Let us recall that during the state of emergency, all credit institutions, by order of the head of state, had to suspend the imposition of fines, penalties, and interests for overdue loan payments by individuals and legal entities. In addition, they were instructed to provide affected businesses and the public with a postponement of loan repayment for up to three months.
- Eldar, tell us how the state measures designed to help citizens affected by the quarantine influence the banking sector today?
- The banking sector is very sensitive to all factors happening both in the country and around the world. And now, like all other market participants, we are experiencing difficulties and carrying a certain burden. The important role of the state in such a period is to take timely measures.
If we look back at 1929 when the Great Depression began in the USA, we can see that the government and the Federal Reserve delayed with support measures (such as tax reliefs, payment deferrals, and other economic stimuli). Because of this, their crisis lasted almost 10 years.
Therefore, I believe that the decisions taken by the leadership of our country were made on time and in full. The most important thing is that we managed to avoid a break in the economic chain. At least today we see how it affects our borrowers, and their well-being directly reflects on us. Thus, many clients among micro and small businesses who requested a loan deferral until June are beginning to exit the negative spiral and resume their payments. Thus, activity in some of our triggers is recovering.
Furthermore, lending to the real sector hasn't stopped. I'll emphasize that preferential state programs, thanks to cheap resources, became a good support for SMEs. Here we acted as agents, which also allowed us to expand our client base. Banks, on their own, couldn't offer loans at such low rates due to the high cost of attracted funds.
Moreover, I am pleased that our economy has withstood this severe blow and continues to operate.
Undoubtedly, the banking sector will still experience a slight decline. But not as some skeptics predict.
- However, in recent months there has been an outflow from customers' deposit accounts, which inevitably affects the banks' funding base...
- Yes, it's natural when, in a non-standard crisis situation, people needed cash to cover their needs.
At the same time, the deposit portfolio isn't the only source providing the banks' funding base. We, for instance, placed and sold bonds worth 47 billion tenge and also issued shares totaling more than 20 billion tenge.
- When the AQR results were announced, no one anticipated a state of emergency would be initiated in the country. Now we can see the consequences of the quarantine to some extent. In your opinion, will Kazakhstan's banking sector be able to maintain stability, as stated by the regulator at the beginning of the state of emergency?
- If we refer to global practices (for example, Canada and Iceland) during the previous crisis of 2008-2009, it showed that a strict conservative approach to assessing the quality of bank system assets is particularly effective.
In this context, AQR has shown both the external and internal markets that today Kazakhstan's banking system tends to improve, as well as in which part we (the banks. – Ed.) can grow, where to lose, and which risks to take on.
Nevertheless, despite the changing situation, we cannot say that something unexpected will happen in the banking sector this year. It’s no secret that we report daily to the Financial Market Regulation and Development Agency, which makes our activities transparent and imposes certain obligations on us. Thus, I think that the joint measures taken by the state, the regulator, and the banks will maintain the stability of the banking sector.
- How ready are second-tier banks to compete with each other in providing online services and offering new solutions to the market? And how has digitalization impacted the operational activities of banks during quarantine?
- Due to competition pressure, banks have long started investing in IT technologies at an international level. And the quarantine has only pushed towards digitization of banking services. Therefore, we survived the state of emergency quite easily. Moreover, I am confident that those innovative solutions that are now at the forefront of the world market will be seen by Kazakh bank clients in the near future.
On the other hand, competition reduces our base cost, making online services even more accessible to the public. This benefits consumers. However, the margin of the banking sector inevitably decreases.
While from our side, definitely more resources are now invested in internet banking, infrastructure equipment, POS terminals, ATMs, and we are updating the bank's information system.
- Will there still be a need for "live" personnel?
- Currently, many banking operations cannot be performed without the initial visit to a manager, as we are limited by both legislation and global practices. Therefore, I believe that there will be a need for operational services for the next few years.
However, I suppose that the number of branches will still decrease in the future, simply because there will be no need for them. At the same time, I do not rule out that there might be only one office left per large city or even region. Everything else will go online. It's only a matter of time.
- Do you consider fintech companies as your potential competitors?
- It should be noted here that banks and MFIs are still the only sources of accessible and preferential loans for the population and businesses today. Therefore, to claim that fintech can soon replace the banking sector is incorrect. I would say fintech companies simply complement some services.
- Have you noticed any change in client behavior?
- Unfortunately, not all borrowers yet understand the need for a good credit history and how it can affect them in the medium and long-term. Nevertheless, we notice that the population's attitude towards banking discipline is improving. Alongside, their financial literacy is also growing. Clients are becoming more demanding and informed, which allows them to "negotiate" the best terms for themselves. This, in turn, also affects the banks' margin.
- According to international rating agencies, the profit of the banking sector in 2020 will decline more than twice compared to last year. How justified is such a forecast?
- Undoubtedly, banks' net profit this year will significantly decrease. However, as you probably know, banks' income differs somewhat from standard companies' income. In turn, we can derive profit from various sources, like interest income (main source), as well as commission income. Thus, we are able to compensate for lost revenue through other means. That's the first point.
The second is that, under the conditions of quarantine and the necessity for the digitalization of banking services, the income earned by the bank may, for instance, be invested in information or communication systems.
The third and most common and correct decision is to create additional reserves, reflecting the real value of assets today. This is an IFRS requirement and also one of the regulator's requirements.
Therefore, when rating agencies mention the overall decline in banking sector profitability, they relate their forecast to banks creating additional reserves to cover future losses.
Clearly, a bank can be quite successful, stable, and doesn't necessarily need high income.
- How long will it take for the situation in the banking sector to finally stabilize?
- This year, one shouldn't expect windfall profits from banking activities. Firstly, because even those second-tier banks that could potentially display good financial results will be very cautious in evaluating their activities. Secondly, you know that banks act as financial intermediaries for other market participants, meaning we entirely depend on our borrowers and depositors. As I've mentioned, their well-being reflects on us.
The faster the economy recovers, the quicker the banking sector will recover as well. Nevertheless, based on how promptly we responded to the corona crisis, it can be assumed that in the second half of 2021, Kazakhstan will regain its footing with renewed strength.