The Case Study - Seylan Bank

Growth and Its Challenges11Rapid, Profitable GrowthSeylan Bank enjoyed immediate success, reporting after tax profit of Rs. 11.3 Mn.for its first partial year (i.e., from 24th March) ending 31st December 1988. Overthe next 17 years, the Bank grew at an unprecedented pace, with assets totallingRs. 113.6 Bn. by the end of 2005. Profits in the same period fluctuated to somedegree but followed the same overall rapid trajectory, reaching Rs. 687 Mn. (aftertaxes) in the 2005 financial year.Other key measures showed a similar pattern of dramatic growth.The Bank’s workforce increased steadily from an original staff of 72 to acompanywide total of 3,733 employees. A single head office location grew intoa network of 117 outlets - based, from 1997 onward, in a new headquarters,Ceylinco Seylan Towers. By 2005, Seylan Bank was Sri Lanka’s fifth-largestBank and ranked third among privately owned financial institutions.Unfortunately, that same year brought a dramatic heightening of publicconcern - following several years of increased scrutiny from regulators, bankinganalysts and other industry watchers - that Seylan Bank’s remarkable recordof growth masked some significant underlying management problems. Inretrospect we can see that these unresolved issues, while not the direct cause ofthe Bank run three years later, undoubtedly set the stage for the crisis to come.Overexpansion Carries a PriceIn the view of some stakeholders, the staggering growth achieved by SeylanBank had led to a classic case of overtrading. Banking is by definition a capitalintensivebusiness. However, in the case of Seylan Bank, aggressive expansion,both in terms of business volumes as well as physical infrastructure - openingbranches, expanding the ATM network, building new premises, etc. - had exertedtremendous pressure on the limited amount of capital available. Within fiveyears of the Bank’s founding, its gearing ratio (the degree of leverage requiredto finance operations, calculated as total assets divided by total shareholders’funds) shot up past 29 times. This pointed to serious problems ahead.