How governance and reform helped bank turn its biggest profit

How governance and reform helped bank turn its biggest profit


Christopher Loh, CEO of uab bank, proudly shows off his brand new three-storey head office in uab Tower, Yangon. Every detail, from the colour scheme on each floor to the positioning of the billiard tables so staff “can mingle and release stress,” has been considered with care.

“Here is the nursing room especially for new mothers. This is the new staff kitchen; I had cooking facilities installed so our employees can prepare their own meals. These are the innovation rooms that are individually designed to encourage the birth of new ideas. We have seven in total,” Loh told The Myanmar Times during a recent tour of the office.

Located in Times City, a US$325 million mixed development project just launched in Yangon, the new office is the culmination of a two-year effort by uab to restructure, rebrand and rally some 1900 employees behind a new culture and identity tailored for growth. 

To stand out in an industry with 26 other private banks, uab wants to be known for “leading change and humanising banking. We want to make banking so convenient and affordable for clients, from big firms to the individual who comes in with a few thousand kyat, that we become the most desired banking brand in Myanmar,” Loh said.

Loh refuses to reveal the actual sum, but the new 60,000 sq ft uab office is estimated to have cost the bank some US$80-US$100 per sq ft to develop, according to judges of the Myanmar Property Awards. That’s potentially at least US$4.8 million, a hefty investment for a bank that up until September 2017 had been struggling to turn a profit.

But Loh says uab can comfortably afford its new headquarters. With non-performing loans (NPL) contained below 5pc for the full year ended September 30, 2019 and return on equity (ROE) at 18.8pc from just under 2pc the year before, he claims uab is the most profitable bank in Myanmar, based on ROE. 

Onerous requirements

But it wasn’t too long ago that uab was under pressure to stay afloat and adhere to a slew of Central Bank directives aimed at regulating capital reserves and reclassifying loans. With pressure to reform mounting, Loh, who was then based in Kuala Lumpur, was parachuted in with instructions to modernise the bank and turn it around. 

“When I joined uab in September 2017, it was just past its five-year mark and needed to start making the necessary financial provisions. In Myanmar, banks are exempted from making provisions within this period. This requirement created a lot of stress on the profitability of the bank,” Loh said. At the time, the bank’s cost to income ratio had surpassed 100pc and losses were mounting.

In countries that follow the International Financial Reporting Standards, the provision requirement for banks is between 1pc and 1.25pc. This is based on each bank’s calculation of expected credit losses (ECL).

In Myanmar though, banks do not have the seven years of loan data needed to model an ECL portfolio. Instead, bank loans are secured against collateral such as property, land or gold, leading to issues such as inconsistent valuations. Consequently, banks are required to maintain higher provision levels. 

There are other onerous requirements for Myanmar banks, such as the industry’s loan-to-deposit ratio (LDR) of 60pc compared to 90pc in countries like Singapore and Malaysia. “That means we can only lend $60 out of every $100 we receive in deposits, making it very hard for us to make money if you consider the savings rates versus lending rates,” Loh said. 

For example, at a fixed deposit rate of 10pc, banks must pay depositors $10 for every $100 saved. Yet, it can only charge a maximum of 13pc, or $7.80 for every $60 lent to borrowers. Those are tough conditions to meet at a time when competition for legit borrowers with satisfactory collateral is heating up. At uab, the LDR is 72pc, Loh said. 

The minimum savings rate for Myanmar banks is 8pc, while borrowers with secured collateral must pay a maximum of 13pc. Last year, the central bank permitted banks to provide unsecured loans at a maximum interest rate of 16pc. 

“Even though we can now accept unsecured loans, the larger part of banks’ portfolios are loans secured at 13pc, because most don’t like to take risks. This has made the lending environment even more competitive, as some banks decrease their lending rates to 11pc,” said Loh.

Despite the tough environment though, uab managed to reverse its losses six months after Loh joined the bank. For the 12 months September 30, 2019, the bank announced K13.6 billion in profits after tax, a record high.

Focus on governance

uab was founded in 2010 as United Amara Bank by U Nay Aung, who is also chair of IGE Group, a Myanmar conglomerate with businesses in trading, forestry, telecommunications and energy. 

U Nay Aung is a son of the late U Aung Thaung, who was sanctioned by the US in October 2014 while serving as a member of parliament. U Aung Thaung was also Minister of Industry for 14 years from 1997 to 2011 under the Union Solidarity and Development Party. He passed away from stroke complications in Singapore in 2015, aged 74.

Part of uab’s reform process involved removing the bank from under the IGE umbrella, “to improve the public’s perception over the bank given IGE’s ties. We asked for a hard split from IGE so that uab could build its own identity,” said Loh. 

He also pushed hard for segregation between the board and management. “A new culture of corporate governance and accountability was needed to restructure, starting with U Nay Aung himself taking a non-executive role in the bank,” Loh said. 

Other moves include enforcing regulations and establishing limits on inter-company loans and restructuring the renumeration system from payoutsbased on the number of years of service to performance driven compensation. Introducing transparency was also on the agenda. Last year, uab disclosed its audited accounts in full on its website for the first time. 

“This shocked the organisation,” Loh said, recalling that he was told by older employees at the time to“respect the culture”. Instead, he embarked on a mission to cut costs. By removing outdated practices, he reduced the number of employees required to open a new bank branch to just 10 compared to 24 before.

In 2019, uab was ranked first for corporate governance and received the fifth highest overall score for Transparency Report in the Pwint Thit Sa Report (Transparency in Myanmar Enterprises) by the Myanmar Centre for Responsible Business.

Embracing reform

Active and consistent engagement with the CBM on strategies designed to help the bank comply with ongoing reforms was key to turning the bank around. The CBM introduced rules requiring banks to submit reports on large debts, reclassify loans and tighten reserve requirements in July 2017.

For uab, the most challenging was the process of unwinding its overdraft loans into term loans. “We first had to understand the nature of our client’s financing needs, as not all loans are readily convertible to term loans.For businesses that require working capital, such as in trading, it doesn’t make sense to convert the credit lines into term loans, as this will impact cash flows and eventually result in NPLs,” said Loh, recalling that uab approached all of its clients personally to explain the CBM’s reforms and benefits of repaying loans on a monthly basis. 

To meet funding requirements, U Nay Aung injected an additional $10 billion in emergency capital into the bank’s coffers when Loh took the reins, taking paid-up capital to $54 billion in 2017. That pool has since grown to $85 billion and uab is now one of the few Myanmar banks with a higher capital ratio than required. As at September 30, 2019, the capital ratio was 8.99 pc. The CBM requires this to be at least 8pc.

Growth and diversification

Moving forward, uab plans to add moresmall and medium-sized enterprises (SME) to its loan book. Previously corporate focused, more than a third of the bank’s portfolio now consists of retail and SME clients. Its aim is for at least half the loan book to be covered by startups and SMEs for a greater variety and volume of customers.

But why take on the unsecured risk?Loh reckons much of the paranoia over defaults is unfounded. The way he sees it, borrowers are inclined to repay their loans. 

“Nobody chooses not to pay if they can. When a borrower chooses to restructure a loan, it is classified as an NPL until he or she can show six consecutive of repayment discipline. Most people want to avoid that,” he said.

In fact, SMEs and entrepreneurs represent a large but untapped market for banks, as many are actually capable of servicing their loans despite not meeting collateral requirements. Identifying and doing due diligence on these borrowers has been a key driver of growth for uab. 

“For example, if there is a big multinational brand or principal buyer sourcing from a bunch of local SMEs, we would have no problem lending to them on an unsecured basis. Understanding the cash flows of our clients has allowed us to diversify into a new market and unleash new sources of revenue,” he said. 

This year, uab is considering the feasibility of waiving transaction and service fees for retail clients and delivering options to make financing more accessible to man on the street.

New ventures in fintech will also be announced in 2020, following the launch of uabs mobile banking app and agreements with foreign vendors enabling contactless payments at local stores in 2019.

“Fintech is the necessary evolution for banking. On this front, we are working on a retail payment and lifestyle ecosystem and SME technology such as cash management solutions,” said Loh. The bank will also open 15 new branches across Myanmar. It currently has 78 outlets in 47 townships nationwide. 

Ultimately, the goal is to be in a position to acquire or merge with other banks to expand market share as Myanmar continues grow, Loh said.

Credit: Myanmar Times

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