Thoughts of an 'old-fashioned banker'

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ALLIANCE Bank group CEO Sng Seow Wah sits down with Anna Taing and Joyce Goh to talk about what the bank has done in the last three years to stay nimble and relevant.

The Edge: Alliance Bank seems to have found a nice spot in the banking industry over the last two years. How did the group arrive at where it is today?Sng Seow Wah: How did we get here? It is really due to our people. I am very thankful for the support of our people and our leadership team.

Within the bank, we needed to do three things. One was to continue to deliver a consistent and sustainable financial performance. This is the thrust of our balance scorecard... a set of goals and targets for the year. And we distil the targets in the scorecard into KPIs for all levels of staff. 

The second is, how do we continue to build customer service?

Third is the people, the human capital. How do we get employees more engaged and how do we retain and train the people? How do we give them more opportunities in the bank for self-development, to do other things, so that later on, they can assume bigger responsibilities? 

We did an employee survey last year, where we gave them a set of 59 questions. The survey was to obtain feedback on what the employees think of the bank. It was not about how happy they were with the bank. Happiness doesn't drive financial performance or how the bank is going to operate. What will make a difference to an employee is how we have communicated to him/her, how we have explained why their role is relevant to the bank. Have we provided them with training? If you want to win in the marketplace, you have to first win within the organisation.

Alliance Financial Group Bhd has performed strongly (as its latest results indicate), despite being the smallest banking group in the country.

We will continue to do what we have done well in the last three years. From the outside, people don't see much change between last year and this year. I think the biggest change that has helped us move forward and create a nice momentum, is the internal change — changing the mindset of the people.

We are more customer-centric now than we were several years ago. At the heart of everything that we do, we ask ourselves: does this make it easier for our staff to do their job? If our processes are tedious, the customer will get bad service. So, we have committed some serious investments to infrastructure, capacity building and risk management processes. 

It's about improving productivity. We not only have to make do with what we have, but we have to do more. Our revenues have gone up, so have our earnings, but our staff strength has actually shrunk.

Whenever people leave, we take the opportunity to reorganise the processes and deliver more with the lesser number of staff members.

The part that has changed most is our human resource practices. It's about communication and establishing the right values. We had a six-month exercise to develop our corporate values.

We established focus groups to find out from our employees what should be the values of the bank. The beauty of it is that the employees developed the bank's values — R.I.T.E (R: Respect; I: Integrity; T: Teamwork; E: Excellence). This means the buy-in to "live" these values is much higher.  

So, what we have done is to build for the future, not for the next two or three quarters, but for the next three to five years. For example, we have a sound risk management framework. Based on our loan impairment numbers, we are better than the industry.  The Edge: Earlier, you talked about generating higher revenue with a leaner team ... how much leaner?Sng Seow Wah: In 2010, we had 4,700 people. Today, it is more than 10% lesser.

The Edge: You also talked about getting the buy-in of the staff. What about the attrition rate? Sng Seow Wah: The level of turnover among our high performers has dropped dramatically. The turnover now is coming from the low performers.

While we give equal opportunities to everyone, we don't give rewards equally to everyone. The rewards are given according to performance, which goes back to the three dimensions — financial performance, customer service and human capital practices.

You can have someone who helps make a lot of money, but if he is not a team player, then this would not bring about sustainability in the way that we want to operate. We don't want an unhealthy work environment.The Edge: In the three years that you have been with the bank, what were your toughest challenges?Sng Seow Wah: If we trace the history of Alliance Bank, it was formed from the merger of a few banks and finance companies in 2000. Many of our staff came from various organisations and along the way, we also hired new people. Trying to have everybody aligned to a set of common goals is the most difficult thing to do.

We think, over the last three years, this is something we have succeeded in doing. Our employee engagement scores remain high. We are seeing growing momentum in many areas in the bank's performance.

You may say the first year is an accident, the second year a bit of luck, but when it comes to the third year, it cannot be by accident or luck. There is consistency in what we do.

What we want is a high degree of predictability in what we do, and the delivery is in the financial results. Shareholders and investors don't like surprises. I am an old-fashioned banker. We need to be very consistent about it. We work as a team. The Edge: A KPI is for your ROE to touch 16% by 2015. Are you on track?

Sng Seow Wah: No, we are not there yet. This is the most difficult piece that we have to deal with, frankly speaking.

There are two difficult issues. One, the NIM (net interest margin) compression has been worse than expected, although in the case of Alliance Bank, NIMs have compressed much less than among our competitors.

The second problem is cost. There is serious wage inflation. And cost in the banking industry is more inelastic. We are relentless about reducing cost. 'Try to do more with fewer resources' is our mantra.

There are three major sets of cost in banking. People cost, which accounts for 60% to 70% of any bank's overheads. Next is IT, and third is distribution — the branches and other delivery channels that we must have.

We have invested in IT over the past three years; now we are in the amortisation stage. So I hope that over the next couple of years, we will have a better handle on cost.

We closed last year at 13.8% ROE. With full implementation of FRS139, we saw writebacks of provisions.  We had been very conservative in loan provisioning. Consequentially, our shareholders' funds increased. This is good, but it also diluted our ROE. So, yes, 16% ROE is still our target.

The Edge: So, on all fronts, you are ready to run faster?Sng Seow Wah: Yes. And we don't rest on our laurels. We pat ourselves on the back, we feel good about it for a while, and then we set ourselves more aggressive targets for the next year.

Like I mentioned earlier, we are running on a treadmill that is moving faster. So if we want to keep up and not fall off, we have to focus on these key priorities — human capital, risk and controls. The last piece in the puzzle is to keep on reengineering the processes to become more efficient.

The Edge: Being a small bank, do you think you have managed to create a niche in the industry and communicated this to your customers?

Sng Seow Wah: Customers will bank with whichever they think is the best bank out there. So, it is up to us to reach out to them, get them to experience our service and then hopefully, they will like it and stay with us.

When we did the customer satisfaction survey, we found that SME customers that banked with us loved us. Of course, those who don't bank with us may not know of us. It's really up to us to go out there and get market share.

There was a time in the past when we were not bringing in new customer accounts. Today, we are successfully bringing in new-to-bank customers in all our business lines.  

We must continue to do what we are good at. We don't want to go the way the other banks are going. If you pick the easy things to do, the other banks will kill us, because they are very much bigger. So we pick the more difficult things to do, like SMEs. Why are SMEs difficult to do? It is because the segment is credit process-intensive.

The beauty of being small is that we can be focused and clear on what we want to be. We don't waste resources in trying to be everything to everybody. Being small means we have the ability to move fast.

How do we differentiate ourselves? It's all the internal changes that we have embarked on, that can then translate into external benefits. The key is our ability to communicate and make decisions quickly. We don't need to do something extraordinary. We simply do what we are good at, and we continue to do it well.

But nothing beats having a great team. We have built a great team. We are also focused on succession planning. I could be knocked down by the proverbial bus tomorrow, but I am confident the bank will keep running — everyone knows exactly what they have to do; they know what the mission is and what is at stake if we don't win. It's not acceptable to be a 'so-so' bank.

The Edge: Are you gaining market share in the SME segment?Sng Seow Wah: Yes, we are gaining market share at the expense of the competitors, because the market has not been growing as fast. It's the same with loan growth.

The Edge: Where were you three years ago?

Sng Seow Wah: We didn't do a survey then, but we knew that the bank had a niche. So, we built a vital model to reach out to the SMEs in a meaningful way. Last year, we talked about our investment in customer relationship management and today, it's fully operational.

We know every customer. We have a business analytics team that looks at transaction information and turns data into information. They provide us with insights into customer behaviour. Some 67% of our SME customers maintain their main operating account with Alliance Bank. These accounts are very sticky.

Transaction banking is another big focus — it helps build recurring fee income. One of the things we have done differently is to take cash management tools that the larger banks offer only to their big corporate clients, to sole proprietors and the small businesses.

The Edge: What are the risks going forward?

Sng Seow Wah: In school, we were taught, a good economy is one where people save more and businesses invest more. Today, the global economy is quite different. To drive growth, we encourage people to borrow and spend more. This goes against conventional economic wisdom.

The second thing is that instead of investments, governments are printing money and injecting it into the economy.

Where is all this headed? I don't know. You can't control some of these external factors, so you have to make sure the bank has a strong balance sheet, which we have.

In terms of capital, we are the highest in the market today. We can improve our profitability further if we go according to the norms of the market and release our capital. But we think it's prudent to maintain a higher capital level and at the same time, keep strong liquidity. In the market, we are always among the top two in terms of liquidity.

In terms of Basel 3, the bank's core equity tier-1 capital ratio was at 10.6% at end-March 2013, which is the highest in the industry. The total capital ratio is 14.8% and the loan-to-deposit ratio 78.7%. Since we can't be sure of what's round the corner, we have to be prudent.

The Edge: What are your strong and weak segments?

Sng Seow Wah: The strongest sector is SME. We have clearly defined ourselves in the market — it's a nice sweet spot for us.

The other area that we are building quickly is consumer banking — we are very big in mortgage loans.

Beyond that, there are a few sweeteners that are helping us enhance our non-interest income ratio — it has been growing very nicely, from a low of 22% in FY2011, to 28% as at end-March 2013. This is quite close to our target of 30%.

In consumer banking, non-interest income will come from credit cards, wealth management and bank assurance.

In Islamic banking, we are doing well. It is a profitable business for us. Some of the regulatory guidelines have recently changed.

For example, if the bank does long-term loans, there is a need to match the funding of these loans with longer-term deposits. However, the bread and butter of banking business is how to use short-term deposits to fund long-term commitments and to make the interest differential.

Under the new requirements, if there is a mismatch in the funding structure, this will call for more capital for market risk. Eventually, most Islamic banks have to grapple with the increased capital requirements for market risk.

On the IB side, we have not gained as much traction as we had hoped for. Moving forward, this is the last cylinder that hasn't quite fired.

We will be working on it and hopefully within two to three years, investment banking will again be one of our major revenue contributors. We have already built the research and institutional sales team. Before this, the strategy for IB wasn't so defined.

We hope to get to 30% non-interest income soon, hopefully within the next two to three financial years. With non-interest income comes higher ROE.

The Edge: Where do you see AFG in three to five years?

Sng Seow Wah: Barring inorganic growth, I think we are in a nice sweet spot. We want to be in a position where shareholders find it rewarding to have invested in AFG.

From June 2010 to June 2013, AFG's market capitalisation went up more than 75%. In June 2010, it was below RM5 billion, but today we have crossed the RM8 billion mark.

Foreign shareholding was at 37.8% at the end of May 2013. It was at 24.7% in June 2010. This excludes Temasek's indirect stake.

We paid 32% of our net earnings as dividends in FY2011. In FY2013, we paid 47%. Our policy is to pay upto 50% of net earnings as dividends.

This story first appeared in The Edge weekly edition of June 17-23, 2013.