Eldar Sarsenov, Chairman of the Board of Nurbank, was the latest guest at Vlast's business breakfast. During the meeting, he spoke about the prospects of the banking sector, new principles of regulation, attitude towards government programs, and high-interest loans. Main points of the conversation.
On Government Support for Banks
A bank, in its essence, is not much different from an LLP; it is a commercial organization with its own plans, budgets, and risks undertaken consciously. In this case, why should the state, represented by each taxpayer, help banks that assumed certain risks and did not succeed?
The practice of financial assistance to large systemically important banks is not new. It was used in the last century in America, England, and Russia. Systemically important banks differ from ordinary businesses as they work with deposits. This is the fundamental and only reason why they receive financial support. Your deposits are a very strong sign of trust in the organization; you bring them there voluntarily, having weighed all the pros and cons, and you chose this particular financial institution, which you consider the most reliable and optimal. If trust in a large bank holding more than ten percent of the entire market is undermined, it affects trust in everyone. It would mean a withdrawal of deposits, similar to the situation in America in 1929, which marked the beginning of the 'Great Depression,' lasting ten years. Such a recurrence is undesirable for any country, hence support is provided in case of severe financial instability, for both individual banks and entire groups.
Unprecedented support was provided to a number of banks holding precisely systemically important positions. This was done to maintain public trust in banks, support the capability of financial organizations to continue lending both to businesses and the real sector of the economy, and help banks clear their loan portfolios. If systemically important banks can reduce their toxic portfolio, it will positively impact the entire economy. In the end, a cumulative effect becomes apparent—we gain public trust, support large financial institutions that, in turn, pay salaries to thousands of compatriots, pay large taxes, and support a whole layer of contractors working with these organizations, thereby having significant economic benefits. Therefore, the provided assistance was timely. Whether it is a lot or a little is another question, but the fact that it was provided is a big plus.
Will Banks Require Recapitalization in the Future
We will not face the need for new sector recapitalization in the future. The financial support provided will have long-term effects, and it is unlikely that banks that have already undergone a cleanup will face new problems. The top ten banks, having high levels of capitalization, received substantial support, and this will suffice for at least five years.
Since the beginning of this year, we have been working under new IFRS standards, which, among other things, require different provisioning, now more strictly. That is, at the first symptoms indicating a loan might become doubtful, we must create provisions. Moreover, the National Bank has a complete picture of each bank's state and, even before any triggers take effect, it can oblige a bank to recapitalize or make additional provisions. Thus, we have all the conditions to avoid cases similar to those that led the banking sector to its previous state. And most importantly—after such financial support, no bank will repeat the same mistakes for the third or fourth time.
Why Nurbank Did Not Participate in the Bank Support Program
This program was too interesting not to try to participate. On the other hand, as always, there's a downside—there were rather strict limitations to our activities. One step aside, and it’s execution. We looked at our performance and plans, what we wanted to do with our portfolio, and the freedom we wished to enjoy in decision-making. Having weighed all the pros and cons, listened to specific experts, it was decided that this program was more suited for those banks that needed and received this assistance.
On the Real Situation of Banks
Banks are the most regulated commercial structures in Kazakhstan. We are constantly monitored by various authorities, from the National Bank to emergency services. Our financial reporting is completely transparent. We report to the regulator daily. It is impossible to hide or disguise anything, and doing so is severely punishable. Therefore, what rating agencies say, that the financial condition of some clients might be questionable and that banks allegedly try to hide their true state, is not entirely correct. Let's take a usual bakery as an example—a true small and medium business. It has liquidity problems, lacks turnover, does not have the customer flow indicated in the business plan. Six months after receiving a loan, it operates well; then, another larger bakery opens nearby, and its business does not go so well. Customers become fewer, several cash gaps occur, and the bakery becomes technically overdue, up to ten days. According to the standards, we are obligated to either partially or fully provision the amount we lent to this client. But the bakery continues to operate, with a reduced flow, but people still come. We take action, meet the client, talk, review, and adjust their payment schedule to somehow sustain them moving forward. We are not at all interested in seizing collateral, limiting exit abroad. Why? Banks are always interested in their clients’ well-being. Therefore, we meet them halfway and change conditions for them—review payment schedules and structures. However, we will still be obliged to create provisions for this loan and mark it as overdue. Due to these reasons and similar clients, albeit on a larger scale, rating agencies have questions about banks. But these are the clients for whom something can always be disputed, because they are living clients. This is real life, where declines and growth happen.
On the Work of Medium-Sized Banks
The notion that medium and small banks are more vulnerable is unfounded. There is a ratio used by the National Bank and rating agencies—capital to risky assets. All banks should have it no less than the regulatory standard of 10-12 percent. Many banks have this ratio within a small corridor, just above the standards. That is, whether a large or small bank, the ratio is approximately the same. The most important factor to consider, talking about ordinary depositors, is capital—the ratio of capital to assets. Second, the number of individuals holding money in the bank. In some cases, such as in Russia or nearby regions, many banks had a dozen clients who comprised almost the entire deposit portfolio. These were legal entities, large individuals, VIP clients who made up the core, the main part of the deposit portfolio. Consequently, if your deposit portfolio, say, 100 billion tenge relies on 10 clients, it’s a high-risk portfolio. One client's exit would immediately cause an outflow. Essentially, bankers are brokers. We take free liquidity from the public and place it with another part, paying most of the margin to depositors. If you lack the ability to replenish liquidity or there is a sharp outflow, you cannot fulfill the obligations you have taken on. Therefore, assessing a bank's solvency, it is essential to focus on the number of clients—individuals. In our bank over one calendar year, from April 1, 2017, to April 1, 2018, the growth in individuals was 54%. This is a gradual, complex, meticulous daily effort. A vigorous effort to avoid mistakes.
On Government Funds in Banks
There are almost no large government funds left in medium-sized banks. They all have flowed into three to four banks in the top five, and thus, the risk formerly assumed by medium banks last year has now been assumed by those banks in the top ten. This absence of large government funds in medium-sized banks is both a plus and a minus. The minus is that neither we nor our colleagues can expansively expand and offer loans to a wide range of our clients on other terms. The plus is that we understood our stability. We survived a stress test; in 2017, we had large outflows of state funds. We realized we could operate without large depositors, proving our market resilience. Passing such a stress test and continuing active lending is, I believe, a significant achievement that we have not yet publicly acknowledged. We are modest guys, but we are proud of it.
Concerning government programs. We, banks, act as operators. We have services capable of assessing and weighing each client and their risk, and we have infrastructure—ATMs, branches, internet banking, and more. And most importantly, in government programs, we take the risk upon ourselves, not the state. If under a government program some client fails to meet obligations, it is not the state that loses money, but the bank. This is called the risk premium. Our margin under each government program varies, but it ranges from 1 to 3 percent at maximum. Today, we participate in 19 programs, both regional and republican. This government support is extremely necessary, providing real aid.
On Deposits as a Tool for Liquidity
Concentration on five to seven depositors is highly dangerous and shortsighted. Our bank behavior is built on liquidity diversity: we have three business directions by deposits and portfolios—large, medium, and individuals. We receive 20-30% from individuals, the same from small and medium business, and roughly the same from corporate clients. Thus, if fifty or more depositors exit simultaneously, it will create difficulties with a large volume, but will not destabilize us. We strive to diversify our base, focusing on individuals, and avoid the mistakes made in our market by others and in our neighbors' market to ensure the utmost stability and thrive another 25 years or more in this market.
As of April 1, 54% of our bank's portfolio is retail (111 billion), large business occupies 24% (49.1 billion), and small and medium business 22% (44.8 billion).
If the State Ends Implementing Government Programs Through Banks
This will again be a stress test: if the government program ends tomorrow, it will primarily affect us and the entrepreneurs already counting on this money, who have signed credit agreements and have lines. If support halts, clients who received money under these preferential programs and conditions cannot continue borrowing, hence the chance of this happening is zero. It is not in the state's interest for the real sector to stop functioning. Even the small part financed by medium-sized banks. What will happen to my partners? I think nothing serious. I highly doubt it will broadly affect our partners and competitors. I dislike speaking for others; however, I presume their loan portfolio quotas funded by government funds do not exceed 50% for small and medium-sized businesses. And the most active banks working in the same directions as us are in the top ten.
Is Recapitalization Possible Through Issuing New Shares, Bonds, or Other Means?
Until today, using their preemptive purchase right, current shareholders had already recapitalized the bank by purchasing shares. But, as we know, there are alternative options. Of course, we consider all possible ways to further develop our bank. We have already seen different methods of attracting investments into capital on the market. Some have a positive experience in placing shares in the primary market, others in placing subordinated liabilities. Some banks have attracted foreign investors. We are also interested in all of this. Sometime, something from this will happen with us as well, probably not this year. Certain measures must be taken before IPO or bond placement, and preparation is required.
Will Nurbank Participate in the '7-20-25' Program?
Participation is interesting, but its final parameters are still unknown—it was announced a few weeks ago. Interest rates are not a problem for us. We work in the entrepreneurial programs and other state support programs where rates are from 6%. This is simple—subsidies. From an overall interest rate, part is covered by us, part by the government via the 'Damu' fund. But the client receives 6-7% at the end.
On Lending for Education
Looking at Western experience, the prospects are enormous. The cost of our education grows annually, as it does worldwide. We have a similar state lending program, and we also have subsidies on education deposits. That is, the deposit rate is 13.2%, plus the state adds 7%. It results in jointly paying about 20% on education deposits. The term of the deposit is quite long, and you can allocate these funds only for education. Almost 20% annual reward over five years is very favorable conditions. So far, we have not seen significant interest in financing. I think we as a society are not yet ready for long-term financial planning. Typically, parents begin thinking about their children's education literally a year in advance. Consequently, a five-year plan does not suit everyone. However, I still hope that within our lifetime, people will start saving for their children's education from birth. Currently, such deposits do not even comprise a tenth of a percent—a very small portion.
On Attitude Towards Online Lending
I am against such lending. It is not an ethical norm, and considering the financial literacy of our citizens is not yet very high, many take advantage of it. I fully support the state's policy that lending rates should not exceed 56%—a cap for banks. This should also apply to all market participants. When I mentioned we are the most conservative bank, it also applied to individual lending. In April 2014, a norm called DSI—Debt Service-to-Income Ratio—was introduced. It implies banks cannot provide loans larger than 50% of a person's salary. If your salary is 100 thousand tenge, the bank cannot issue more than 50 thousand. This excludes commitments you already have. As of today, in commodity lending—direct lending for household appliances and other goods—we are among the few banks upholding the DSI. Which means the limit exists, but not all banks adhere to it. They say they do, but there’s a loophole; some banks accept if clients state their income is 1 million tenge in questionnaire data. We refer only to SCPP reports, that is, official pension contributions. Therefore, our margin here is small, and our portfolio doesn’t grow at the same pace as my partners’. But here’s the ethical side. All sorts of things happen in life, and I, as a private citizen, come to the bank and need a loan. In banks, you're always asked how much you want to get, instead of your salary size. The person indicates earning 2 million tenge but does not earn that amount. Thus, they receive a loan they already cannot service. And the bank bears primary responsibility here because it knows the client cannot repay, lacking such net income verified for servicing the loan. Perhaps they rent out an apartment or ride a taxi, not a white income, but Nurbank relies only on official earnings. Those microloans issued online and not yet under National Bank regulation should go. You can't borrow 100 tenge and pay back 2000 tenge. It's unethical. My subjective opinion is that it negatively influences the entire credit sector. A rotten apple doing this can spoil the sector's reputation.
In Which Business Directions Can the Bank Relax its Conservative Approach
We are not ready to relax our approach yet—in any way, in any case. Except if we talk about micro-lending in the correct sense, lending to cafes, pastry shops, and other small enterprises with an average check of 10-15 million tenge, there the approaches differ somewhat. Such business entities typically lack solid collateral always relied upon. They borrow 1 million tenge for commodities procurement, certain current repairs, but cannot back it with collateral. Therefore, in micro-lending, alternative methodologies exist, for example from the European Bank for Reconstruction and Development, assessing accompanying factors—size of inventory values, turnover, time in market operation. This methodology literally suggests looking at what’s in the borrower’s fridge: what kind of products are consumed, the client flow coming daily. That is, these are unique factors orbiting the borrower, evaluated to predict compliance with obligations for an unsecured loan. Thus, micro-lending doesn’t imply the strict selection we apply to other borrowers. Otherwise, for the next 2-3 years, our credit and collateral policies will remain at the same level.
On Industry Regulation and Stress-Tests by the National Bank
To illustrate this point, I can say we have a specific small office in our office. It is never empty. But our staff does not sit there; we specifically allotted it for inspectors. And there is always someone there. Some inspecting authority or audit sits there even today. Hence, stress testing continuously occurs. I’m more concerned about market-induced stress testing. The most recent is the liquidity crisis stress test when all state funds are withdrawn from banks. Yet, with such a scenario, we will still operate comfortably. And the point you mentioned—the National Bank sees us more than anyone else. If it wants to look at our borrowers and clients again, feel free.