a secondary public offering to raise LKR 4 Bn. in equity, which will boost our capital base from the current LKR 10 Bn., to around LKR 21 Bn. by 2024, inclusive of cumulative profits.

As we gear for growth, we will continue to focus on shrinking the Bank’s cost to income ratio, which currently remains at over 60%, to a healthier 48%-49% range. During the year, we made significant gains in reducing our cost of finance, which declined from 12% in January 2020 to 8.3% by December 2020, by renegotiating better terms, managing our balance sheet better and rebalancing the savings to deposit ratio. The DFC credit line will further reduce our cost of finance in 2021.

Our digital strategy to automate internal processes will also support the cost containment drive. End-to-end automation can be expected to generate 20%-30% operational efficiency increases, and profits will be enhanced through internal reengineering for greater cost savings and better staff productivity. The introduction of digital signatures for instance, has enhanced efficiencies significantly by slashing turnaround time from days, to minutes. We have linked up with the Department of Registration of Persons for online verification of identities, which will make the process of opening accounts, much faster.

Outlook for the new financial year

We extremely optimistic of the future. Although banking sector growth is often linked to GDP, I believe banks are integral to economic growth and can promote growth through their policies. Therefore, the economic contraction in 2020/21 will not be a hindrance for growth in the new financial year and I believe we can sustain our growth momentum.

We have set ourselves an ambitious task to grow our balance sheet by 20% within the next 12 months and we are passionate about reaching this objective. To achieve our target, we will focus on SMEs, which is a global and local growth trend. In this regard, COVID-19 has generated an advantage for SDB bank, as larger banks are limiting their exposure in the SME sector due to the relatively high administrative costs associated with smaller loans. SDB bank however, can leverage its well-established digital platforms and deep rural connections to provide highly competitive services for both SMEs and the cooperative sector.

A word of appreciation

I would like to conclude by thanking the wonderful team at SDB bank for their commitment, dedication, and work during the year, which has been the source of our success, and the Board of Directors for their support. I also appreciate our shareholders who invested in a Rights Issue during these difficult times and our potential investors for their continued confidence in us. I would also like to thank the Central Bank of Sri Lanka, the Colombo Stock Exchange, and the Securities and Exchange Commission for their guidance and support. We face the new year, with confidence knowing we have a winning team behind us, and a strong support system.

Sincerely

Thilak Piyadigama
Chief Executive Officer

19 March 2021