Further concentration in the banking sector contributes to the recovery and strengthening of Kazakhstan's financial system, which will positively impact the overall economic development and enhance its investment image. Eldar Sarsenov, Chairman of the Board of Nurbank JSC, discussed this and much more in an interview with 'K', commenting on current industry events and the bank's latest financial figures.
– Probably the most discussed news in the financial market today are the upcoming M&A deals, particularly the merger of Halyk Bank and KKB, Tsesna and BCC. There are also rumors of the merger of 3–4 more banks. How do you personally assess the process of banking sector consolidation? Is it good or bad for the banks themselves, their clients, and the economy of RK?
– The unwritten law of market economy is that the more competitors there are, the better it is for clients. We have a unique market; even Europe cannot boast such a number of financial institutions per capita, including microcredit organizations and fintech.
We have a sufficiently high credit level market, yet a non-growing market. This, in aggregate, does not present a very good picture – 34 classical financial institutions can accept deposits. For 17–18 million people, this might be a reasonable figure, but year after year, we see negative growth in the economy. GDP per capita does not grow at the same pace as the economy is loaned through commercial banks.
The cost of standard loans, excluding subsidies, for legal entities is 14-17%, for individuals 20-25% and higher in case of unsecured lending. The economy does not grow at such rates. If the economy does not do this, then real incomes of the population do not grow either. At best, they stagnate or fall, as was the case after devaluation.
– So there is no correlation between these indicators?
– Exactly. And because of this, all our colleagues in the industry are having difficulties, including us. Either an economic boom is needed to first of all ensure credit demand, and secondly provide reserves for future growth, or the number of banks needs to be reduced – a policy adhered to by the National Bank today. This is generally correct, since banks, unlike other commercial enterprises, work with deposits. This is a fundamental difference that sets us apart and adds a certain responsibility.
– There is a certain social responsibility...
– Indeed. If banks face some difficulties, cannot pay their bond loans, cannot ensure withdrawal of funds by individuals, the whole system trembles. No need to look far: 2008, America. When a big bank fails, the connection between creditors and debtors closes immediately. Both suffer. And further along the chain. This is called the ripple effect. A large number of companies suffer, the employees working there, unemployment rises, consumer demand falls, the entire economy suffers.
Therefore, for the National Bank and the government, it is vital to have a balanced banking system. This is the first. For this, either economic growth is needed, which does not depend on us, or a reduction in the number of banks, so they can recover, enlarge and have the backbone necessary on one hand for the state and on the other hand for the private sector.
Secondly, there is currently too large a number of non-performing loans. This affects the sovereign credit and investment rating. The latter is much more important since without a good reputation, large institutional investors will not enter Kazakhstan. Investments are very important for our economy. Investments are the tool that allows, without burdening the state budget, sharing future income with the investor, to develop enterprises, the industry, and the economy as a whole.
– Can't investors directly invest in the RK economy?
– Certainly, they can. But if the banking system is faltering, it affects the entire economy. It means that the banking sector cannot effectively service the economy, so why would I as an investor invest in a country with a weak banking sector, increasing toxic loans, and declining purchasing power of the population and enterprises. Why do I need this?
Therefore, our government is working to heal the system, clean our problem portfolios, which will give a positive boost to become more attractive to investors. This is our ultimate goal.
– How can banking system consolidation help reduce NPL in the system?
– When two banks merge, they reveal their books. Each acquiring bank conducts due diligence and assesses what is 'good' and what is 'bad'. Bad assets are removed, good ones remain or are purchased at a large discount. It's like a "spring cleaning." It immediately shows what is 'bad'. Usually, in its activities, the bank may have opportunities to retouch certain problems with figures. This is absolutely legal and common worldwide. But during acquisitions, these problems emerge immediately, and if 6–7 banks merge, consolidate or enlarge somehow, then all these things will be visible.
Secondly, from 2018, Basel 3 and IFRS 9 come into effect regulating capital calculation and provisioning methods. Two indicators bankers do not like to calculate. It means – one, we will have to calculate provisions differently and will be forced to show them, in our opinion, in a more conservative manner than they are. And two – capital requirements will tighten. Thus, in principle, it is correct.
Of course, competition will suffer, but the main thing is that the number of banks does not reduce below a critical point. In no case should it be like in the USA or Europe – 3–4 large banks and the rest micro banks. In my opinion, the most optimal case is when all kinds of banks operate – small, medium, and large – there is enough for all clients. If 10 banks leave – that's good, but this should be done cautiously so as not to generate distrust of the entire banking sector. The banking sector will recover, and we can turn a chapter and start fresh.
– In one of her recent interviews, the head of the National Bank Umut Shayakhmetova stated they are interested in KKB without bad loans inherited from BTA. How do you think this issue of high NPLs at KKB should be resolved? What would you do if you were buying KKB?
– I will not speak for the National Bank. If I were purchasing a financial structure and had the opportunity to examine all assets in their true state, I would divide them into a 'good' and 'bad' bank – this is a common practice worldwide. Either, as I said earlier, purchase bad assets with a discount but provided I knew how to manage them, or take good assets and pass the bad ones to collection agencies. I believe that most assets can be improved, the rest written off.
– If you were to buy at a discount, what would it be?
– (Laughs) It's like asking if you buy a red or blue car, what discount would you ask for the blue one? It's hard to say. It needs consideration.
– Does Nurbank consider purchasing any bank or selling?
– We are certainly not considering selling. We are more than aware of the need to recapitalize. Moreover, our capital adequacy ratio (K2) is quite high – 15.1% against the previous standard of 8.5% and the current standard of 10%. That means we exceed the capital requirement by nearly one and a half times.
However, there is an understanding that there is a need to enlarge. If we have such an opportunity, it will stabilize our positions, allow us to acquire competencies. It is difficult for us to compete with banks like the top ten or top five – they have capital, good administrative resources, talents they purchase for a lot of money. However, we have learned to do quite well.
The opportunity to enlarge would put us into that cohort, whereby it becomes profitable to purchase technologies, have access to specific resources, and compete on more confident terms.
We are by no means considering selling the bank; rather, we are exploring different channels for enlargement.
– With what financial results did Nurbank close 2016?
– Our assets grew by 21% compared to the previous year. Mostly due to the growth of our loan portfolio, which grew by 15.3%. The portfolio structure by clients looks as follows: 23-25% – SME, 63% – large business, the rest – retail. The loan portfolio grew due to large and medium businesses, with SMEs being the champions, where we made a strategic decision to enter last year.
Since the economy doesn't grow at such rates, I would say it's a heroic growth.
– How are you doing with liquidity?
– Very well. In 2016 we observed a strong increase in tenge deposits. Thanks to the National Bank's de-dollarization policy and adjustments to rates in foreign currency and tenge, many of our clients transferred deposits from dollars to tenge. This allowed us to secure a financial safety cushion in the form of tenge liquidity at the end of 2016. Plus, we also work with state programs.
– So the liquidity situation for you in 2016 was quite good?
– Yes, special thanks to the National Bank for activating the note market last year. If banks had any excesses, they could place them there. It was a very effective tool to support bank liquidity and, secondly, to allow banks to earn back, compensating for the losses we incurred during the two devaluations.
– In 2015-2016, banks were divided into two types – those who were experiencing an acute liquidity shortage and those who had excesses. They were helping each other on the interbank market...
– You should have seen the interests they were charging each other (laughs).
At the end of 2015, we were those who borrowed at very high rates for tenge liquidity. We always had dollar liquidity. Thanks to our loan portfolio, which increased significantly and the National Bank, we corrected this situation. But more than a year ago, it wasn’t very amusing.
– Do you think banks need to reduce reserve requirements?
– As a banker – yes, as a citizen – no. Provisions – these are unrealized expenses that reduce net income; these expenses may not actually exist, but it’s a correct approach intended to stabilize the banking system so that banks don’t fall like dry trees. It's correct. But this, of course, cuts into our profit, which hasn't been fast-growing in recent years.
As a citizen, I argue for these requirements to stay the same, maybe even stricter. Why? The 2007 mortgage crisis showed that countries with the strictest regulatory requirements for banks had the easiest post-crisis periods. This includes Canada, some EU countries that had independent policies towards their banks. 2009-2011 was relatively easy for them. And now they have higher figures compared to their neighbors.
– What is the current reserve requirement standard in Kazakhstan, and how much higher is it compared to other CIS countries?
– There is no single number. There is a general methodology for how you calculate them – this is IFRS.
– How does it compare to European countries?
– We have relatively strict requirements.
– Each bank has its own focus when choosing a client. What client do you prioritize? Large, retail, SME? How do you position yourself in the market?
– We position ourselves as a universal bank. Crises have shown that when there is an outflow of clients from one business block, we survived due to having clients in other blocks. Of course, there is a possibility to fully concentrate on one or two products and build expertise there. It works well in a stable economy and even more so in a growing one.
But when a lean year comes, the bank that survives has diversified income sources. It's comparable to a human surviving the winter period. When there are problems with food, the one who survives has the most diverse diet: grains, vegetables, fruits, meat, and others.
Crisis is the same winter. We have already experienced five major crises over all this time, and they have shown that universal banks are most resilient.
– When you spoke about the portfolio structure, you mentioned that 63% is large business. Do you plan to reduce this share?
– Yes, we want to reduce it by about another 10–15% according to our strategy. The idea is for the loan portfolio to be more or less evenly distributed between different client segments for more stable development.
– Do you actively participate in state programs and plan to continue doing so in 2017?
– Yes, here I would like to especially note Damu Development Fund, DBK, and other state initiatives in supporting SMEs. 2016 vividly showed that it was precisely due to subsidizing interest rates and preferential financing that many enterprises stayed afloat. When there was a jump in the market rate due to devaluation, not every enterprise could afford to loan at 17–18% per annum, it was a heavy burden. Subsidizing at 7–10% caused a boom in the market and greatly supported businesses.
Last year, I traveled all over Kazakhstan, was in every regional center, and held a total of 124 meetings with clients. Everyone is interested in state funds. About 30% of our total loan portfolio consists of clients who received financing under state programs.
– Previously, there was business distrust of the state and state funds...
– Today there is a great interest from businesses. And I also want to say that such support existing in Kazakhstan, I have not seen in the USA, where I lived for 7 years, or in Europe. There, enterprises are left alone with their problems. There is, of course, subsidizing of the agricultural sector or some specific aviation or machine-building enterprises, but SME fights for themselves.
In Kazakhstan, there is great support for small businesses, and many enterprises and banks exist thanks to it.
– What problems do you think still exist in the banking system? For example, recently ATF Bank head Anthony Espina spoke about issues with collateral collection, which can take up to 10 years, and the necessity of paying taxes for debt forgiveness. Do you face such problems? Are they discussed in working groups in the National Bank?
– Effective bankruptcy legislation – that's what we need. In the US, for example, bankruptcy does not mean that the person or enterprise ceases to exist; it is simply a process of protecting you from creditors, obligations, and some vacuum time given for you to stand on your feet, as an enterprise as well as an individual.
For us, it is somewhat more complicated. For individuals, the legislation is in progress. If for certain reasons a person cannot meet obligations, a well-developed regulatory framework for what to do in such cases is not available yet. I think we will get there soon.
For legal entities – there is a legislative base, but it has its nuances, as the problem is not the absence of any legal project but the system itself. You have to go through a chain of courts: local economic court, district, city, regional, etc., and in one of these instances, usually, the case stops. All this takes up a huge amount of time. Maybe it’s right. Our legal system shouldn’t be simple; otherwise, it would be subject to other external currents.
– Does it really take up to 10 years to collect collateral?
– Maybe it’s about certain isolated cases... In practice, such examples are rare. To enforce the sale of collateral property in court takes from 6 months to 1 year. If the borrower or the pledger resists, this period can increase, but not to 10 years. 10 years – this is completely different numbers. If the collateral takes 10 years to implement, it means there is simply no demand for it or the bank itself is not making necessary efforts or actions realizing it.
– Anthony Espina also voiced issues of taxation when writing-off assets...
– I think this issue will be resolved this year or next. The problem is under discussion. The fact is any problematic asset, from a taxation perspective – is an income-generating entity. Any action with this asset – is a transaction taxed in Kazakhstan. If a vacuum sphere were created around this income-generating entity, the bank would more boldly take it onto their balance, sell, or transfer it to a company that deals with selling these assets more efficiently than the bank. It would accelerate the process of cleaning the bank's balance sheet. The bank will be more interested in doing something. But now, since if I know I have to pay tax for each step left or right, then why bother?
If assets are backed by pledged real estate, prices for which do not grow but stand still or even fall, why do I need to do anything at all? Let this enterprise or real estate stay on my balance, better times come, I'll sell it.
When this happens, the system does not clean, and debts accumulate.
Solving the problem requires three factors – effective legislation, effective taxation system, and the desire of the client/bank so that everything is done. If there is some dialogue, everything can be resolved quickly.
– What is your NPL situation, what level are they at now?
– Our NPL at January 1, 2017, is 6.94%. On January 1, 2016, it was 9.82%, January 1, 2015 – 13.18%. For reference, about four years ago, it was around 49%.
– What methods have you used?
– There is no secret. These are standard tools – recovery through updating schedules based on the company's production cycle, taking onto balance, transferring to management companies... Rarely does a borrower want to go into bankruptcy, it affects their credit history, reputation, makes it harder to open a new enterprise, so almost all borrowers wish to continue working. If we provide such an opportunity, give some infusion, other ways to review their business, they work calmly. Here economic factors are considered – product demand, competitive environment, etc.
Returning to the topics of bankruptcy and taxation, in my view, the state should help such clients, who have the opportunity to continue working. Give them a push. If such a shoulder is provided – 50% us and 50% – the state, together we give the client a second or third chance, and the client works – this will significantly improve our economy and the banking sector in particular.
Overall, we do this even without state help.
– What are your plans for the loan portfolio this year?
– All is prescribed in our strategy. First and foremost – diversification of our loan portfolio, i.e., moving away from corporate business. We started working with retail business only about 7 years ago; before that, we positioned as a corporate bank. Back then, we actively started developing SME direction, and now we've achieved more than enough success.
As 2016 showed, we have both the desire and opportunities: our largest growth was precisely in SME and retail.
– What exactly can you offer them – lower interest rates or a higher level of service?
– A banker is like your hairdresser, financial consultant, for example, when general income declaration is introduced, or like a personal mechanic – here it all revolves around personal relations. It's service, convenience, starting from parking, and ending with geographical location and other invisible factors like comfort, competence, speed. We strive to be a bank people don't think about. When the bank quickly and efficiently satisfies client needs, people don't think about us and can switch to their other matters – it’s normal. That’s what we're aiming for.