Let us recall that for the duration of the state of emergency, all credit institutions were instructed by the head of state to suspend the accrual of fines, penalties, and fees for late payments on loans to individuals and legal entities. Alongside this, they were instructed to provide affected entrepreneurs and the public with a deferment on loan repayments for up to three months.
- Eldar, tell us, how do the state measures intended to help citizens affected by the quarantine impact the banking sector today?
- The banking sector is very sensitive to all factors occurring both in the country and around the world. And now, like all other market participants, we are experiencing difficulties and bearing a certain burden. The important role of the state during such a period lies in timely measures.
If we look back and consider the example of 1929 when the Great Depression began in the USA, it is evident that the government and the Federal Reserve delayed support measures (such as tax relief, deferrals on payments, and other economic stimuli). Consequently, their crisis lasted almost 10 years.
Therefore, I believe that the decisions made by the leadership of our country were timely and comprehensive. The most important thing is that we managed to avoid a break in the economic chain. At least today, we observe how this affects our borrowers, and their wellbeing directly reflects on us. Many clients, especially from micro and small businesses who requested loan deferments up to June, are already starting to recover from the downturn and resume their payments. Hence, activity in some of our metrics is recovering.
In addition, lending to the real sector is not stopping. I must emphasize that government preferential programs have been a significant support for SMEs due to cheap resources. We acted as agents, which also allowed us to expand our customer base. Independently, banks could not offer loans at such low rates given the high cost of attracted funds.
It is also pleasing that our economy has withstood this strong blow and continues to function.
Undoubtedly, the banking sector will still experience a slight decline. But not as significant as some skeptics predict.
- However, in recent months there has been a noticeable outflow from client deposit accounts, which cannot help but affect the funding base of banks...
- Yes, it's natural that in an abnormal crisis situation, people needed cash to cover their basic needs.
However, the deposit portfolio is not the only source ensuring the banks' funding base. We, for example, have placed and sold bonds worth 47 billion tenge, and we have issued shares amounting to more than 20 billion tenge.
- When the AQR results were announced, no one predicted a state of emergency in the country. Now we are somewhat witnessing the consequences of the quarantine. Do you think the banking sector in Kazakhstan will maintain stability as declared by the regulator at the beginning of the state of emergency?
- If we refer to global practice (for example, Canada and Iceland) during the previous crisis of 2008-2009, it demonstrated that a strict conservative approach to assessing the quality of banking system assets is particularly effective.
In this regard, the AQR exactly showed the external and internal market that the Kazakhstani banking system currently trends towards improvement and identifies where we can grow, where we can lose, and what risks we can undertake.
Nevertheless, despite changing circumstances, it would be inaccurate to say that something unexpected will occur in the banking sector this year. It's no secret that we report daily to the Agency for Regulation and Development of the Financial Market, which makes our activities transparent and imposes certain obligations on us. Therefore, I believe that the joint measures taken by the state, regulator, and banks will help maintain the stability of the banking sector.
- How prepared are banking institutions to compete with each other today 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 competitive pressures, banks have long since begun investing in IT technologies, including at an international level. The quarantine has only accelerated the digitalization of banking services. We thus navigated the state of emergency period with relative ease. Moreover, I am convinced that those innovative solutions currently leading the global market will soon be available to customers of Kazakhstani banks.
On the other hand, competition helps reduce our costs, making online services even more accessible to the population. This benefits consumers. At the same time, the banking sector's margins are inevitably decreasing.
Undoubtedly, we are investing more resources in internet banking, infrastructure equipment, POS terminals, ATMs, and updating the bank's information system.
- Will there be no need for "live" staff?
- Many banking operations still require the client's initial visit to a manager, limited by legislation and global practice. Therefore, I think the need for operational services will not disappear over the next few years.
Nevertheless, I assume that the number of branches will eventually decrease because they will become unnecessary. I do not rule out that there may be only one office per large city or even region. Everything else will go online. It's just a matter of time.
- Do you see fintech companies as potential competitors?
- It's important to note that banks and microfinance organizations are currently the only sources of accessible and preferential credit for the population and businesses. Therefore, stating that fintech will soon replace the banking sector is incorrect. I would say fintech companies complement some services.
- Have you observed changes in client behavior?
- Unfortunately, not all borrowers understand the necessity of a good credit history and how it can impact them in the medium and long term. Nevertheless, we do notice an improvement in the population's attitude towards banking discipline. Alongside this, financial literacy is growing. Clients are becoming more demanding and informed, which enables them to "negotiate" more favorable terms for themselves. This also affects bank margins.
- According to international rating agencies, the profit of the banking sector in 2020 will decrease by more than half compared to last year. How justified is this forecast?
- Undoubtedly, banks' net profits will significantly decrease this year. You probably know that banks' income differs somewhat from that of standard companies. Profit can come from various sources, both interest income (the main item) and fee income. We can thus compensate for lost income through other receipts. That's the first point.
Secondly, in terms of quarantine and the need to digitalize banking services, the income earned can, for instance, be invested in information or communication systems.
Thirdly, the most widespread and correct decision is to rebuild reserves, reflecting the current value of assets. This is an IFRS requirement and also a regulator's requirement.
Therefore, when rating agencies talk about the overall decline in bank sector profitability, they link their forecast to banks rebuilding reserves to cover future losses.
Evidently, a bank can be quite successful and stable without necessarily having high profits.
- How long will it take for the banking situation to stabilize?
- We shouldn't expect excessive income from banking activities this year. Firstly, because those banking institutions that could potentially show good financial results, will be very cautious in assessing their activities. Secondly, you know that banks are financial intermediaries for other market participants. We are entirely dependent on our borrowers and depositors. As I've mentioned, their condition impacts us.
The faster the economy recovers, the quicker the banking sector will recover as well. Nonetheless, based on how quickly 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.